What are option clauses?

Unilateral option clauses allow one party, at its discretion, the exclusive right to choose whether to resolve any future dispute by litigation before the courts or arbitration before an arbitral tribunal.

This is beneficial because arbitration and litigation can offer different processes and procedures in areas such as disclosure, fees, interim relief, summary judgment and international enforcement. Option clauses preserve the ability to benefit from the differing processes by allowing a party to choose the most appropriate forum once a dispute has arisen and once the circumstances, value and complexity of the dispute are known. 

The clauses are generally included in favour of parties that have stronger bargaining power in negotiations, who are more likely to be a claimant than a defendant in any future proceedings. For example, a financial institution that is making a loan facility available and wants to preserve different options for securing quick default or summary judgment may request the benefit of such a clause.  

Option clauses around the world

The 2024 survey confirms that unilateral option clauses are not necessarily valid and enforceable in every country. While the position is clear in some countries, in others it can be inconsistent or uncertain.

Some courts (like those in France, Mauritius and the United Arab Emirates (UAE)) may determine unilateral option clauses to be wholly or partially invalid or decline to enforce arbitration awards that derive from them. This is generally on the basis that their laws consider the inherently imbalanced and one-sided nature of option clauses to be contrary to principles of public policy, fairness and equality of treatment, or that such clauses lack the requisite unambiguous expression of certainty to constitute a valid arbitration agreement. This could have significant adverse consequences for a party seeking to rely on or enforce a clause in that country. For example, in October 2024, the Dubai Court of Cassation held that a unilateral option clause did not constitute a valid agreement to arbitrate according to UAE law. The Dubai courts assumed jurisdiction over the dispute, despite the party with the benefit of the option electing for arbitration.

In contrast, many jurisdictions have a demonstrated track record of recognising and upholding such clauses. For example, in England and Wales the courts have consistently upheld the validity of option clauses and have taken steps to protect a party’s option by staying proceedings if necessary. Moreover, in other countries (such as South Africa and Kenya), although the courts have not directly examined unilateral option clauses, it is anticipated that they would uphold them as they generally uphold contractual terms freely entered into, provided that they are not illegal, immoral or contrary to public interest or policy.

The survey emphasises the diversity of approaches to unilateral option clauses globally. Consequently, before considering entering into an option clause, advice should be taken as to the position under the applicable laws and in any countries where the parties are located or enforcement of a judgment or award may be sought.