[Sajjad is a student at NALSAR University of Law.]
Asymmetrical clauses, also known as lopsided or unilateral clauses, are those clauses that grants one party greater control over key aspects of dispute resolution, giving them a distinct advantage over other parties to the contract. Asymmetrical jurisdiction clauses (AJCs), a peculiar species of asymmetrical clauses, provide a disproportionate right to one party to choose a particular jurisdiction for litigation from multiple options, as compared to the other party, which has to accept a specific jurisdiction and has no autonomy to choose. Another species of asymmetric clause is the 'unilateral option clause,' wherein one party is given the sole authority to choose a particular form of dispute resolution, such as arbitration or litigation. However, only that party is granted this choice. In arbitration, asymmetrical clauses allow one party as opposed to the other to appoint an arbitrator unilaterally.
What Are AJCs, and Why Are They Contentious?
The essential functionality of an AJC in an agreement is to make one party to the agreement sue in a specific court while allowing the other party to sue in that court or any other court with jurisdiction under its local rules. This other party with greater rights and freedom to sue is generally a financial institution that acts as a creditor in granting financial credit to other institutions or individuals in need of it. Since in agreements of this type, the creditor is always on an upper pedestal, such clauses have become commonplace.
Asymmetrical jurisdiction clauses have always been contentious due to their lack of consistent admissibility by the courts. There has always been a risk in including such clauses in contracts since different jurisdictions have treated them differently. While in India, the superior courts have yet to make their stance clear on it, many courts in common law jurisdictions have decided on the permissibility of these clauses.
For instance, the validity of AJC has been repeatedly upheld by English courts, unlike those in other common law jurisdictions such as France. Recently, in the case of Barclays Bank PLC v. PJSC Sovcombank & Anor, the High Court approved a bank's request for a final anti-suit and anti-enforcement injunction. This decision prevented the foreign parties involved from proceeding with litigation in a foreign court, as that would have violated the exclusive aspect of an asymmetric jurisdiction clause in a syndicated loan agreement.
However, the landscape in France concerning these clauses is entirely in contrast. In 2012, the French Supreme Court decision in Mme X v. Banque Privée Edmond de Rothschild observed that asymmetrical jurisdiction clauses were inequitable and, therefore, unenforceable. The court held that an asymmetrical jurisdiction clause is void because it is a "potestative condition." A potestative condition is a condition in a contract which gives only one party the complete authority to execute an aspect. The court here essentially weighted its decision based on the principle of equality of parties.
However, in 2015, the French Supreme Court, in Apple Sales International v. eBizcuss, held that asymmetrical jurisdiction clauses are valid under French law, provided that each party can identify, in advance of starting legal proceedings, the jurisdictions that may be competent to hear a potential dispute (in this case, the jurisdiction in which eBizcuss was registered, and those within which Apple had sustained a loss). On the condition that asymmetrical jurisdiction clauses comply with this ‘foreseeability requirement,’ they were said to be enforceable by the court.
Despite this seemingly partial acceptance, the position in France still needs to be more specific regarding the clause's admissibility since the French Supreme Court did not fully accept the validity of the AJC. It premised its decision based on an agreement's clause, which gave Apple an upper hand in choosing jurisdiction. However, the options were still limited regarding "any jurisdiction where harm to Apple is occurring." The position still needs to be clarified regarding those cases where a clause provides unlimited options to one party in choosing any number of jurisdictions, which might not be foreseeable.
In other European countries, the courts in Spain, Italy, Luxembourg, and Greece have all taken the same stance as the English courts, while the courts in Poland and Bulgaria have rejected asymmetric jurisdiction clauses.
The Prominent Bone of Contention in the Admissibility of AJCs
The fundamental underlying issue that the courts generally deal with when looking at the validity of AJCs is whether to give more importance to the autonomy of the parties when they choose to voluntarily enter into a contract, favouring the doctrine of pacta sunt servanda, thereby understating the power imbalance that exists between the two parties in such contracts. Or, should it give more regard to the inequities of the parties that exist and uphold the general equality of parties in a contract.
Thus, the main issue here is how to balance these two very important values—the equality of the parties vis-à-vis their autonomy. It is important to note that in the case of contracts with AJC, inequity can occur in two ways: one, the inherent lack of power balance between the parties, and second, the inequity in the potestative condition itself in the asymmetric clauses. The power imbalance is often starkly visible in these cases where one party, typically a bank or financial institution, wields significant bargaining power, enabling it to impose terms unilaterally. This dynamic frequently leaves the other party, often a borrower or smaller entity, with little to no room for negotiation, effectively creating a "take-it-or-leave-it" scenario. Consequently, the courts face the complex task of reconciling these two competing principles.
The tension between party autonomy and contractual equity is not merely a theoretical debate but can also be seen in the real-world adjudication of disputes. While Indian courts have yet to address the validity of asymmetrical jurisdiction clauses directly, their approach to other asymmetrical contractual provisions offers insights into how they might navigate this issue. Cases involving unilateral arbitration clauses shows the Indian judiciary's cautious stance toward provisions that grant disproportionate power to one party.
For example, courts have been conservative in allowing the use of ‘unilateral arbitration clauses’ by rejecting clauses that enables a party to unilaterally appoint an arbitrator while giving no such privilege to the other party. At this juncture, it is crucial to analyse the Supreme Court’s recent 5-judge bench decision in the case of the Central Organisation for Railway Electrification v. M/s ECI SPIC SMO MCML (JV). The majority in this case held that unilateral appointment of arbitrators would be invalid in all the cases where a contract is between a public sector undertaking (PSU) and a private party. The basis for the decision was that such clauses in public-private contracts go against Article 14 of the Indian Constitution, which guarantees equality. It stressed that fair treatment for both parties is crucial throughout the arbitration process, including when arbitrators are chosen.
In this case, the particular PSU had curated and maintained a panel of potential arbitrators and, in the contractual clause, had mandated the other party to choose arbitrators only from that panel. The court held this as against the principle of equal treatment of parties because there is no effective counter-balance as the parties do not participate equally in appointing arbitrators. Though the parties have complete contractual freedom and party autonomy, especially in arbitration, the court observed that these cannot override the public policy concerns and constitutional equality of the parties.
This decision was with respect to a public-private contract where the government holds greater bargaining power compared to the private party, and hence the rationale. However, the position of unilateral arbitration clauses between two private parties, where there is no apparent power disparity, is still unclear.
Similarly, many other High Courts (HC) have also rejected these clauses on the similar reasoning. Recently, the Delhi HC in the case of Chabbras Associates v. M/s Hscc (India) Limited and Another ruled that an arbitration agreement allowing only one party the exclusive right to appoint an arbitrator is inherently flawed and contrary to legislative intent. It rejected the contention that such a clause reflected the parties' free intent to create such a mechanism.
In another case, the Delhi HC in Telecommunication Consultants India Limited v. Shivaa Trading observed that an unilaterally appointed arbitrator lacks inherent jurisdiction, and proceedings before him or any decision he made are void ab initio.
Policy and Economic Implications of Enforcing or Restricting AJCs
A clear stance on the admissibility of AJCs in India by the superior courts holds considerable significance for domestic business practices and international trade. In a diverse business landscape like India's, where companies vary widely in scale and bargaining strength, the stance on AJCs can have broad and lasting effects.
For Indian small and medium enterprises (SMEs), which often have limited legal and financial resources, AJCs can present a significant challenge. Smaller companies frequently find themselves in agreements with more giant, often multinational, corporations where the terms of AJCs tend to favour the stronger party. Enforcing AJCs could force these SMEs to navigate legal disputes in foreign jurisdictions, which would involve steep legal and logistical costs. This might discourage smaller businesses from pursuing international opportunities or diminish their negotiation leverage, limiting their prospects in the global market.
On the flip side, enforcing AJCs could boost foreign direct investment. Many international investors and multinational companies lean towards contracts with AJCs because they provide greater predictability and strategic advantages. If Indian courts opt not to enforce AJCs, it could create hesitation among foreign investors, who may see the lack of enforcement as a barrier to reliable dispute resolution.
However, enforcing AJCs without adequate protections risks favouring stronger contractual parties, potentially casting doubt on India's commitment to fair market practices. A middle path that enforces AJCs under specific conditions, similar to the foreseeability standard in French law, could attract investment while safeguarding the interests of less powerful parties.
Policy Considerations and Conclusion
From a policy standpoint, India should consider adopting guidelines or legislative frameworks addressing the enforceability of AJCs. Clear rules could mitigate the risk of legal uncertainty and forum shopping while ensuring equitable treatment for all contracting parties. For instance, guidelines could:
first, mandate that AJCs must be reasonably foreseeable and specific, ensuring the weaker party can anticipate the jurisdictions they might be subject to;
second, require the demonstration mutual understanding and acceptance of AJCs, especially in contracts involving SMEs or individuals;
finally, limit the admissibility of AJCs in contracts where one party holds disproportionate bargaining power, aligning with principles of natural justice and the Indian Contracts Act 1872.
In conclusion, the Indian judiciary's silence on the validity of asymmetrical jurisdiction clauses creates much uncertainty in cross-border commercial contractual relationships. While these clauses raise valid concerns about power imbalances, particularly for SMEs dealing with multinational corporations, their outright rejection could deter foreign investment and complicate international business dealings. Indian courts can adopt a balanced approach, perhaps similar to France's foreseeability standard, while incorporating safeguards that align with principles of contractual fairness. Clear judicial guidelines on AJCs will only enhance India's business environment and demonstrate its straightforward approach to modern commercial realities while protecting the interests of weaker parties.
Comments