The Privy Council (British Virgin Islands) has ruled in a case where a contractual clause provided that the parties “may” submit a dispute to arbitration, but one of the parties commenced litigation. Although the commencement of litigation did not violate the “optional” arbitration clause, the court ruled that the other party, which had not yet commenced arbitration proceedings, was entitled to a stay of the litigation pending arbitration.
The dispute in Anzen Limited and others v Hermes One Limited focused on the interpretation and meaning of an arbitration clause in an English law-governed shareholders’ agreement which provided that in the event of a dispute “any party may submit the dispute to binding arbitration” under the rules of the International Chamber of Commerce (ICC).
Hermes commenced litigation in the BVI in respect of an unresolved dispute. Anzen had not itself started arbitration proceedings but applied for a stay of the BVI litigation under section 6(2) of the BVI Arbitration Ordinance 1976 (Cap 6) (BVI Act).
Although the decision is one of the Privy Council (and so is not binding on the English courts) and concerns a stay under the BVI arbitration regime, it is of wider application as decisions of the Privy Council are persuasive for English courts (and in other offshore jurisdictions, including Bermuda and the Cayman Islands), and section 9 of the English Arbitration Act 1996 (1996 Act) is materially the same as section 6(2) of the BVI Act.
Section 6(2) of the BVI Act and section 9 of the 1996 Act provide that if a party to an arbitration agreement has legal proceedings brought against it in respect of any matter agreed to be referred to arbitration, that party may seek a stay of the litigation proceedings. The relevant court shall grant the stay requested unless it is satisfied that the arbitration agreement is “null and void, inoperative or incapable of being performed.”
It was common ground between the parties that, had Hermes commenced litigation after Anzen had already referred the dispute to arbitration, a stay must be granted.
It was also common ground that, although an arbitrator could not grant the relief sought by Hermes in the BVI proceedings, the arbitrator could decide the underlying factual and legal issues which would be relevant to subsequent pursuit of relief in court.
The Privy Council determined that the BVI litigation should be stayed pending any referral to arbitration. It was clear that this did not oblige either party to commence arbitration proceedings. However, the practical result was that Hermes would have to arbitrate as a precursor to obtaining the relief it sought.
In reaching its decision, the Privy Council decided that the wording of the arbitration clause was permissive rather than exclusive. Until an election had been made by one of the parties, there was no obligation to arbitrate, but once this election was made, the obligation to arbitrate became binding, even if the other party had already commenced litigation.
As a result, neither party would be in breach of the clause if it started litigation proceedings before any election had been made to arbitrate (had the language been exclusive rather than permissive, for example by using the word “shall” rather than “may,” then the commencement of litigation would have been in breach of the clause and may have given rise to damages). However, a party against whom litigation proceedings were brought was entitled to a stay of those proceedings pending arbitration.
In reaching its decision, the Privy Council noted that for “optional” arbitration clauses, one party should not be able to gain an advantage over the other by “jumping the gun” and commencing litigation.
The Privy Council also determined that Anzen did not have to commence (or intend to commence) arbitration in order to elect that arbitration must be the forum for a dispute. In making this ruling, the Privy Council relied, among other things, on the inherently consensual nature of arbitration which legislated against the need for a party to commence “artificial” declaratory proceedings in order to make good its election for arbitration. In particular, the Privy Council noted the requirement under the 1996 Act that “[t]he parties shall do all things necessary for the proper and expeditious conduct of the arbitral proceedings.”
The case is a further example of English judges strongly upholding arbitration clauses and highlights that if parties wish to preserve the choice to litigate or arbitrate any given dispute, the relevant provision must be very carefully worded.