• Aditya Singh

Examining the Validity of Arbitration Clauses in Standard Form of Contracts

-Aditya Singh†


This article explores key areas wherein the validity of arbitration clauses in standard form contracts comes into contention in India. The first of them is Unilateral Arbitration Clauses. The author argues that the same should be valid owing to the unnecessity of striking them down under public policy and the passageway to adopt the common law position hence giving precedence to mutuality. It also lays down other areas wherein the courts in India have done the same in similar scenarios. The article’s second prong of critique is on the evolved jurisprudence around ascertaining the validity of arbitration clauses referenced from other documents. Per the author, the courts should stick to evaluating the parties' intention using the construction of the clause that references the external document as opposed to also ascertaining the validity on the basis of the parties' familiarity based on the type of document that has been referenced (standard form of one party, standard form of a known trade association etc) to bring in more certainty.


I. INTRODUCTION


With the increasing number and volume of financial transactions, the utility of standard form of contracts has been increasing. Hence, making it the new norm, both in transactions occurring between multiple companies and between consumers and companies. Standard form contracts are premade templates with terms of agreement and hence they remove the requirement of drafting a new contract from scratch. Dispute resolution is an integral part of a contract and the increasing trend of the parties to adopt arbitration as a primary mode of dispute resolution makes it imperative to examine its jurisprudence in the context of the most prevalent form of contract format i.e., standard form contracts. Hence, this article will specifically analyse the Indian position around the validity of arbitration clauses in a standard form of contracts and propose the necessary changes required. To that end, the article will look at Unilateral Arbitration Clauses (UAC) and the requirements of valid incorporation i.e., the way an arbitral agreement has been referenced from another document, as they are prominent grounds on which the validity of arbitration clauses is brought into contention. To that end, the article in section II will look at the statutory guidance available as therein lies the root of the current conundrum. In section III the paper after examining the position will argue for the validity of UACs on the grounds of mutuality, pre-existing statutory protection to prevent patent injustice, and the adoption of common law position. Finally, in section IV, the paper will highlight the need for the codification of uniform guidelines for referencing to prevent internal contradictions and haphazardness within jurisprudence.


II. ABSENCE OF SPECIFIC GUIDANCE


The absence of specific statutory guidance has been an issue when it comes to adjudicating upon the unconscionability of a standard form of contract as a whole and even in the case of arbitration in particular. Firstly, looking at the domestic legislation, while Section 28 of the Indian Contract Act, 1872(‘ICA’), does not permit clauses that restrict parties from enforcing their rights in ordinary tribunals, arbitration is an exception to it hence upholding the validity of exclusion clauses directing dispute resolution to arbitration. The requirement of ICA is limited to the fact that the parties to the contract have agreed to the arbitral agreement. Apart from mutuality, it is silent on how the arbitral clause should be constructed whereas it offers some guidance on a normal exclusionary clause stating that the same cannot be absolute or limit the liability/ option of enforcement by time. Even if one were to look at Section 7 of the Arbitration and Conciliation Act, 1996 (‘A&C Act’), it only states that the agreement has to be in writing. While it goes beyond the ICA which it should, being a specific legislation, “reference” i.e., to the document containing the arbitration clause- stated in Section 7(5) is not defined by the act hence creating a wide room for judicial interpretation. This normally creates problems in cases when the parties adopt the terms of a former contract into a current contract because there are various types of references and the intricacies of the same will be elaborated upon in section IV of this article. While the only common provision in both the ICA and the A&C Act is “public policy” it is used to strike down UACs; it is an unruly horse, meaning the courts have gone into expanding the ambit of public policy lacking statutory and precedential basis. Secondly, if we were to look at the international sphere, the situation is not very different from that of the domestic sphere. When dwelling upon the validity of an agreement to arbitrate, the New York Convention - on which chapter I of Part II of the A&C Act is modelled, lays down the condition that the agreement should be in writing. While the Model Law in the explanatory note issued by the UNCITRAL secretariat for the 2006 amendments specifies that “the reference in a contract to any document” (for example, general conditions) “containing an arbitration clause constitutes an arbitration agreement in writing provided that the reference is such as to make that clause part of the contract”.” It also states that the degree of consent to the contract is to be determined by the domestic contract law. Apart from the fact that the domestic laws (both the ICA and A&C Act) are silent on the same, there are two other problems that arise out of this. Firstly, this does not cover the circumstances when it is a direct standard form of contract with every clause entailed in a single document. Nor does it distinguish between a one or two-part contract. This distinction, as will be highlighted in Section IV of the article is important else the courts arbitrarily categorize contracts as single or two-part based on the probability of a party’s familiarity with the contract. Secondly, the explanatory note requires the usage of the domestic contract law, hence in cases of parties having unequal bargaining power one will have to refer to ‘free consent’ as mentioned in Section 10 of the ICA. This again is a judicial construct in India hence leaving a lot of room for uncertainty and in a few cases leading to a non-uniform treatment across sectors. The same will also be covered in Section III of this article. While there have been amendments both in the Model Law and the A&C Act to cope with modernization and the emerging issues such as the codification of construing electronic communication as written, it is required that further grey areas such as the ones delineated are filled preferably at the domestic level to reduce uncertainty.


III. UNILATERAL ARBITRATION CLAUSES


In this section, the article argues to give precedence to mutuality and the prevailing common law position as there are protections in place to prevent patent injustice. This should eliminate the need to hold UACs unconscionable under public policy. To begin with, there cannot be a blanket, one-size-fits-all stand on the validity of unilateral arbitration clauses. While quite a few of them accord power to one of the parties to select the seat of arbitration (in standard form contracts), select the forum/ institution of arbitration, etc; there may be other specifications that need to be examined from a case-to-case basis.


Several layers of statutory protections are already in place to protect the parties from UACs which are prima facie unjust. For instance, if a clause absolutely restricts the opposite party from enforcing their rights, it will be voided by Section 28 of the ICA. In case the UAC allows one of the parties to also unilaterally appoint the arbitrator/ forum and the arbitrator’s relation with the party falls in one of the categories listed under Schedule VII, such a clause will be held void under Section 12(5) of the A&C Act. Apart from statutory safeguards, UACs in standard form consumer contracts are now reduced to token clauses. In the case of Emaar Mgf Land Ltd. v. Aftab Singh, after interpreting Section 8 of the A&C Act to not have the wide power of inundating special remedies, it was due to various reasons held that the courts can refuse from enforcing the arbitration clause when a special remedy is present.[1] And in such cases, the Consumer Protection Act is considered a special legislation. This implies that there is a mechanism in place to protect the parties if there is a special remedy in place. Apart from statutory protections, there are pointers laid down by courts to adequately notify the parties about onerous clauses in a standard form contract through different colour/ font sizes etc when the bargaining power is unequal.[2] Hence, when there are statutory protections present to prevent patent injustice and manipulation, mutuality should be given precedence in the remaining cases.


Moreover, what arises further is the issue of double standards. When the parties have mutually agreed to the fact that one of them will be selecting the seat and/or the forum of arbitration, it is imperative that the freedom of contract is preserved. Even if we look at the Indian jurisprudence in cases where a majority of the terms are either set by a statute, notification or government orders leaving the traders with zero bargaining power, it has in several cases been held that the contract is still valid. For example, in the case of IS. and W. Products v. State of Madras, it was held that an agreement is a contract in law as long as mutual assent is not excluded completely. Even in the Andhra Sugars case, a contract wherein the factory owners had to purchase sugarcane from the farmers at the prescribed terms and conditions with little bargaining power was upheld. Hence, why is there a dichotomy in the instant sphere of jurisprudence despite there being multiple statutory safeguards preventing patent injustice? If the former is not opposed to public policy and is upheld on the basis of mutuality, the same should apply in the instant case. As long as a clause is in conformity with the statutes mentioned in Section III of the article, it should not be struck down on the basis that it confers a certain degree of advantage on one of the parties. It was also stated by Mann J. in Law Debenture Trust Corp. PLC v. Elektrim Finance that a unilateral clause gives an additional advantage to one of the parties to a contract but this should be treated in the same vein as any other contractual clause giving advantage and not as a peculiarity on its own.


Secondly, as mentioned earlier, the legality of UACs barring a few cases cannot be deduced by either the ICA or A&C Act. As it has been held in Naresh Chandra Guha v Ram Chandra Samanta, under such circumstances, common law principles and practices are used to decide cases. And the common law post-1986 under various cases held UACs as valid on the grounds of mutuality. Even if we are to look at the jurisprudence around the ‘reference’ of arbitration clauses referred to in section II, the Indian courts have extensively relied on the principles of common law since Section 7(5) of the A&C Act has not been laid down any specific guidelines for a valid reference. This indicates differential treatment being rendered to UACs inconsistent with the mass discourse. In terms of similarity, the A&C Act of both the UK and India have been majorly modelled after the UNCITRAL Model Law on International Commercial Arbitration and UACs have not been held unconscionable in the UK despite there being the additional safeguard of the Unfair Contracts Terms Act.


IV. THE ‘REFERENCE’ CONUNDRUM


In this section, the article attempts to reconcile the various positions on the validity of arbitration clauses based on the manner they have been incorporated into the main contract. It highlights the need for laying down a common set of guidelines for a valid reference to enhance the ease of doing business and the logical soundness of jurisprudence revolving around the same.


Although scattered and different for various types of references, the position of Indian Courts is settling with time, that is various nuances are being acknowledged and covered in cases. However, there is still the problem of non-uniformity of principle unravelling a potential contradiction.


To begin with, in the landmark judgement of M.R. Engineers & Contractors v Som Datt Builders Ltd, the court stated the need for a conscious acceptance of the arbitration clause which is synonymous with the intention of the parties. To illustrate it laid down different types of possible references. Firstly, if the main contract explicitly states that all the clauses of a particular document will be a part of the contract and that document contains an arbitration clause then the arbitration will be the mode of dispute resolution. Secondly, in the absence of such explicit wordings, the context of incorporation will be analysed. That is, if the external document has been referred specifically for particular details such as a sale template, it will be construed that the intention was not to adopt the document in its entirety and hence there has to be a special reference to the arbitration clause.


The ‘intention test’ assessed using the objective evidence (wordings/ construction of the referencing clause) at hand does form a sound criterion but the water starts getting muddied when the courts themselves try to gauge whether the parties would be familiar with the terms of the referenced contract. This is because the courts have used it to deny the validity of references if there is a two-part contract. What is problematic is that the courts are undertaking an absolute assumption that the opposite party will be unfamiliar and in turn waiving the ‘duty to read’ and also making the intention aspect virtually irrelevant by underlooking the wordings/manner used to incorporate the arbitration clause. This has also led to inconsistencies. For example, in the M/S. Inox Wind Case, the court used Habas Sinai v Sometal’s ratio and M.R. Engineers’ ratio, which stated that reference to a standard form of contracts shall be construed as a single contracts case and a general reference will be sufficient if it is the standard form of contracts is of a recognized trade or professional association. The Court expanded it by ruling that even if the document referred to is a standard form of contract of only one of the parties, it should be construed as a single contracts case, without really providing reasons for the same. Even if we look at the text of section 7(5), although it may not be decisive, it requires that the “reference is such as to make that arbitration clause part of the contract” hence pointing towards the fact that if the reference clause denotes an intention of the parties to incorporate another document in such a manner that it covers the arbitration clause contained in it, the same should be valid.


The court’s venture into upholding or denying the validity of an arbitration clause based on their own assessment of a party’s familiarity is rather arbitrary. To avoid such inconsistencies, it is proposed that ‘reference’ is defined by codifying the intention test to have a uniform guideline for implementation. The same as stated is deducible by the construction and wordings of the clause and in terms of objective evidence, commercial negotiations even have additional objective pieces of evidence such as term sheets. The M/S Inox case was upheld in the Giriraj Garg v Coal India Limited hence making the familiarity requirement all the more irrelevant. Apart from this even in cases of general references, there is already a pre-existing liability under contract law to provide sufficient notice of the general reference clause if it is a standard form of contract. While we are in a better position than before and while the courts are consolidating the subject with time, this confusion can be put to rest by the abovementioned proposal.


CONCLUSION


To conclude, the stand taken is that unilateral Arbitration Clauses if patently unjust will be voided by law and hence in other cases, precedence should be given to mutuality and the common law position should be adopted for the reasons stated above. Guidelines for a valid ‘reference’ should be codified to uniformize the requirements across multiple types of contracts as this will go a long way in improving the arbitrability of disputes and the ease of doing business.


†Aditya Singh is a second year student at National Law School of India University, Bangalore.


[1] Emaar MGF Land Limited v. Aftab Singh, 2018 SCC Online SC 2945 [52].

[2] J Beatson, A Burrows, and, J Cartwright, Anson's law of contract, (29th ed. OUP) 173-177.




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