– Ramit Singh*
Article 18 of the UNCITRAL Model Law provides for procedural equality after the commencement of arbitration proceedings. This has been a literal view of Article 18 and has been used to validate asymmetrical arbitration clauses. This blog suggests a purposive interpretation of Article 18 so that the scope of equality can be applied before the commencement of the arbitration proceedings. If an arbitration clause has an impact on the procedural equality of the parties, then such a clause, according to the purposive interpretation of Article 18, can be declared invalid. This approach can also be applied to asymmetrical arbitration clauses, and it provides a new perspective on the issue of the validity of asymmetrical arbitration clauses.
An Asymmetrical Arbitration Clause (“AAC”) is a unique clause that gives only one party the right to invoke the arbitration. An AAC helps a party to choose between arbitration and other dispute resolution options that best suits the interest of the party. Traditionally, these clauses are found in financing agreements where the right of one party to refer a dispute to settlement is greater than the other party due to the nature of the transaction involved. Such clauses are a result of differences in the bargaining power between parties and the right of party autonomy.
This blog post deals with the application of Article 18 of the UNCITRAL Model Law (“Model Law”) to invalidate AACs. By arguing in favor of a purposive interpretation of Article 18, it can indeed be invoked to invalidate AACs when they have a direct bearing on procedural equality.
A LITERAL INTERPRETATION OF ARTICLE 18 OF THE MODEL LAW
Article 18 of the Model Law provides that “the parties shall be treated with equality, and each party shall be given full opportunity of presenting his case.” However, the scope of this article is confined to the conduct of arbitration proceedings, reflected by its position under Chapter V of the Model Law titled “Conduct of Arbitral Proceedings”. Article 21 of the Model Law clarifies that arbitral proceedings only begin when the other party has received a request for arbitration. In this light, Article 18 protects the parties by guaranteeing them equality in all the aspects of arbitral proceedings only after and not any time before the commencement of proceedings. Thus, the ambit of Article 18 is limited to guarantee procedural equality to the parties. In fact, the UNCITRAL Case Digest makes it clear that the purpose of Article 18 is to save parties from the injudicious conduct of the tribunal and is not intended to protect a party from their own strategic choices and failures. Since the scope of Article 18, as per its literal interpretation, requires equal treatment of parties only after the commencement of proceedings, it may not be cited to invalidate an AAC upon a literal reading.
Traditional approach of Article 18 would only allow equal protection of parties after the proceedings have commenced. An AAC can put a party to an unequal position from the point of invocation of an arbitration clause which does not fall under the ambit of literal interpretation of Article 18. Therefore, a literal interpretation of Article 18 is disadvantageous because of its restrictive application and thus a purposive interpretation must be preferred.
A PURPOSIVE INTERPRETATION OF ARTICLE 18 OF THE MODEL LAW
The issue of the validity of an arbitration clause is a jurisdictional issue, which an arbitral tribunal is competent to rule upon under Article 16 of the Model Law. Article 18 of the Model Law does not deal with jurisdictional issues. However, in some instances, when a jurisdictional issue has a bearing on the procedural issue, Article 18 can be applied.
A procedural agreement influences the proceedings and the procedure applied in it. Such agreements regulate the steps to be taken in the proceedings. Therefore, these agreements include a choice of forum agreement and arbitration agreement. So, an arbitration agreement can affect the procedure and the substantive rights of the parties during the proceedings. An arbitration agreement comes under the ambit of procedural agreement because it has an impact on the procedure that will be applied in the proceedings and therefore, they come under the ambit of procedural agreements.[i] In this light, one party does not have the right to invoke the arbitration clause and can never have the same impact on the procedure of the proceedings as compared to another party that can invoke the clause, thus creating unequal position between the parties.
The point of inception for the application of Article 18 of the Model Law should be the arbitration agreement. If the arbitration agreement violates Article 18 – which is a mandatory provision – then it shall be declared invalid. In a case, the arbitration clause stipulated that the claimant will get to appoint one arbitrator out of the seven arbitrators in the panel whereas the respondent could appoint more arbitrators than the claimant. This resulted in claimant’s interest not being equally represented and inequality originates from such arbitration clause. The court found that the claimant was at an unequal position even before the commencement of the proceedings. Further, the court applied the purposive interpretation of Article 18 and declared that the unequal position of parties in terms of appointment of arbitrators impacts the procedural equality of the parties, thus invalidated the clause. By the same token, if an AAC has the capacity to affect the procedural equality between the parties, then Article 18 can be invoked to challenge the validity of the AAC. Considering the purposive interpretation over the literal interpretation of Article 18, any inequality which is inherent in the arbitration clause that affects the procedural equality of the parties can be declared invalid.
Through the years, jurisdictions have changed their stance over the validity of AACs. In the case of the U.S., earlier AACs were invalid because of lack of mutuality, but now they are acceptable as mutuality is not anymore a requirement for a valid arbitration clause. Similarly, earlier in France, in light of judgments such as Rothschild Case and ICH v. Credit Suisse, AACs were not enforceable due the doctrine of potestativité. But in the Apple case, AAC was declared valid as such the jurisdiction before which a case can be brought was foreseeable and provided limited options to the party that benefits from an AAC.
Model Law countries such as England and Singapore have validated AACs. In cases such as NB Three Shipping Ltd. vs. Harebell hipping Ltd and Wilson Taylor Asia Pacific Pte Ltd vs. Dyna-Jet Pte Ltd the Courts have given preference to party autonomy and validated AAC. But in other Model law countries such as India, the stance regarding AACs is still not clear. It is worth considering that Model Law jurisdictions can adopt the purposive interpretation of Article 18 to give a new and fresh perspective on the question of validity of AACs.
The literal interpretation of Article 18 of the Model Law, which is applied only after the commencement of the proceedings, may not always be the correct view. It must be understood that in certain cases, inequality between the parties can transpire from the arbitration agreement and hampers the right of equal treatment of parties after the commencement of the proceedings. When an advantageous party invokes an AAC then it gets to determine the procedure that is going to be followed by choosing arbitration among the other dispute resolution options available. The parties in such a case, shall not be placed at an equal footing because of the inequality existing in the arbitration clause and its bearing on the procedural equality of the parties. Thus, a purposive interpretation of Article 18 must be developed. It allows using the guarantee of equality and fairness as provided under Article 18 even before the commencement of proceedings. In cases where inequality emerges from an AAC, and if it has an impact on the procedural equality between the parties, the principle of party equality is denuded — thus making it violative of Article 18 of the Model Law. Though significant development with respect to AACs has taken place over a period of years, the validity of such clauses is not far from the clouds of uncertainty. However, a purposive interpretation of Article 18 provides a novel perspective to reappraise the issue of the validity of AACs.
[i] Alexander J. Belohlavek, The Definition of Procedural Agreements and the Importance to Define the Contractual Nature of the Arbitration Clause in International Arbitration, 2 Y.B. on Int’l Arb. 21 (2012). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2193907