Read this before entering into an agreement containing a Mandatory Arbitration Clause.
Mandatory Arbitration Clauses have been growing rapidly in the past few decades. Such clauses have started to see its use in upcoming businesses and companies, where it’s being administered in their user contracts. On most occasions, many consumers are unaware of such clauses and the impact of its implications on their rights as consumers. However, on the bright side, business and companies who do include mandatory clauses have voiced the benefits of these clauses, for both themselves and their consumers.
WHAT IS THE MEANING OF MANDATORY ARBITRATION CLAUSE?
Mandatory as a word means required or compulsory. When 2 or more parties agree to a mandatory arbitration clause, the parties to the agreement will be required to resolve the matters through the mode of arbitration only.
A mandatory arbitration clause is a clause which exists in various agreements/ contracts. It is a clause in a contract that requires the parties to resolve their disputes through an arbitration process.
Such clauses are often found in a contract’s “terms of agreement” which differs from contract to contract. Mandatory arbitration clauses usually state that the parties to the dispute will not litigate their legal issue in the event of a dispute which might arise from their contract or in connection to their contract, hence agreeing to the mandatory arbitration clause. Parties to the contract waive or forfeited their other legal rights to resolve their dispute by any other ways and agree to submit to arbitration in order to resolve the dispute.
Most mandatory arbitration clauses limit the rights of a party in order to appeal an arbitral award and prevent the claimants from pursuing their claims as a class action. Further, some mandatory arbitration clauses impose a cap on damages and require a non-disclosure agreement to be signed.
An example of a mandatory arbitration clause: All disputes or differences arising between the parties from the present contract or in connection to the present contract shall be referred and resolved through arbitration under arbitration and conciliation act, 1996, as governing law for the arbitration proceedings.
WHAT IS THE PURPOSE OF SUCH A CLAUSE?
The purpose of using mandatory arbitration can be positive and negative depending on the facts of the case.
● Alternatives to going to court:
The main positive purpose of having a mandatory arbitration clause is that the arbitration award will be final and there will be no unnecessary appeals that are often seen in the courts for the purpose of the derailment of the court proceedings. I see it as a positive because general court proceedings showcase that parties who refer their dispute to the court and after the court gives its decree, the losing party consequently files an appeal in the superior court. Usually, it takes years to get a decree in the lower court and evermore filing an appeal against the decree passed by the lower court will take more 5-10 years. This shows how the parties misuse the court proceedings to derail/delay the judgement. Whereas in arbitration, if it’s binding, the award is final and binding on both the parties, and there can be no appeal to the arbitral award.
● Giving up with the right of appeal:
When the arbitration is mandatory because of a mandatory arbitration clause in the contract, in that case, the party does not have any flexibility and has to opt for arbitration. Only when both parties agree, it becomes mandatory for the parties to choose arbitration and therefore, there is no other option except referring their dispute to arbitration. This rule has a downfall since it forces one of the parties to use arbitration in order to resolve their dispute. In a situation where the arbitrator is reliant on one party for repeat business, then the potential for abuse is present and the advantage of impartiality is lost. By agreeing to such mandatory clauses, the parties waive all other legal rights to litigate and most of the times this can be misused. For example, an employer adds a mandatory arbitration clause in an employment contract to have a legal advantage over the employee.
● Hypothetical situation:
Keeping in mind the Indian practice and how things go practically in India it is very easy for the employer or the company to misuse the mandatory arbitration clause and take legal advantage over his employee.
Company “X” wants to hire “Y” as an employee in his company. Company “X” and employee “Y” enter into a contract that has a mandatory arbitration clause in it. The clause states that in case of any dispute arising in the future related or in connection to the contract, the parties will refer to the arbitration, which will be final and binding on the parties. In this situation, any of us will have to take the risk of waiving the right to appeal against such an arbitration award to secure the job in that company. In that case, if any dispute arises, the company has the advantage to influence the arbitrator and get the arbitral award in his favour, and in such a scenario the employee will have to face all the losses and he/she cannot appeal to such arbitration appeal because many times the employees are not aware of such a mandatory arbitration clause in their employment contract because of the way it is inserted in the contract. Most contracts are lengthy to read, which would have a small mandatory arbitration clause that easily gets ignored by the employees.
Many of us are not aware of such a clause and still agree and give consent to it. For example, many of us do online shopping in Myntra, Amazon, etc. Did you know that by agreeing to their terms and conditions, we also agree to a mandatory arbitration clause? Similarly, there are many companies which are used by a common man on a daily basis which have a mandatory arbitration clause in their contract.
WHEN ARE MANDATORY ARBITRATION CLAUSES USED?
This can be explained in 2 stages:
1. Pre dispute stage
In the pre-dispute stage indicates before the happening of the dispute, when there appears a possible chance of a dispute or certainty to be involved in any sort of disputes in the future, the parties in the very beginning of the contract add these clauses in their agreements or in their contracts terms and conditions. For example, if X and Y are entering into an employment contract or any sort of contract there might be a chance that the parties will have some disputes in the future or during the contract in regard to the contract. Therefore, in that situation the party inserts a dispute resolution clause in their employment contract.
2. Post dispute stage
Post dispute stage is a stage after the happening of the dispute. After the dispute has occurred the parties can mutually enter into a new mandatory arbitration agreement agreeing that the dispute in hand will be referred and resolved through arbitration. In this situation the consent of both the parties are required to refer their dispute to arbitration
WHAT SHALL BE NECESSARY INGREDIENTS OF SUCH A CLAUSE?
The necessary ingredients of mandatory arbitration clause are very similar to the arbitration clause such as:
Reference to arbitration: Mere using the word mandatory arbitration in the clause is not sufficient there must be a clear intention of the parties to refer the dispute to arbitration. For example, use of word such as “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” or “if any disputes arise between the parties, they shall consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement.
Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd. Civil Appeal No. 2268 of 2018
2. Number and name of arbitrators: Number and name of the arbitrators are also important because it prevents the parties from getting into some conflict in the future. Generally, the number of arbitrators is always odd in number but in most cases it’s only 1 arbitrator (sole arbitrator) or 3 arbitrators.
3. Seat and venue of arbitration: Most students consider seat and venue as the same, however, they are different things. Parties to the agreement must mention the venue and seat of arbitration proceedings. For example, New Delhi. It also helps to identify which court will have the jurisdiction for any appeal coming out from the arbitration.
Union of India v. Hardy Exploration and Production (India) Inc Civil Appeal No. 4628 of 2018
4. Type of arbitration: The clause must mention the type of arbitration, since there are only 2 types of arbitration, ad hoc arbitration or institution arbitration. Therefore, the parties must be clear on selecting the type of the arbitration.
5. Governing laws: The parties to the contract must mention the governing law in their mandatory arbitration clause, that will be applicable in the arbitration proceedings, example of governing law is the Arbitration and Conciliation Act,1996.
6. Exclusive jurisdiction: It is always better to mention in the mandatory arbitration clause that which court will have the exclusive jurisdiction to any appeal after coming out from the arbitral proceedings. It is always suggested to select a court where parties reside, cause of action or the place of seat of arbitration.
BHEL v. Uttar Pradesh Rajya Vidhyut Utpadan Nigam Limited Arb. P 78/2019]
WHAT IS THE LAW AND JURISPRUDENCE OF THE SAME?
Technically, there is no difference between the general arbitration clause and mandatory arbitration clause except the intention of the parties in the arbitration clause. Law of mandatory arbitration clause will be same for the mandatory arbitration clause.
An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
“Arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
The legality of mandatory arbitration clauses remains a debatable issue worldwide and is the subject of nigh ubiquitous jurisprudential discussion. Many countries such as the United Kingdom, Singapore, and United States generally support the practice of mandatory arbitration clause and uphold unilateral clauses with certain riders. Indian High courts have remained silent on this issue, giving primacy to mutuality, and a direct authority from the Supreme Court on the validity of mandatory arbitration clauses remains difficult to track.
There are few decisions of the Supreme Court peripherally touch upon the issue of unilateral clauses, in the context of employer-employee, consumer disputes, and unilateral appointment of an arbitrator. Interestingly, even jurisdictions that have an ‘affirmative party autonomy’ approach to unilateral clauses in arbitration have displayed a rather conservative approach to mandatory-optional arbitration provisions when it comes to inequitable contracting relationships.
Roderick Campbell v. General Dynamics Government Systems (4007 F.3d. Court of Appeals, 1st Circuit 2005), the Appeals Court was called upon to consider the enforceability of a mandatory arbitration clause contained in a dispute resolution policy announced by the employer to its employees by a mass e-mail.
In 2018, the Supreme Court of the United States in Epic Systems Corp. v. Lewis, [138 S.Ct. 1612 (2018)] was confronted with the question – whether one-on-one mandatory arbitration agreements imposed by employers upon their employees are enforceable.
Party autonomy is the strongest argument in favour of unilateral arbitration clauses. However, there are calls from various scholars all over the world – U.K., U.S., and Singapore – to declare such clauses as unenforceable.
Mandatory arbitration clause is a dispute resolution clause in a commercial agreement which mandate the parties to resolve their dispute by arbitration only and award passed by the appointed arbitral tribunal will be final and binding on the parties.sources: https://www.barandbench.com/columns/npacs-arbitration-review-the-validity-of-mandatory-arbitration-clauses-in-unequal-contracting-relationships
Researched and drafted by Mr. Girijesh Kumar Tripathy, Fresher Associate at Law Firm.