Asymmetric dispute resolution clauses: proceed with caution

Speedread

Recent decisions of the Russian and French courts have real significance for anyone involved in drafting dispute resolution clauses. Both decisions looked at asymmetric clauses - dispute resolution clauses where one party is able to choose where the dispute should be resolved, while the other party has no choice. In finance transactions for example, it is common to see the borrower confined to the exclusive jurisdiction of one particular court, with the bank able to commence proceedings in any competent court. Likewise, you may see a clause that gives the stronger party the choice between arbitration and litigation, but confines the other party to just one of those forums. Both the Russian and French courts considered asymmetric clauses to be inequitable and as such, invalid. In light of these decisions, caution should be exercised whenever you are considering incorporating an asymmetric clause. Local advice should always be taken as to their validity in both the jurisdiction of the counterparty and any jurisdiction in which enforcement of any judgment or award is likely to be sought.

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Background

In transactions where one party has the stronger bargaining position it is common for the contract to include an asymmetric dispute resolution clause. Often referred to as unilateral clauses, these one-sided dispute resolution clauses typically provide for both court jurisdiction and arbitration coupled with a mechanism allowing the stronger party to determine the procedure once a dispute arises. So, for example, the contract provides for disputes to be resolved in the English High Court but Party B also has the right to refer the dispute to arbitration.

Caution should always be used whenever such asymmetric clauses are considered. Although recognised as valid in certain courts (including England, Australia and Singapore), other jurisdictions may take a different approach, as highlighted by two recent decisions.

Recent decisions

Last year, the Russian Supreme Arbitrazh Court considered a dispute resolution clause which referred all disputes to international arbitration (London seat) but granted one party the option to litigate. The clause was found to violate public policy due to the inequality it created between the contracting parties. As a result of the decision, the unilateral clause was effectively regarded as giving bilateral rights - so both parties could choose to arbitrate or litigate. Consequently, the party that only had the option to arbitrate in London was permitted to continue its proceedings in the Russian courts.

More recently the highest court in France, the Cour de Cassation, declared invalid an asymmetric jurisdiction clause which restricted the customer of the bank to the exclusive jurisdiction of the Luxembourg courts but permitted the bank to bring proceedings in the country of the customer or any other competent court. The customer commenced proceedings against the bank in the French courts. The French courts dismissed the bank's objection to jurisdiction by virtue of the asymmetric nature of the clause. The clause in this case was similar to that used in many finance transactions.

Implications

Taken together these decisions highlight the need to exercise caution if using dispute resolution clauses that confer unilateral rights. In an increasing number of jurisdictions these clauses may be considered unfair and against public policy. In addition, some jurisdictions will not recognise a unilateral right to refer a dispute to arbitration. This could result in proceedings being brought in the jurisdiction the clause was intended to avoid or parallel proceedings. It could also affect the enforceability of any arbitration award if the counterparty is able to argue that the underlying dispute resolution clause was invalid. The message is clear: always take local advice if you want to include an asymmetric clause and consider whether the benefits of using such a clause outweigh the risks.

Please click on the links below for the other articles in the February 2013 Arbflash:

• Anatomy of an arbitration Part I: Why arbitrate?
• Queen Mary 2012 survey on international arbitration practice: snapshot of key findings
• Arbitration in China: CIETAC developments
• Australian High Court considers constitutional challenge to Australia's international arbitration regime
• International round-up
• Investment treaty update
• Frequently asked questions: is my tiered dispute resolution clause binding?