The parties entered into an agreement (governed by English law) which provided that: "If a dispute arises…and the dispute cannot be settled within 20 business days through negotiation, any Party may submit the dispute to binding arbitration" (emphasis added). The clause then went on to specify various issues connected to the arbitration eg venue and language.

Following a dispute, the respondent commenced court proceedings in the BVI. The appellants did not start arbitral proceedings. Instead, they sought a stay of the court proceedings (relying on a statutory provision which is similar to that of section 9 of the Arbitration Act 1996, which provides, broadly, that a party to an arbitration agreement against whom legal proceedings are brought may apply to the court to stay the proceedings). A stay was rejected at first instance and on appeal (on the ground that no arbitration of an identical subject matter had been commenced by the appellant) but the Privy Council has now allowed the appeal.

In reaching its decision, the Privy Council considered 3 possible analyses of the arbitration agreement:

  1. the parties must arbitrate if they wish to pursue the dispute ("analysis I");
  2. one party may commence litigation if it wishes, but the other party has the option of arbitrating if: 

it commences an arbitration ("analysis II"); or

  1. it requires the other party to submit to arbitration by making an unequivocal request to that effect and/or applying for a stay ("analysis III").

The Privy Council found many significant pointers against analysis I. Clauses depriving a party of a right to litigate should be clearly worded and there was an obvious linguistic difference between "may" and "shall". The Privy Council rejected the argument, though, that the litigation proceedings had not been properly begun.

If analysis II is adopted, the Board said that it would lead to "evident incongruity", in that the litigation can only be ended by a party actually commencing an arbitration in which the only claim they might be able to make is for a declaration of non-liability in respect of any claim being brought in the litigation. It was said that that would make no commercial sense.

Accordingly, the Privy Council favoured analysis III. The clause contemplated a consensual approach and the view that notice by the appellants triggered a mutual agreement to arbitrate fitted that approach.  As a result, the litigation proceedings had been properly begun but they should now be stayed, once the appellants invoked arbitration. However, the appellants did not have to actually commence arbitration themselves in order to obtain a stay of the litigation. Thus the party which started the litigation will be forced to commence the arbitration (whilst paying the requisite fee) if the other side doesn't and if it wishes to pursue its claim.

In reaching its decision, the Privy Council referred to earlier decisions that a clause which entitles either party to elect arbitration (but provides for litigation otherwise) is a valid arbitration agreement once the option is exercised by starting arbitration. However, the Board has gone further in this case by confirming that merely applying for a stay or invoking arbitration (without actually commencing arbitration) is also enough to make the arbitration agreement binding.

COMMENT: Although analysis III has the result that the party commencing litigation has not done anything wrong, the effective result is that a party wishing to arbitrate can obtain a stay of the litigation proceedings, thus producing the same practical result as for analysis I. This result could be said to make commercial sense, in that the undesirable situation of parallel decisions from a court and a tribunal will be avoided. However, the party which legitimately started litigation here will no doubt be aggrieved that it will now be put to the expense and hassle of starting an arbitration in order to pursue its case. The party which didn't want to litigate waited only a month here before applying for a stay. Had it decided instead to let the litigation continue for some time (perhaps in order to assess its likely chances of success before the court) before finally invoking its option of arbitrating, the scope for potential unfairness would be great (the court having no option to refuse a stay, unless the arbitration agreement is null and void).