Unilateral option clauses in arbitration: an international overview

20 December 2024

Clifford Chance has updated and expanded its Survey on the current effectiveness of unilateral option clauses across the world. The 2024 edition of the Survey now covers 120 jurisdictions.

Our international arbitration specialists and selected local counsel have worked together to produce a snapshot of the treatment of unilateral option clauses in their home jurisdictions as of November 2024. As in the prior editions, the results are summarised in a ‘traffic light’ format, categorising the position across jurisdictions from green to red to reflect the risk associated with such clauses in each jurisdiction.

What are unilateral option clauses?

Unilateral option clauses are a common feature in many transaction documents. Unilateral option clauses provide one party to an agreement with the exclusive right to decide between arbitration or litigation as the forum to resolve a dispute. For instance, a unilateral option clause may provide for disputes to be referred to arbitration but give one party the exclusive right to elect to refer a dispute before the courts. Alternatively, a unilateral option clause may provide for disputes to be referred to litigation but give one party the exclusive right to elect to refer a dispute to arbitration instead.

These clauses allow a party to choose the forum for their dispute at the time the dispute arises, rather than at the time of negotiating the agreement.

Treatment of unilateral option clauses in various jurisdictions

Treatment of these clauses vary significantly between jurisdictions. Some jurisdictions find no issue with their enforceability, on the basis of pacta sunt servanda and the principle of contractual autonomy (e.g. England and Wales and Hong Kong). Other jurisdictions consider that such clauses violate principles of equality and mutual agreement between parties (e.g. Poland, Russia). Different considerations may also apply in different contexts, for example, various jurisdictions recognise that in the consumer or employment contexts, the unequal bargaining position between the parties means that unilateral options clauses should not be upheld (e.g. Montenegro, Switzerland and Costa Rica), or upheld only if the option is exercisable by the "weaker" party (e.g. Vietnam).

The consequences of including unilateral option clauses in agreements that are connected with a jurisdiction that considers them to be invalid can be severe. A unilateral option clause may be declared void, potentially resulting in local courts seizing jurisdiction over a dispute or an arbitral award being unenforceable. In the latest iteration of the survey, examples of jurisdictions in which such clauses would or would very likely be considered void fall within the 'red and orange categories' as per the 'traffic light' format.

Enforceability of unilateral option clauses

When considering whether to include a unilateral option clause in an agreement, specialist advice should be pursued in relation to:

The governing law of the agreement;
The proposed court or arbitration proceedings (if different from the jurisdiction of the governing law);
The jurisdiction(s) in which the contractual counterparties are domiciled; and
The jurisdiction in which the contractual counterparties' assets are located (i.e. where any award or judgment would need to be enforced if not voluntarily satisfied).

This will help in assessing the risk associated with trying to enforce such clauses in each jurisdiction.

Headline Updates

There have been notable developments on this topic in the following jurisdictions:

UAE

A significant judgment issued on 29 October 2024 in the Dubai Court of Cassation held that a unilateral option clause does not constitute a valid arbitration agreement under the laws of the UAE. This is tied to the essentiality of mutual consent to an arbitration agreement. There must be an unequivocal willingness to submit to arbitration in the event of a dispute.

While the courts of the Abu Dhabi Global Market and Dubai International Finance Centre freezones appear to have accepted the enforceability of unilateral option clauses, pending any further decisions by the onshore UAE Courts on this matter, parties should be cautious about introducing unilateral option clauses in contracts with UAE counterparties given that there is a considerable risk that they may not be enforced.

France

To date, the French Supreme Court and the Paris Court of Appeal (which is particularly authoritative in arbitration matters) have not yet specifically ruled on the validity or enforceability of such clauses. In August 2023, the French Supreme Court referred several preliminary questions regarding the validity of asymmetrical jurisdiction clauses (i.e. those which provide for the exclusive jurisdiction of specific courts, but allow one party the option to bring a dispute in any other courts with jurisdiction) to the Court of Justice of the European Union ("CJEU"). The CJEU's ruling on these issues may provide clarification on the criteria by which to assess the validity of such clauses.

At the time of publication, the CJEU decision remains awaited. This decision may have implications for the validity of unilateral option clauses which would impact all EU Member States.

People's Republic of China

The PRC Courts do not have a consistent approach to the validity of unilateral option clauses. Such clauses may be invalidated if found to lack the requisite consensus to arbitrate. In the 2022 case Jing 74 Min Te No. 4, the Court upheld the validity of a unilateral option clause in a Pledge Agreement and provided detailed reasoning (which is uncommon) for doing so. The clause had satisfied the requirements of a valid arbitration agreement under the PRC Arbitration Law, namely: (i) a clear expression of intention to arbitrate; (ii) the subject matter to be submitted to arbitration; and (iii) a designated arbitration institution. The clause was also freely negotiated between the parties. By commencing arbitration proceedings, the Pledgee had expressly waived its right to commence litigation. The case reflects a pro-arbitration approach in the PRC. However, since the PRC does not follow the common law doctrine of stare decisis, this case may not be regarded as establishing a uniform precedent for all PRC courts.

USA

In the US, it is the law of each individual state, rather than federal law, that governs the enforceability of arbitration clauses in contracts. As such, courts in the US do not take a uniform approach to the validity of unilateral option clauses. An important consideration is the idea that contracting requires "mutuality of obligation". However, this is a greater consideration in situations where the weaker party has a unilateral obligation to submit to arbitration while the more powerful party has a unilateral option to resort to the courts. Thus, unilateral option clauses may be struck down on grounds of unconscionability often-time in instances of consumer and employment law.

Implications

Parties negotiating documentation for a transaction that has a connection with any jurisdiction in which the validity of unilateral option clauses is not well established should consider whether the flexibility which they seek is worth the associated risks, or whether a bilateral arbitration clause may be more appropriate.

Each transaction should be approached on a case-by-case basis and specialist advice should be sought when seeking to determine the most advantageous dispute resolution regime.

Collaborating with almost 80 local counsel, the 2024 edition now covers 120 jurisdictions.