Unilateral option clauses
Polish arbitration law
Unilateral option clauses in arbitration agreements have been in the legal spotlight recently following a series of cases in which the courts have questioned their validity. However, they have not yet been examined by Polish courts and Polish law expressly prohibits the use of provisions in arbitration agreements which violate the principle of equality of the parties. This update examines what effect this ban might have on unilateral option clauses.
A 'unilateral option clause' is a term coined for dispute resolution clauses which provide for a binding dispute resolution forum, but at the same time give one party a unilateral right to refer the dispute to another forum. Unilateral option clauses could give one party an option to litigate or to go to arbitration. The effect of this clause is that only one party can choose the forum which will hear the claim. Such asymmetric clauses are often used in financial transactions.
One party's unilateral right to choose a forum to resolve a dispute could be considered contrary to the principle of the equality of parties or the doctrine of unconscionability. However, such clauses are upheld in a number of jurisdictions, including the United Kingdom,(1) the United States,(2) Italy,(3) and Germany.(4) The courts in those jurisdictions take the view that unilateral option clauses fall under the autonomy of the parties and should be treated in the same way as any other contractual clause that gives advantage to one party to the contract.
Polish arbitration law (largely based on the United Nations Commission on International Trade Law Model Law) prohibits a violation of the equality of parties in arbitration agreements.(5) Polish law expressly lists clauses which entitle one party only to bring a claim before an arbitration or a common court as an example of a term which violates the principle of equality of the parties. Under Article 1161(2) of the Code of Civil Procedure, such clauses are "ineffective".
Although the principle of equality of the parties is one of the fundamental principles of arbitration, this provision (in particular, the prohibition of unilateral option clauses) has met with some criticism in Poland. Some commentators argue that the parties should have the possibility of stating in the arbitration agreement that only one party will have the right to bring a claim to a particular forum.
As yet there is no case law on unilateral option clauses in Poland. It is still unclear what 'ineffective' means and what the consequences of including a unilateral option clause in an arbitration agreement might be. It remains to be seen how this provision will work in practice. However, there are three main ways of interpreting Article 1161(2) of the Code of Civil Procedure that could be adopted by the Polish courts:
- a bottom-up approach;
- a top-down approach; and
- a delete-all approach.
This update analyses each of these approaches on the basis of the following hypothetical arbitration clause: an arbitration clause between A and B provides for arbitration before the London Court of International Arbitration, with the arbitration seat in London, but gives one party (A) the right to bring any dispute before the common courts in Poland.
The bottom-up approach is that the unilateral option clause might be considered ineffective only in as far as it prohibits the other party (B) from enjoying a similar range of choices for taking the claim to litigation or arbitration. Under this scenario, Article 1161(2) of the Code of Civil Procedure would even up the options of the two parties. This would mean that the option clause is effective, but no longer unilateral and instead becomes bilateral (ie, both parties can refer claims to either arbitration or to litigation in Poland). This approach does not prohibit the initial option beneficiary (A) from referring a claim to a forum of its choice – in this case to courts in Poland – but gives the other party (B) similar rights. This approach is endorsed by some commentators in Poland. A similar stance has also been taken by the Russian Supreme Arbitration Court.(6)
Under the top-down approach Article 1161(2) of the Code of Civil Procedure would simply strike down the unilateral option clause. Under this scenario, the party that had the unilateral right (A) would be deprived of it. Therefore, neither A nor B would be entitled to submit claims to state courts and would be bound by arbitration only. This approach can be derived from the literal wording of Article 1161(2).
This scenario merely reduces the range of choices available to both parties. The fact that part of the arbitration agreement is struck down does not in itself render the entire agreement invalid. Under Polish law, the arbitral award can be set aside or enforcement refused only if the entire arbitration agreement was invalid. Therefore, it is likely that an arbitral award rendered on the basis of an arbitration agreement which had a unilateral option clause of this kind would be enforced in Poland.
In some circumstances the inclusion of a unilateral option clause may lead to the invalidity of the entire arbitration agreement. This can be seen in the delete-all approach which, although the least probable, is the riskiest scenario. Under the general rules of Polish law, if one of the terms of an agreement is invalid, the entire agreement may also be rendered invalid if it is proven that without this term the agreement would not have been concluded between the parties at all. There is a remote risk that this principle could also be applied to arbitration agreements. In such a case, if a unilateral option clause is struck down, the entire arbitration agreement could also become invalid.
This scenario would allow the initial option beneficiary (A) to argue that without the unilateral option clause it would not have agreed to submit its disputes to arbitration and thus the entire arbitration agreement should be deemed void. In such a case, the initial option beneficiary could still take advantage of its right to bring a dispute before the common courts (as there would be no arbitration agreement).
The third scenario entails the harshest consequences of applying Article 1161(2). It is unlikely that the Polish courts (when faced with the prospect of applying this provision) would adopt such an anti-arbitration interpretation. Further, the first draft version of Article 1161(2) provided that in cases of violation of the principles of equality of the parties, the arbitration agreement would be invalid. However, this was later changed and Article 1161(2) now states that clauses which violate the principle of equality of the parties are ineffective. This could be yet another argument against the strict 'delete-all' application of Article 1161(2).
The prohibition of unequal arbitration agreements and unilateral option clauses has been criticised in Poland. As there is no case law in this respect, special care should be taken when providing for unilateral option clauses in arbitration agreements which are governed by Polish law (or which are to be enforced in Poland). The parties should be aware of the risk that such unilateral option clauses could be ineffective under Polish law and could lead to the other party being given a parallel option or the option clause being struck down.
For further information on this topic please contact Bartosz Kruzewski or Adelina Prokop at Clifford Chance by telephone (+48 22 429 95 24), fax (+48 22 627 14 66) or email (email@example.com or firstname.lastname@example.org).
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(4) The German courts have held that unilateral option clauses are valid unless they violate boni mores and are significantly imbalanced or give manifest advantage to one party only. "Unilateral option clauses in arbitration: a survey as to their effectiveness", Clifford Chance, February 2013, Berard and Dingley.