The difference between the mandatory “shall” and the permissive “may” in a contract is, perhaps typically, straightforward. One mandates action; the other allows, but does not require, it. This analysis can be more complex in the context of an arbitration agreement: can a party to the agreement force a stay of litigation based on a clause that states the parties may submit the dispute to arbitration? The Privy Council in Anzen Limited v. Hermes One Limited faced essentially this question, and, in part based on Ontario Court of Appeal jurisprudence, held that the answer is yes.

Background

The facts in Anzen may be briefly stated. The parties were shareholders in a business incorporated in the British Virgin Islands, Everbread Holdings Ltd., for the purpose of developing airline fare search software. They entered into a shareholders’ agreement that contained an arbitration clause. The portion of clause 19.5, the arbitration clause, read: “If a dispute arises out of or relates to this Agreement or its breach (whether contractual or otherwise) and the dispute cannot be settled within twenty (20) business days through negotiation, any Party may submit the dispute to binding arbitration.”

The respondents, Hermes One Ltd., commenced proceedings against the appellants and Everbread alleging unfairly prejudicial conduct in the management of Everbread’s affairs. The appellants applied to stay the proceedings pursuant to clause 19.5 and section 6(2) of the Arbitration Ordinance 1976. They did not seek to commence arbitration against Hermes One Ltd. The court of first instance dismissed the stay application because the appellants had not commenced arbitration, and the Court of Appeal upheld that judgment. At issue before the Privy Council was the construction of clause 19.5 and whether it allowed the appellants to seek a stay of the litigation in favour of arbitration, without actually commencing arbitration themselves.

Decision

The Court organized its reasons by focusing on three “possible analyses” of clause 19.5. Quoting directly from the Court’s reasons, the three analyses were as follows:

a) The words “any party may submit the dispute to binding arbitration” are not only permissive, but exclusive, if a party wishes to pursue the dispute by any form of legal proceedings (analysis I).

b) The words are purely permissive, leaving it open to one party to commence litigation, but giving the other party the option of submitting the dispute to binding arbitration, such option being exercisable either by:

i) Commencing an ICC arbitration, as the respondent submits and Bannister J. and the Court of Appeal held (analysis II); or

ii) Requiring the party which has commenced the litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay, as the appellants have done (analysis III).

The Court reasoned that there were several initial but important pointers away from analysis I. First, it cited the well-known principle of contractual interpretation that the language and context of the agreement is decisive. Examining the language and context of the agreement, one would expect an arbitration clause that deprives a party of any right to litigate would be clearly worded—the implication being that the Court did not view clause 19.5 as a clear deprivation of any right to litigate. Furthermore, the decision to use “may“ instead of the mandatory “shall“ in clause 19.5 could be understood by the parties to mean that litigation was open unless and until arbitration was elected.

The Court then turned to other common law authorities for assistance in confirming that analysis I was inappropriate and choosing between analysis II and III. Most interestingly for the Canadian Appeals Monitor`s purposes, the Privy Council considered the Ontario Court of Appeal case of Canadian National Railway and Others v. Lovat Tunnel Equipment Inc. (1999), 174 D.L.R. (4th) 385 (Ont. C.A.) as a “clear authority“ against adopting analysis I. Lovat Tunnel Equipment considered a dispute resolution clause stating that “the parties may refer any dispute under this Agreement to arbitration, in accordance with the Arbitration Act of Ontario.“ The Ontario Court of Appeal held that the clause allowed the appellant to choose between electing binding arbitration or acquiescing to the respondents` pursuit of litigation. Interpreting the clause otherwise would render it surplusage: parties can always mutually decide to arbitrate regardless of an arbitration agreement. The clause must mean that either party could refer the dispute to arbitration, rather than requiring the consent of both parties in order for the arbitration clause to operate.

As between analysis II and III, the Court was especially troubled by the implication stemming from analysis II that a defendant to litigation could only force arbitration on the plaintiff by commencing arbitration itself. Commencing arbitration was not as simple as starting the new proceeding; the defendant would be obligated first to follow procedural niceties provided in the contract, including waiting 20 days and attempting to settle the dispute first. Additionally, in commencing arbitration, the party might only be able to seek a declaration of no liability in respect of the first party`s claims in the litigation. This approach did not make commercial sense.

The Court concluded, therefore, that analysis III applied to the contract. The words “any Party may submit the dispute to arbitration“ in clause 19.5 were not inextricably linked to actual commencement of arbitration—the appellants could seek a stay of the litigation without commencing arbitration themselves. This interpretation also upheld the hallmark principle of commercial arbitration, consent.

Significance

While the result in this case may seem obvious from a Canadian perspective—Lovat Tunnel Equipment is seventeen years old and oft-cited for the proposition that where two interpretations of an arbitration clause are possible, courts should lean towards the interpretation providing for the option of arbitration—the Privy Council`s discussion of other common law authorities demonstrates the same is not necessarily true in other common law jurisdictions. Authorities in the United States, as reviewed in the Privy Council`s reasons, go both ways. This case serves as a reminder to draft arbitration clauses carefully, particularly with respect to whether the parties wish to deprive themselves of any right to litigate in favour of arbitration.

Case Information

Anzen Limited v. Hermes One Limited, [2016] UKPC 1

Date of Decision: January 18, 2016