Anzen Limited & Another v Hermes One Limited

In the case of Anzen Limited v Hermes One Limited [2016] UKPC 1, the Privy Council considered the use of permissive language in an arbitration clause. Specifically, the Council considered what obligations the use of the word “may” imposed, if any, on the parties.

The background

The parties were shareholders in a BVI Company. The shareholder agreement included an arbitration clause (clause 19.5) which stated that:-

“This agreement shall be construed in accordance with English law, without reference to its conflict of law principles. If a dispute arises out of or relates to this Agreement or its breach…and the dispute cannot be settled within twenty (20) business days through negotiations, any Party may submit the dispute to binding arbitration.”

Hermes commenced litigation against the appellants in relation to their alleged unfairly prejudicial conduct in the management of the BVI company.

The appellants applied to stay the proceedings pursuant to section 6(2) of the BVI Arbitration Ordinance 1976 on the grounds that clause 19.5 was a valid and binding arbitration provision. Section 6(2) states that:-

“If any party to an arbitration agreement….commences any legal proceedings in any court against any other party to the agreement…and the court, unless satisfied that the arbitration agreement is null and void….shall make an order staying the proceedings.”

The Privy Council’s decision

The Privy Council considered in depth three possible interpretations of the dispute resolution clause. It held that the wording “may submit” was not an exclusive agreement to arbitrate all disputes. If that were the case words like “should” or “shall” would have been used.

However, the Council widely interpreted ”submit” so as to leave it open to one party to commence arbitration or to give the other party the option of submitting the dispute to binding arbitration. This would be done by requiring that other party to submit the already commenced litigation to arbitration and/or by applying for a stay in the litigation.

The effect of such an interpretation was to allow the Council to conclude that the party who wished for a dispute to be arbitrated could either, commence arbitration itself, or to insist on arbitration, before or after litigation had already been commenced. Such an insistence could occur without the party having to commence arbitration itself.

In reaching its conclusion, the Privy Council made reference to the consensual approach to arbitration. The parties to an agreement are under a mutual obligation to one another to cooperate in the pursuit of the arbitration; this obligation is carried over in the current English Arbitration Act 1996.

Further, the agreement between the parties in this particular case clearly contemplated such a consensual approach by included a provision that the parties were to negotiate for at least 20 business days and only then, if such negotiations were successful, were the parties able to submit the dispute the arbitration.

This decision highlights the English Courts willingness to give effect to arbitration clauses.

The agreement between the parties, whilst not expressed as an obligation, illustrated the parties intention to arbitrate. The Privy Council found a way to give effect to that intention by requiring litigation, which had been commenced, to be stayed pending arbitration.

However, once the litigation has been stayed, there is no obligation on the party wanting to arbitrate to actually commence if it does not wish to do so. This would seem to impose a cost burden on the litigating party as, once the stay has been granted, in order to resolve the matter he will need to commence arbitration.

Whilst the Privy Council upheld the appellants’ rights to have the dispute determined by arbitration, the use of permissive language in the dispute resolution clause created significant uncertainties for both parties. This is particularly so when there was also no indication regarding the Court in which the litigation could be started. Hermes could have chosen to commence litigation in a less arbitration friendly jurisdiction and the outcome may have been very different.

Therefore, if the parties do genuinely intend for disputes to be referred to arbitration only this intention should be clearly worded in any dispute resolution or arbitration clause in the potential agreement.

Finally, it is worth also noting the timings for challenging the courts' jurisdiction. In England and Wales, under section 9(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).