Construction contracts and subcontracts, both domestically and internationally, have widely opted for arbitration as a dispute resolution mechanism over litigation. An increasing number of contracts contain so-called “unilateral” or “one-sided” arbitration clauses that permit one of the contracting parties to opt for either arbitration or litigation as it sees fit. These clauses seek to preserve the advantages of arbitration and litigation in the empowered party after the dispute has arisen, and thus enables the party to select the forum that will best fit its needs in the present dispute. Some of the key comparative advantages of arbitration include less procedural complexity, quicker disposition, less (or at least more tailored) discovery, and consequently, usually lesser costs. In addition, under the 1958 New York Convention, an arbitral award can be readily enforced in the 156 signatory countries. Litigation in national courts, however, may permit a default or summary judgment (thus shortening the proceedings and lowering costs), and has the ability to join multiple parties.
The one-sided nature of unilateral arbitration clauses calls into question enforceability. Such clauses have been subject to attack as lacking in mutuality or as unconscionable. The law is continuing to evolve on this question, and this Article seeks to provide a primer on the current status of unilateral arbitration clauses in the United States and in certain foreign jurisdictions that have addressed the issue.
Unilateral Arbitration Clauses In The United States
The United States is widely known as a very arbitration-friendly jurisdiction. In the Federal Arbitration Act (“FAA”) Congress pronounced “a liberal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). “The FAA was designed to overrule the judiciary’s long-standing refusal to enforce agreements to arbitrate, and to place such agreements upon the same footing as other contracts.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989) (citations omitted).
The FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. “This savings clause permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740, 1746 (2011). The determination of the validity of arbitration clauses is thus a matter of state law regarding enforceability of contracts.
As a general matter, the environment in the United States as to the enforceability of unilateral arbitration clauses is quite permissive. While many states have questioned the enforceability of such clauses in the context of employment contracts or contracts of adhesion, finding that they may be unconscionable, most jurisdictions have found them valid and enforceable in commercial contracts.
Courts in several states have, however, questioned the enforceability of unilateral arbitration clauses in commercial contracts. Maryland appears to be at the forefront of the pushback against unilateral arbitration clauses. In Cheek v. United Healthcare of Mid-Atlantic, Inc., 378 Md. 139 (2003), the Maryland Court of Appeals held that an arbitration provision in a contract is treated as a severable provision that must be supported by separate consideration on its own. Subsequently, the United States Court of Appeals for the Fourth Circuit, applying Maryland law and relying on Cheek, found a unilateral arbitration clause in a home building contract to be unenforceable because it lacked mutuality of consideration. Noohi v. Toll Bros., Inc. 708 F.3d 599 (2013), cert. dismissed, 134 S. Ct. 48. In Noohi, the court rejected Toll Brothers’ argument that the unilateral arbitration clause was supported by consideration underlying the entire contract, finding that Maryland law required the arbitration provision to be supported by its own consideration (i.e., mutuality) in order to be enforceable.
The United States District Court for the District of Maryland later found that a unilateral arbitration clause in a construction subcontract was unenforceable in U.S. ex rel. Birckhead Elec., Inc. v. James W. Ancel, Inc., 2014 WL 2574529 (D. Md. June 5, 2014). In Birckhead, the arbitration clause provided that “All disputes . . . at the Contractor’s sole option, be resolved by arbitration . . .” and that “any such arbitration proceedings shall, at the Contractor’s sole option, be consolidated with any arbitration proceedings between the Contractor and any other party.” When Birckhead, the subcontractor, filed suit against Ancel in the District Court for breach of contract and violation of the Miller Act, Ancel filed a motion to dismiss or a motion to stay pending arbitration. The court found that the arbitration agreement was not supported by mutual consideration, as it did not create an obligation for the contractor, only the subcontractor. The court thus denied the contractor’s motion and permitted the lawsuit to proceed.
A handful of other states have carefully scrutinized unilateral arbitration clauses. In Global Client Solutions, LLC v. Ossello, 382 Mont. 345 (2016), the Supreme Court of Montana stated that “[s]uch one-sided arbitration clauses do not serve the objectives of the FAA” and found the clause unenforceable because it was unconscionable. The Supreme Court of Tennessee has adopted a “flexible, case-by-case approach” to determining whether unilateral arbitration clauses are unconscionable. Berent v. CMH Homes, Inc., 466 S.W.3d 740 (Tenn. 2015) (finding that the unilateral arbitration clause in the particular home building contract was not unconscionable). Other states that have adopted the flexible approach include Ohio, Missouri and Oregon, although not yet in commercial contract settings.
While unilateral arbitration clauses are mostly enforceable in the commercial arena in the United States, contracting parties should look carefully at the particular state’s jurisprudence to determine the validity of such provisions.
Treatment of Unilateral Arbitration Clauses Internationally
In the international arena, as in the United States, unilateral arbitration clauses are generally enforceable. In the English courts, it is well-settled that such clauses are valid and binding. Mauritius Commercial Bank Ltd. v. Hestia Holding Ltd., 2 Lloyds Rep. 121 (2013). Similarly, in Australia, the courts have long upheld unilateral arbitration clauses. PMT Partners Pty Ltd. v. Australian National Parks & Wildlife Service (184 CLR 301)(1995). Courts in Spain have recently concurred with this position. Camimalaga S.A.U. v. DAF Vehiculos Industriales, S.A. (Provincial Court of Appeal, Madrid, October 18, 2013).
In the past several years, however, cases from France and Russia have called into question the validity of unilateral arbitration provisions. The Presidium of the Supreme Arbitration Court of the Russian Federation found that a unilateral option to litigate was invalid as it placed one of the parties in a privileged position and violated the principle of equality between the parties. CJSC Russian Telephone Co. v. Sony Ericsson Mobile Telecommunications Russia LLC., Case No. 1831/12 (June 19, 2012).
In the French case, the disputes clause provided for exclusive jurisdiction in the Luxembourg courts and a unilateral option to litigate in another jurisdiction. The clause was invalidated by the Cour de cassation, France’s highest court, as “potestative” under the French Civil Code. Mme X v. Bank Privée Edmond de Rothshild, Case No. 11-26.022 (Sept. 26, 2012). The concept of a potestative condition is defined in the French Civil Code as when the fulfillment of the agreement is entirely within the power of one party. The court found the unilateral jurisdiction clause to run afoul of this provision and invalidated the disputes clause. See also Cour de cassation Case No. 13-27.264 (Mar. 25, 2015) (striking down an asymmetrical jurisdiction clause similar to the Rothchild case). While these French decisions involve one party being permitted to select from different courts, they may have application to unilateral arbitration provisions as well.
While unilateral arbitration clauses offer advantages to the empowered party and are generally enforceable, parties must be cautious when including such clauses in their contracts. At a minimum, the parties should consider the laws applicable to the contract, the seat of the arbitration, and where any award is likely to be enforced. If the laws of any of the jurisdictions are unclear, the parties must consider the possibility that the arbitration may be enjoined by the local courts, or that any resulting award may not be enforced in a jurisdiction that disfavors unilateral arbitration clauses. This is particularly important in the international context, where many jurisdictions have provided little or no guidance on the issue.