Applying Unilateral Arbitration Clauses
Alternative dispute resolution (ADR), including mediation and arbitration, are often preferred methods among many business sectors and individuals to resolve conflicts. Among the benefits of these types of dispute resolution, parties in dispute will have agreed in advance to the ADR processes and proceedings in an arbitration clause or agreement. The parties negotiate terms and conditions for triggering and then undertaking an arbitration, for which there are several mechanisms and tools they can enter and agree to. Among these are unilateral arbitration clauses (UACs). This article will discuss what UACs are and how they offer advantages and disadvantages to arbitration proceedings.
What is a Unilateral Arbitration Clause?
Unilateral arbitration clauses (UACs) are basically as their name implies. These clauses provide one-party decision-making rights (unilateral) regarding the selection of the forum to resolve disputes. Often this includes not just which arbitration institutions or dispute resolution centers oversee proceedings. They may also allow the favored party to opt for litigation instead of arbitration. Because these clauses empower only one side, they are also known as one-sided, hybrid, or asymmetrical option clauses. Furthermore, as the name suggests, a UAC allows one side of a potential dispute to weigh the benefits of arbitration against litigation. For example, while the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards may seem to benefit international commerce issues, a party may wish to pursue litigation in a national court where they can directly target assets in disputes.
How does a UAC work?
Typically, a UAC could confer to one party (the beneficiary) the ability to choose arbitration or litigation for dispute resolution while restricting the other side to more limited remedies. Any party to the arbitration agreement could initiate proceedings, but the beneficiary maintains the right to dictate whether the proceedings are arbitration or litigation. However, depending on the UAC’s language, it is possible for the beneficiary to be restricted under what circumstance they can exercise this unilateral right to choose arbitration or litigation.
For example, a broadly worded UAC may include the following language:
“The courts of [jurisdiction] shall have jurisdiction to settle any dispute which may arise out of or in connection with this Agreement but [beneficiary] shall have the option of bringing any dispute hereunder to arbitration…” (Gary Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing – 3rd Edition, WoltersKluwer, 2013. )
while a more limited UAC may be drafted as:
“This Agreement to arbitrate shall not apply with respect to the [beneficiary]’s rights to submit and pursue in a court of law any actions related to the collection of the debts.”
Some point to UACs being a natural extension of the flexibility and control afforded to parties in an arbitration agreement. Parties can set the terms and conditions regarding dispute resolutions relatively unfettered, and they agree to such terms before a dispute arises. With this foresight, a party can make their case for a UAC and have it applied to their arbitration agreement.
By having the option of arbitration and litigation available from the very beginning, the beneficiary may be more willing to enter an agreement. This is because they will then have the time to consider arbitration and litigation on a case-by-case basis, choosing what best suits specific situations.
As mentioned earlier, arbitration is often considered a preferred dispute resolution method; however, there are cases when litigation in court may actually be more beneficial. The arbitration may pave the way to a swift solution, but the beneficiary may want or need court-mandated mechanisms such as extended discovery and appeals processes that may not be as clear-cut in arbitration.
UACs are highly appealing in business transactions and are often found in finance and construction contracts. When lenders or contractors are faced with increased risk, assumed or otherwise, a UAC granting them beneficiary rights may ameliorate certain anxieties about entering a business relationship.
While the concept of a UAC may appear straightforward, it is by name and nature a clause that creates inequality between the parties from the beginning. However, since it is a mutually agreed upon clause, it could be argued that both beneficiary and counterparty are fully aware of the ramifications. However, a UAC is discussed at the onset of a relationship, so there may be a bit more optimism on the part of the counterparty, which ultimately may lead to a “buyer’s remorse”, so to speak, once a conflict occurs.
And this conflict may become problematic as it may lead to compounded disputes across multiple jurisdictions. That is, UACs themselves, because they open an agreement to litigation, may be subject to jurisdictional machinations whereby they may be deemed invalid. Some examples of such and additional discussions are in the following sections.
UACs globally and in Thailand
Unilateral arbitration clauses have appeared in courts around the world, resulting in varying degrees of acceptance and enforceability. In England, the courts went from invalidating a UAC, stating that arbitration must offer the same rights to both parties (Baron vs Sunderland Corp (1966)) to an about-face pointing to the fact that an agreement may favor one party over another, but as long as they both agreed to it, then it is enforceable (Pittalis vs Sherefettin (1986)). More recently, in 2015, the French Supreme Court (Rothschild (Cass. 1. Civ, 26 September 2012)) weighed in, refusing to recognize a UAC because it contradicted the French legal concept of condition potestative, whereby a condition is void if it relies only on the will of one party to the exclusion of another. In Germany, the legal principle of autonomy allows significant leeway for UACs.
Specifically, in Thailand, the Thai Arbitration Act does not explicitly prohibit UACs, and the courts have yet to directly declare their validity, although they have ruled in favor of UACs when contested before them. Furthermore, Thailand is a party to the New York Convention, and awards resulting from a UAC are known to have been enforced. However, this is in relation to UACs being used to instigate arbitration. Under Thai law, the courts do not necessarily recognize judgments from foreign jurisdictions, so parties may be forced to re-litigate their disputes in Thai courts.
THAC is your arbitration resource
If you are contemplating arbitration in Thailand, the Thailand Arbitration Center (THAC) is your resource for expertise and advice. THAC is an international-standard ADR center that can assist in every step of the arbitration process, from drafting arbitration clauses or agreements to providing facilities for hearings. Conveniently located near the Phrom Phong BTS Station in central Bangkok, THAC is accessible and suitable for local and cross-border ADR proceedings. Furthermore, THAC offers innovative online dispute resolution (ODR) services, such as its proprietary TalkDD platform, which has an intuitive interface that is accessible by most computers and mobile devices. For further information, please feel free to contact us at [email protected] or +66 (0)2018 1615. THAC is looking forward to helping you.