In the case of Anzen Limited and others (Appellants) v Hermes One Limited (Respondent) (British Virgin Islands), the Privy Council ("PC") considered the impact of a dispute resolution clause providing that "any Party may submit the dispute to binding arbitration". The PC held that this wording did not prevent a party from starting litigation in the courts but gave the other parties an option to require "the party which has commenced litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay".

Whilst, in this case, the PC upheld the right to have disputes determined by arbitration, the ambiguous wording led to additional expense for both parties and unwelcome delay. Also, parties cannot rely on a similarly benevolent approach to the construction of the arbitration agreements being taken in every case or jurisdiction. If the intention is to arbitrate all disputes under the relevant agreement, parties should include a clear, unambiguously drafted arbitration agreement to that effect.

The Privy Council Decision

The parties were shareholders in a BVI company (the "JV Co"). The Shareholders' Agreement ("SHA") included an arbitration clause providing that, if the parties were unable to resolve a dispute through negotiation within 20 business days, "any Party may submit the dispute to binding arbitration". The clause expressly provided for the number of arbitrators, the seat of arbitration and the applicable institutional rules.

Hermes One Limited started litigation against the appellants in relation to their alleged unfairly prejudicial conduct in the management of the JV Co. The appellants applied to stay the proceedings pursuant to section 6(2) of the Arbitration Ordinance 1976, on the basis that the SHA included a valid and binding arbitration clause. The PC considered three possible interpretations of the dispute resolution provisions in the SHA.

The PC refused to interpret the wording "may submit" as an exclusive agreement to arbitrate all disputes. However, the PC applied a broad interpretation of the word "submit", such that it covered not only proceedings initiated by the party in question but also any proceedings initiated by another party to the SHA.

The PC rejected an interpretation whereby a party could only end litigation proceedings commenced by another party by itself commencing arbitration. In the PC's view, this interpretation did not "make much commercial sense" because: (i) to do this, the objecting party might have to comply with complex mandatory pre-conditions to arbitration (e.g. settlement negotiation, mediation, etc); and (ii) the objecting party may have no real basis for commencing arbitration other than to seek a declaration of no liability for the claim brought by the claimant(s) in litigation.

Drawing on the conclusions in Bremer Vulkan v South India Corp [1981] AC 909 that parties to an arbitration agreement are under mutual obligations to cooperate in the pursuit of arbitration, the PC preferred an interpretation whereby notice alone could trigger the mutual agreement to arbitrate. The PC would have reached the same conclusion under the current English Arbitration Act 1996, which makes the cooperation duty express in section 40(1), by providing that: “The parties shall do all things necessary for the proper and expeditious conduct of the arbitral proceedings”. The PC also held that this obligation can apply before any arbitration proceedings are afoot.

The PC concluded, therefore, that the wording "any Party may submit a dispute to binding arbitration" enabled a party wishing for a dispute to be arbitrated, either to commence arbitration itself, or to insist on arbitration, before or after the other party commences litigation, without itself actually having to commence arbitration.

Comment

This decision confirms the PC's pro-arbitration stance. The PC's preferred interpretation of the permissive wording in the SHA comes close in effect to an exclusive agreement to arbitrate. The only difference is that, unless and until one party insists on arbitration, there is no promise not to litigate.

Under an exclusive agreement to arbitrate, court proceedings should not begin at all. On the PC's interpretation of "may submit", litigation was properly begun, but was required to be stayed as regards all arbitrable claims, if and when the appellants invoked arbitration.

The evident risk that the word “may” can be understood to mean that litigation is open, unless and until arbitration is elected, creates potential time and cost exposures for the parties, as well as creating concerns regarding the privacy and confidentiality of the dispute(s) in question.

If by commencing litigation a party is not in breach of the arbitration agreement, but another party can nonetheless require that the litigation be stayed in favour of arbitration, it is not clear which party would bear the costs incurred in the litigation until the stay is granted.

It is worth also noting the timings for challenging the courts' jurisdiction. In England and Wales, under s9(3) of the Arbitration Act 1996, a party must apply to stay the court proceedings before taking any step in the litigation to answer the substantive claim (i.e. before filing its defence).

Although the PC upheld the appellants' right to have disputes determined by arbitration in this case, the use of permissive language in a dispute resolution clause creates significant uncertainties for the parties. This is particularly so where – as was the case here – there is no indication regarding the courts in which litigation could be started. The outcome may have been different if Hermes One had commenced litigation in a different, less benevolent, jurisdiction.

Although this decision may assist parties seeking to enforce permissive arbitration clauses in certain pro-arbitration jurisdictions, where the common intention at the outset is to deprive a party of the right to litigate, the arbitration agreement should be clearly worded. The PC's decision suggests that parties should use the words "should" or "shall", instead of "may".