DHARMASHASTRA NATIONAL LAW

UNIVERSITY, JABALPUR

ALTERNATIVE DISPUTE RESOLUTION PROJECT

(SESSION OF 2023-24)

VALIDITY OF ARBITRATION CLAUSE IN A

BOILERPLATE CONTRACT

SUBMITTED TO: SUBMITTED BY:

MRS. SHRUTI NANDWANA SANSKRATI JAIN

ASSISTANT PROFESSOR SEMESTER- VIII

DNLU, JABALPUR ROLL NO: 116

 ACKNOWLEDGEMENT
The completion of this project required counselling and assistance from many people and I’m
really thankful towards them for their counselling in my project.

I would like to express my deep gratitude towards my teacher asst. professor Mrs. Shruti
Nandwana who took acute interest in my project and guided me all along. I am feeling
extremely privileged to have her as my instructor in the project. I owe my deep gratitude to
the Vice-Chancellor Prof. (Dr.) Manoj Kumar Sinha for his valuable support throughout the
project. This project helped me in gathering a lot of knowledge and becoming more aware of
things related to my topic.

I would like to extend my gratefulness to my parents and friends for their valuable support
and advice.

I am making this project not only to get marks but also to enhance my knowledge. At the end
I would like thank everyone who helped me and invested their valuable time for this project.

Sanskrati Jain

BAL/116/20
 INTRODUCTION
India has witnessed a significant surge in demand for arbitration, driven by the staggering
backlog of court cases, prolonged judicial processes, and the exorbitant costs associated with
litigation. The country's vast size and diversity present challenges, notably the delays in court
proceedings that result in a tardy dispensation of justice. Confronted with such a backlog in
the judicial system, individuals and businesses are increasingly inclined to seek alternative
dispute resolution mechanisms outside of the courts. These out-of-court settlements have
proven effective and efficient in recent years, offering a preferable alternative to protracted
litigation.1

Litigation, with its potential for extended timelines and substantial expenses, often dissuades
parties from pursuing legal recourse through traditional channels. Court cases can languish
for years due to adjournments, appeals, and other procedural hurdles, exacerbating the delay
in obtaining a final resolution. Arbitration, in contrast, offers several advantages. As a private
process, arbitration proceedings and awards are conducted confidentially—a feature that has
been underscored in recent legislative amendments in 20192. This confidentiality is highly
valued by parties involved in disputes. Against this backdrop, the primary reasons why
parties opt for arbitration include its ability to deliver swift resolutions, the efficiency and
expertise offered by specialized arbitrators, the preference for arbitration in commercial and
business transactions, and the cost-effectiveness compared to protracted litigation battles.

As the frequency and scale of financial transactions continue to rise, standard form contracts
have become increasingly essential. These pre-made contract templates streamline
agreements, eliminating the need to create new contracts from scratch. With arbitration
becoming the preferred method for dispute resolution, particularly in transactions between
companies and consumers, it's crucial to explore its legal standing within standard form
contracts. This article aims to analyse the Indian legal landscape concerning the validity of
arbitration clauses in standard form contracts and suggest necessary reforms. As under Order
XXXVII of the Code of Civil Procedure 3, invoices are categorized as "written contracts" for
the purpose of recovery suits.4

The focus will be on Unilateral Arbitration Clauses (UAC) and the criteria for their valid
inclusion, such as how an arbitral agreement is referenced from another document. These
aspects often raise questions about the legitimacy of arbitration clauses. Initially, the author
has addressed the elements necessary for an arbitration agreement to be considered valid. The
statutory framework governing arbitration serves as the foundation for the current legal
challenges and its interpretation, as discussed in section II.

1
Legal Bites, https://www.legalbites.in/13-reasons-why-adr-is-better-than-litigation/, last visited on 20-02-24.
2
The Arbitration and Conciliation (Amendment) Act, 2019, §, No. 33, Acts of Parliament, 2019 (India).
3
The Code of Civil Procedure, 1908, §, No. 5, enacted by Legislative Council of India, 1908 (India).
4
Pranbihanga Borpuzari, Big or small business, Why an Arbitration Clause in Your Contract Can Be Beneficial,
of The Economic Times, dt. 05th April 2021, can be accessed on https://economictimes.indiatimes.com/small-
biz/legal/big-or-small-business-why-an-arbitration-clause-in-your-contract-can-be-beneficial/articleshow/
81908642.cms?from=mdr
Section III will discuss the judicial differences on this issue by various High court and with
Supreme court’s as such no particular opinion and validity of UAC’s on the basis of them
severally. Section IV will argue for the validity of UACs based on principles of mutuality,
existing statutory safeguards against unfairness, and alignment with common law principles.
For instance, in commercial contracts, invoices may contain extra terms which are not in the
original agreement. However, parties can't enforce terms unilaterally. This section will also
briefly delve into the status of such arbitration clauses in other countries. Finally, Section-V
will stress the importance of establishing uniform guidelines for referencing in contracts to
prevent inconsistencies and confusion within legal practice.

RESEARCH OBJECTIVES
 To understand statutory provisions and judicial pronouncements on validity of arbitration
clauses in standard form of legal contracts.
 To evaluate the validity of arbitration clauses in standard forms of legal contract under the
current statutory and judicial regime.

RESEARCH QUESTIONS
 Whether the current legal regime is sufficient and good enough to address the
complexities arising out of these unilateral or boilerplate contracts?
 What are the various underlying differences in approach of different High courts which is
leading them to different views on the same issue?

RESEARCH METHODOLOGY
Doctrinal research also known as, theory-testing or knowledge building research has been
done to shape the project. The research was done mainly by e-resources. There is no field
work required here. For my research work the data has been collected from various databases.
With the help of internet various books’ summary and their excerpts were read. Various
materials that are available on e-sources have been critically analysed and the similar ideas
have been put forward in the project. The primary as well as secondary documentary sources
are utilized to make the study up-to-date, orderly and scientific. Various reports, newspapers,
books, articles, journals, judicial decision, website, international, constitutional norms, and
national measures will be taken as important research tools. Besides these methods, some
other methods will also be applied according to the need of the study.
 STATUTORY FRAMEWORK: ESTABLISHING VALIDITY AND
INTERPRETATION CHALLENGES
In today's commercial landscape, Alternative Dispute Resolution clauses, particularly
Arbitration Clauses, have become standard in most commercial agreements and transactions,
often referred to as Standard Form Contracts. Standard Form Contracts are pre-drafted
agreements where one party's terms and conditions are emphasized, leaving little room for
negotiation by the other party, akin to a "take it or leave it" approach. Typically crafted by
industries and insurance providers, these contracts significantly limit the bargaining power of
the parties, often containing terms that restrict or exclude liability. Customers, in such cases,
are left with little choice but to accept the terms or reject the offer. For instance, when a
customer seeks services from a multinational corporation, they often have to agree to the
corporation's Standard Form Contract.5

In this context, it's crucial to understand how a standard form contract might include a One-
Way arbitration clause. Consider a scenario where Company A hires Employee B under an
employment contract. The contract includes clauses deemed unfair and unreasonable by the
Supreme Court of India under Section 23 of The Indian Contract Act 6, such as in the case of
Central Inland Water Transport vs. Brojo Nath7. Now, let's say the contract also includes a
clause for termination and arbitration as a dispute resolution mechanism. This means that if
Employee B is terminated under circumstances, they find unreasonable and wish to legally
challenge it, the contract stipulates that disputes must be resolved through arbitration, with
the HR department of Company A acting as the sole arbitrator.

In such a scenario, the hiring company holds the advantage in invoking the arbitration clause,
while the employee is at a disadvantage as they cannot initiate the dispute resolution process.
This demonstrates the unequal bargaining power inherent in standardized contracts and One-
Way arbitration clauses.

The Concept of One-Way Arbitration Agreement, also known as Asymmetric Dispute

Resolution Clauses, involves giving one party greater control over choosing the dispute
resolution method, whether arbitration or litigation. For example, Party A and Party B may
agree to English courts' jurisdiction, except that Party B, at its sole discretion, can opt for
arbitration in French courts. These clauses grant one party the exclusive right to elect a
specific dispute resolution mechanism, either arbitration or litigation. However, this option is
only available to one party. Courts grapple with whether to uphold such clauses in the interest
of party autonomy or intervene based on public policy considerations.8

The lack of specific statutory guidance poses challenges in determining the fairness of
standard contract terms and arbitration clauses. In India, while the Indian Contract Act of

5
Deyan Draguiev, Unilateral Jurisdiction Clauses: The Case for Invalidity, Severability or Enforceability,
Journal of International Arbitration, Page No. 19–46, (2014)
6
The Indian Contract Act, 1872, § 23, No. 09, Acts of British Parliament, 1872 (India).
7
The Central Inland Water Transport Corporation Limited vs. Brojo Nath Ganguly, 1986 AIR 1571
8
M. P. Ram Mohan, Promode Murugavelu, Gaurav Ray & Anmol Jain, Indian Law on Standard Form
Contracts, Journal of Indian Law Institute, Volume 62 Issue 4 (2020).
18729 permits arbitration clauses despite restrictions on enforcing rights in ordinary tribunals,
it lacks clarity on how such clauses should be constructed beyond requiring mutual
agreement. Similarly, the Arbitration and Conciliation Act of 1996 10 only mandates that
arbitration agreements be in writing, leaving room for judicial interpretation, especially
regarding references to documents containing arbitration clauses. This ambiguity becomes
pronounced when parties incorporate terms from previous contracts into new ones. Despite
both acts invoking "public policy" to invalidate unfair contract terms, the broad interpretation
of this concept by courts lacks statutory and precedential backing.

Internationally, the situation mirrors domestic uncertainty. The New York Convention11, upon
which India's arbitration laws are based, requires written arbitration agreements, with the
UNCITRAL Model Law12 specifying that references to documents containing arbitration
clauses form part of the contract. However, neither Indian law addresses the scenario of direct
standard contracts nor clarifies distinctions between single and two-part contracts. Moreover,
reliance on domestic contract law, particularly concerning free consent, introduces further
ambiguity, especially in cases of unequal bargaining power.

While amendments have addressed modernization, such as recognizing electronic

communications as written, unresolved issues persist, necessitating domestic solutions to
minimize uncertainty. Clarifying these grey areas domestically can promote uniformity and
reduce ambiguity across sectors.

9
The Indian Contract Act, 1872, No. 09, Acts of British Parliament, 1872 (India).
10
The Arbitration and Conciliation (Amendment) Act, 2019, No. 33, Acts of Parliament, 2019 (India).
11
The New York Convention, can be accessed on https://www.newyorkconvention.org/
12
UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in
2006 can be accessed on https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration
 JUDICIAL VARIATIONS IN VALIDITY AND INTERPRETATION
In the Chloro Controls Private Limited v. Severn Trent Water Purification case 13, the
Supreme Court outlined key conditions for assessing the validity of arbitration agreements.
These include:
(i) the consensual nature of arbitration based on an agreement between parties;
(ii) arbitration as a final dispute resolution method; and
(iii) its role as a substitute for court litigation, resulting in a binding award.

These conditions, along with an exhaustive list provided by the Supreme Court and Section 7
of the Arbitration and Conciliation Act, 1996, form the basis for determining a valid
arbitration agreement. While the Act mandates that arbitration agreements must be in writing,
they can take various forms, as clarified by recent rulings such as Mahanagar Telephone
Nigam Ltd. v. Canara Bank & Ors.14 Here, the Supreme Court emphasized that the intention
of parties to enter into arbitration, evident through clauses in contracts, documents, or
correspondence, is paramount.

In cases involving standard contracts or online purchases where signatures are absent, the
courts have upheld agreements based on the parties' conduct and intention. The absence of
signatures does not nullify agreement to terms and conditions, as seen in Govind Rubber
Limited Vs Louis Dreyfus Commodities Asia Private Limited 15. The Supreme Court clarified
that signatures of both parties are not formal requirements under the Act. Even without
signatures, if a meeting of minds regarding an arbitration clause is evident, it remains binding
on both parties. Thus, the absence of signatures, such as on an invoice, does not invalidate the
existence of an arbitration agreement if the intention to agree is established.

Hon’ble Delhi High Court’s Views

In the case of Bhartia Cutler Hammer Limited vs. AVN Tubes Limited 16, the Delhi High Court
(DHC) ruled that the arbitration clause in the contract was invalid due to lack of mutuality.
The clause allowed only one party, the respondent, to invoke arbitration, denying the
petitioner the same right. The decision was based on the principle of mutuality, emphasizing
the need for a fair and bilateral opportunity for both parties to invoke arbitration.

Similarly, in the case of Emmsons International Ltd. vs. Metal Distributors17, the DHC found
a clause in the contract to be unilateral, depriving the plaintiff of the right to enforce their
rights through ordinary tribunals or alternative dispute resolution mechanisms. This clause,
deemed void, was considered violative of Section 28 of the Indian Contract Act and against
the public policy of India. The ruling in Lucent Technology vs. ICICI Bank18 reiterated the
principles established in previous cases, emphasizing the deprivation of the plaintiff's right to
recourse through legal proceedings, as outlined in Section 28 of the Indian Contract Act19.
13
Chloro Controls (I) Private Limited v. Severn Trent Water Purification Incorporated, (2013) 1 SCC 641.
14
Mahanagar Telephone Nigam Ltd. v. Canara Bank & Ors., (2020) 12 SCC 767
15
Govind Rubber Limited Vs Louis Dreyfus Commodities Asia Private Limited, (2015) 13 SCC 477.
16
Bhartia Cutler-Hammer v. AVN Tubes (1995 (33) DRJ 672
17
Emaar MGF Land Limited v. Aftab Singh, 2018 SCC Online SC 2945 [52]
18
Lucent Technologies Inc. v. ICICI Bank Ltd., 2009 SCC OnLine Del 3213, [17][296]
19
The Indian Contract Act, 1872, § 28, No. 09, Acts of British Parliament, 1872 (India).
Overall, these rulings highlight the DHC's stance on arbitration clauses that lack mutuality or
impose absolute restrictions on one party, deeming them invalid and against the public policy
of India. The High Court of Delhi has often criticized the unilateral arbitration clause in India,
citing concerns regarding public policy and mutuality, as well as invoking Section 28 of the
Indian Contract Act. However, the Arbitration and Conciliation Act, 1996, does not explicitly
require mutuality in arbitration agreements, as outlined in Section 7 of the Arbitration and
Conciliation Act, 199620, which defines the essentials of such agreements. The court's
emphasis on mutuality stems from Section 25 of the Indian Contract Act 21, which deems
agreements lacking consideration void. Nevertheless, the 2015 amendments to the ACA
provide a comprehensive analysis of public policy, ultimately validating one-way arbitration
clauses. Arguments regarding Section 28 of the Indian Contract Act and the validity of one-
way arbitration clauses are flawed, as Section 28 pertains to absolute restrictions on enforcing
rights, not partial restrictions. Moreover, Exception 1 of Section 28 allows for the reference
to arbitration in case of disputes, rendering arbitration clauses valid. Despite concerns about
partial restrictions, recent Supreme Court interpretations regarding arbitrator eligibility offer
solutions to such issues related to one-way arbitration clauses.

Hon’ble Supreme Court’s Views

The Supreme Court of India has articulated a distinct perspective on these matters, as
evidenced by various case laws. In TRF Ltd. Energo Engineering Projects Ltd. and Bharat
Broadband Network Ltd. vs. United Telecoms Ltd.22, the court emphasized that the
appointment of an arbitrator should adhere to the norms outlined in Section 12(5) of the
Arbitration and Conciliation Act, along with the seventh schedule. It highlighted the
importance of ensuring that the party appointing the sole arbitrator does not have a vested
interest in the outcome of the dispute.

In the recent case of Haryana Space Application Centre (HARSAC) and Anr. vs. Pan India
Consultants Pvt. Ltd. & Anr.23, the court deemed the appointment of the Principal Secretary,
Government of Haryana, invalid under Section 12(5) of the Arbitration and Conciliation Act24
due to their controlling interest in HARSAC, a nodal agency of the state. The court further
underscored the significance of appointing an impartial arbitrator and appointed a substituted
arbitrator to oversee the proceedings. Similarly, in Perkins Eastman Architecture DPC vs.
HSCC (India) Ltd.25, the court held that an individual ineligible to be appointed as an
arbitrator cannot appoint one, illustrating the principle of impartiality in arbitration
appointments.

20
The Arbitration and Conciliation (Amendment) Act, 2019, § 7, No. 33, Acts of Parliament, 2019 (India).
21
The Indian Contract Act, 1872, § 25, No. 09, Acts of British Parliament, 1872 (India).
22
TRF Ltd. Energo Engineering Projects ltd., (2017) 8 SCC 377.
23
Haryana Space Application Centre (HARSAC) and Anr. vs. Pan India Consultants Pvt. Ltd. & Anr., AIR
2021 Supreme Court 653
24
The Arbitration and Conciliation (Amendment) Act, 2019, § 12(5), No. 33, Acts of Parliament, 2019 (India).
25
Perkins Eastman Architects Dpc vs Hscc (India) Limited, AIR 2020 SUPREME COURT 59
However, in DK Gupta vs. Renu Manjulal26, despite the dissimilar facts and issues compared
to TRF, the Delhi High Court upheld the validity of a sole arbitrator's appointment due to the
parties' mutual waiver of Section 12(5) of the Arbitration and Conciliation Act and their
submission to the arbitration process.

For better understanding, SC’s views on reconciling the diverse stances on the validity of
arbitration clauses depending on their incorporation into the main contract, there's a pressing
need for establishing a standardized set of guidelines for a valid reference. This would
enhance the ease of conducting business and ensure logical coherence in jurisprudence
surrounding arbitration. While Indian courts are progressively clarifying various nuances in
this regard, the issue of non-uniformity persists, potentially leading to contradictions.27

In the landmark case of M.R. Engineers & Contractors v Som Datt Builders Ltd 28, the court
emphasized the importance of conscious acceptance of arbitration clauses, synonymous with
the parties' intentions. It delineated different types of references, examining both explicit
contractual clauses and contextual incorporations. However, the introduction of the
"familiarity test" by courts, where they assume parties' familiarity with referenced terms,
poses challenges. This test risks disregarding the objective evidence provided by the wording
and construction of referencing clauses, leading to inconsistencies.

For instance, in the M/S. Inox Wind Case29, the court extended the scope of reference to cover
standard form contracts of only one party, without clear rationale. Such arbitrary
determinations highlight the need for a codified definition of "reference," aligning with the
intention test, to ensure uniformity in implementation. Objective evidence from commercial
negotiations, including term sheets, can further bolster this framework. While recent cases
like Giriraj Garg v Coal India Limited30 have upheld the validity of general references, the
proposal to codify the intention test would provide clarity and mitigate confusion in
arbitration clause validity disputes.

26
D.K. Gupta & Anr. vs Renu Munjal, AIR 2018 (NOC) 782 (DEL.)
27
Kluwer Arbitration Blog, Nishanth Vasanth, Rishabh Raheja (NALSAR University of Law),
http://arbitrationblog.kluwerarbitration.com/2017/10/20/examining-validity-unilateral-option-clauses-india-
brief-overview/ last accessed on 25th February 2024.
28
M.R. Engineers v. Som Datt Builders, 2009 (9) SCALE 298
29
M/S. Inox Wind Ltd. vs M/S. Thermocables Ltd., AIR 2018 SUPREME COURT 34
30
iriraj Garg v. Coal India Ltd. and Ors., 2019 SCC Online SC 212
 CONCEPTUALING VALIDITY THROUGH THE LENS OF COMMON
LAW PRINCIPLES AND GLOBAL PERSPECTIVE
This section argues for prioritizing mutuality and the prevailing common law stance instead
of deeming unilateral arbitration clauses (UACs) unconscionable under public policy. It
asserts that a blanket judgment on the validity of UACs is not feasible since each case
requires individual examination. Various statutory protections exist to safeguard parties from
unfair UACs, such as Section 28 of the Indian Contract Act voiding clauses that overly
restrict one party's rights and Section 12(5) of the Arbitration & Conciliation Act invalidating
clauses where one party unilaterally appoints an arbitrator with a listed relation. Moreover,
UACs in standard form consumer contracts are now minimal due to legal interpretations, and
courts can refuse to enforce arbitration clauses when special remedies are available under the
Consumer Protection Act.

The issue of double standards is also raised, highlighting the preservation of freedom of
contract when parties mutually agreed to terms, even if one party has more bargaining power.
Legal precedents, such as IS. and W. Products v. State of Madras 31, uphold contracts even
when bargaining power is unequal, as long as mutual assent is not completely excluded. The
article questions why there's a dichotomy in jurisprudence regarding UACs despite existing
statutory safeguards against injustice. It argues that as long as UACs adhere to relevant
statutes, they should not be invalidated solely because they confer an advantage to one party.

Furthermore, the article emphasizes the role of common law principles in determining the
legality of UACs, especially when statutes like the Indian Contract Act or Arbitration &
Conciliation Act do not provide clear guidance. It notes that post-1986, common law has
generally upheld UACs based on principles of mutuality. Despite similarities between the
A&C Acts of the UK and India, UACs have not been deemed unconscionable in the UK,
indicating inconsistent treatment. Overall, the article advocates for considering mutuality and
statutory protections before deeming UACs unconscionable.32

Global Perspectives on Unilateral Arbitration Clauses

Each country's judicial system follows its own principles when administering justice to its
citizens. Common law countries like England, the United States of America, and Singapore,
as well as civil law countries like France and Russia, have differing approaches.

In the United States, the judiciary upholds the validity of One-Way Arbitration clauses based
on the Mutuality Doctrine. They believe that such clauses are mutually agreed upon by the
contracting parties, providing equal opportunities for each party to present their case and
access the tribunal for resolution. While one party may have autonomy in appointing an
arbitrator, this does not render the entire clause invalid or unenforceable under the law.

31
Indian Steel & Wire Products Ltd vs State of Madras, 1968 AIR 478
32
Aditya Singh, Examining the Validity of Arbitration Clauses in Standard Form of Contracts, National Law
School Business Law Review, published on Oct 3, 2022, https://www.nlsblr.com/post/examining-the-validity-
of-arbitration-clauses-in-standard-form-of-contracts
Similarly, the United Kingdom and Singaporean judiciaries uphold the validity of One-Way
Arbitration Clauses, rejecting arguments of mutuality among the parties and stating that such
clauses are not contrary to English law.

Conversely, the French judiciary invalidates One-Way Arbitration Clauses citing the
'Potestative Condition,' which goes against French law. Likewise, the Russian judiciary
declares such clauses void because they grant one party greater negotiating power, which is
deemed invalid under Russian law.33

In India as seen above, the validity of One-Way Arbitration Clauses is contested in various
High Courts, such as Delhi and Madras, with divergent opinions. While the Delhi High Court
invalidated them, the Madras High Court upheld their validity. However, the Supreme Court
of India has not provided specific interpretations on the validity of One-Way Arbitration
Clauses yet. Nonetheless, it has offered interpretations and laid out guidelines regarding the
eligibility of arbitrators during appointments.

33
Smarth Arora, All you need to know about the one – way arbitration clause in India, Published on June 7,
2021 https://blog.ipleaders.in/need-know-about-one-way-arbitration clauseindia/# Analysis_of_Unilateral_
Arbitration_Clause_in_India
 CONCLUSION
The author expresses concern over the enforceability of One-Way arbitration clauses in India,
particularly due to the lack of a specific interpretation by the Supreme Court. Despite the
absence of a clear directive from the SC, High Court judgments present conflicting views on
the matter. The author highlights the potential bias in arbitration when one party has the sole
authority to appoint an arbitrator, who may favour their interests due to personal or
professional relationships with the appointing party.

The author references the SC's interpretation of Section 12(5) in conjunction with the seventh
schedule of the Arbitration and Conciliation Act, which aims to address concerns about
unequal negotiating power between parties. This interpretation, according to the author,
places the party with less negotiating power in a more favourable position. It argues that the
primary reason for choosing arbitration over litigation is to save time and money. However, if
arbitration clauses are not drafted effectively to serve their intended purpose, they become
ineffective. Therefore, the author emphasizes the importance of drafting arbitration clauses
meticulously, ensuring they are clear, precise, and free of loopholes that could lead to
disputes being resolved through costly and time-consuming litigation.

In conclusion, the stance advocated is that unilateral Arbitration Clauses, if found to be

blatantly unfair, will be invalidated by the law. However, in cases where such clauses are not
deemed unjust, priority should be given to mutuality, and the common law position should be
embraced, as outlined earlier. It is suggested that clear guidelines for a valid 'reference'
should be codified to standardize requirements across various types of contracts. This step
would significantly enhance the arbitrability of disputes and promote ease of doing business.