In the recent case of Anzen Limited anors v Hermes One Limited1 the Privy Council confirmed that optional arbitration clauses become binding when one of the parties submits a request to arbitrate, or applies for a stay of the litigation proceedings.

The background

The issue before the Privy Council arose in the context of a shareholders’ agreement setting up a BVI company creating software enabling airline fare searches. The shareholders’ agreement contained an arbitration agreement which provided: “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.”

Following an issue between the parties over the management of the company, Hermes One Limited (HOL) issued court proceedings in the BVI against Anzen Limited anors. (Anzen). Anzen applied, under section 6(2) Arbitration Ordinance 1976, similar to section 9 Arbitration Act 1996, unsuccessfully at first instance, and also subsequently on appeal, to stay the proceedings in favour of arbitration as provided for by the arbitration clause.

The decision

Anzen then appealed to the Privy Council. The Judicial Committee hearing the case comprised Lords Mance, Clarke, Sumption, Carnwath, and Hodge. The question for the court to decide was whether the word “may” meant that the choice to arbitrate was optional, allowing the parties to, at their option, elect to litigate in the alternative. The Privy Council identified three possible analyses, namely:

  • The parties may arbitrate if they wish (option 1).
  • If litigation is commenced by one party, the other is still entitled to arbitrate:
    • by commencing arbitration proceedings (option 2); or
    • by seeking a stay, or making an unequivocal request to that effect (option 3).

The Board rejected option 1 on the basis that the use of the word “may”, rather than “shall”, was not sufficiently clear to prevent the parties from litigating. Option 2 was rejected on the basis that if litigation was commenced, it might leave the other party in the unusual position of having to issue arbitration proceedings where it might not be seeking an outcome other than to prevent the litigation and put itself at risk of costs in the arbitration by so doing. Option 3 being left, was preferred as it reflected the parties intentions that arbitration was not exclusive and that unless a party objected, the other might litigate.

HFW perspective

Whilst it could be argued that by adopting option 3, the court has effectively punished the party commencing the litigation, this is more desirable than the consequences under either of the other two options, and applying ‘commercial sense’ avoids the potentially unhelpful outcome of incompatible decisions from a court and arbitration tribunal.

As a judgment of the Privy Council, this is not a binding decision on English courts, but is persuasive and will no doubt be of interest to those who had previously viewed this type of clause as non-exclusive.