Deliberations

Deliberations Vol. 1 Mutuality in arbitration.

Mutuality in arbitration:

By Mikhail Behl

Boilerplate agreements such as those endless proforma agreements banks require borrowers to sign, employment agreements usually postulate asymmetrical or non-mutual provisions. A common instance of such asymmetry is observed in provisions that grant a unilateral right to commence arbitrations and/or constitute an arbitral tribunal to determine disputes under these agreements. Mutuality, particularly the right of either or any party to an agreement to refer disputes to arbitration have long been recognised as an essential ingredient of a valid arbitration agreement[i].

But there are those that hold views that differ. Many legal thinkers[ii] contend that it is an artifice to insist upon a perfect symmetry of rights and obligations between the parties to an agreement including a clause related to arbitration thereunder. They argue, that the arbitration agreement must be analysed in much the same manner as one would any other portion of the contract. A contract does not demand for instance a perfect symmetry of consideration, the existence of a valid consideration is sufficient for the agreement to be enforceable[iii].

Complex agreements indeed contain clauses where only one party thereto is under certain obligations, makes certain representations and gives certain warranties. One may observe this in contractual provisions such as warranties about the fitness of a product or service, guarantees for the due performance of an agreement etc. Certain contracts also contain unilateral covenants such as non-compete clauses and non-disclosure clauses. Liquidated damages clauses are almost always unilateral and almost never bilateral, yet all of these clauses are universally regarded as valid and their enforceability is undisputed[iv]. Proponents against the need for mutuality therefore argue that if one sifts through the various clauses of an agreement, it is fairly apparent that there is no term-by-term symmetry or mutuality and therefore question why mutuality is insisted upon only when it comes to arbitration agreements contained within such contracts[v].

Those taking an opposing view, would urge that asymmetry goes against the very essence of arbitration which demands the fair and equal treatment of parties. They also argue, that while asymmetry may not be a grave concern in contracts between sophisticated businesses, they most certainly are a concern when it comes to the little guy[vi]. They would argue that agreements that allow one party to refer disputes and constitute a tribunal are unconscionable and must not be enforced.

Courts around the world have oscillated between these two positions. In the United Kingdom, courts having earlier insisted on mutuality now opine that they saw no reason why an agreement between two persons could not confer on only one of them the right to refer the matter to arbitration. Such an agreement was bilateral and merely because the clause only gave one of the parties the option to exercise the right was immaterial[vii].

In the United States, early opinions of the courts similarly relied upon the mutuality doctrine and refused to recognise arbitration agreements that gave unilateral rights to only one of the parties[viii]. More recently however, US Courts have rejected its application[ix], observing that justice did not demand perfect symmetry[x]. ?????????

In India too, Courts, courts have taken divergent views on the applicability of the doctrine of mutuality. The Bombay High Court[xi], took the view that arbitration agreements that conferred the right on only one of the parties to appoint an arbitrator were valid and could not be questioned on the grounds of mutuality. The Delhi High Court[xii], however disagreed and believed that an arbitration agreement must confer bilateral rights to refer disputes to arbitration.

In 2016, the Arbitration and Conciliation Act, 1996 came to be amended. A new ground for challenge to an arbitrator was inserted, namely, a person, whose relationship, with the parties or the subject matter fell within the categories specified in the Seventh Schedule became ineligible to be appointed as an arbitrator. The parties however, could subsequent to disputes having arisen waive the ineligibility.?

In Perkins Eastman Architects DPC & Anr. v. HSCC (India) Limited[xiii] the Supreme Court of India observed that the provisions of Section 12(5) of the Act were inserted to give effect to the doctrine of mutuality and hence it refused to give effect to an arbitration agreement that authorised the Chief Managing Director of one of the parties to unilaterally appoint an arbitrator.

In Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)[xiv] a larger bench of the Supreme Court of India held that where an arbitration agreement specifically provided for named arbitrators being retired officers of one of the parties the agreement was not vitiated by the doctrine of mutuality or the amended provisions of the Act, namely Section 12(5) read with Schedule Seven thereto.

The ruling of the larger bench in Central Organisation was distinguished in Glock Asia-Pacific Limited v. Union of India[xv] observing that an arbitration agreement violated the principle of mutuality when it allowed an employee of one of the parties to nominate another employee as an arbitrator.

The decision in Central Organisation has since been referred to a larger bench and is pending adjudication.

The law in India on the applicability of the doctrine of mutuality is one of those areas of law where no final or certain position has as yet been arrived at. The three clauses covered by the decision in Perkins, Central Organisation and Glock Asia were identifiably different from one another.

Having placed the two perspectives before you, I leave you with this question. Should India adopt the view taken in other countries such as the United States and the United Kingdom on the applicability of the doctrine of mutuality to arbitration agreements or should India trace its own path here, mindful of its peculiar social conditions[xvi]?

There is definitely much room here for deliberation.

[i] Baron v Sunderland Corp. [1966] 1 All ER 349 (English Ct. App.) & Tote Bookmakers Ltd. v. Dev & Prop. Holding Co. [1985] 2 All ER 555 (Ch.).?

[ii] Gary B. Born, International Commercial Arbitration §5.06[D] (3rd Edition - 2021).

[iii] Restatement (Second) of Contracts § 79(c) (1981) “If the requirement of consideration is met, there is no additional requirement of… ‘mutuality of obligation’.?

[iv] Ian R. Macneil et. al. Federal Arbitration Law § 17.4.2 at 17:56 (Supp. 1999).

[v] Christopher R. Drahozal, Nonmutual Agreements to Arbitrate, 27 J. Corp. L. 537 (2002).

[vi] Hiroo Advani et. al. Examining the validity of asymmetrical and optional arbitration clauses 2022 SCC Online Blog Exp 13.

[vii] Pittalis v Sherefettin [1986] 2 All ER 227.

[viii] Hull v. Norcom, Inc., 750 F.2d 1547 (11th Cir. 1985).

[ix] M.A. Mortenson Co. v. Saunders Concrete Co., Inc., 676 F. 3D 1153 (8th Cir. 2012)

[x] Kalman Floor Co. v. Jos. L. Muscarelle, 481 A. 2d 553 (N.J. Super. 1984).

[xi] Indian Oil v. Raj Unocal Lubricants 1997 (2) Mh. L.J. 281.

[xii] Union of India v. Bharat Engineering Corporation (1977) 11 ILR (Delhi) 57

[xiii] (2020) 20 SCC 760

[xiv] (2020) 14 SCC 712.

[xv] (2023) 8 SCC 226.

[xvi] Dormaan J Dalal, The Fifth Schedule of the Arbitration Act and its impact on adjudication of bulk financial disputes on ODR platforms, Bar & Bench.