In a unanimous judgment issued on 18 January 2016, the Judicial Committee of the Privy Council (the Privy Council) held that the words “may submit the dispute to binding arbitration” give either party to a contract the right to insist on arbitration, which could be achieved by applying for a stay of litigation commenced by the other party. The decision is significant because it highlights the need for clear drafting of arbitration clauses—ideally with the use of mandatory language such as “shall”—to avoid ambiguity as to whether parties are precluded from commencing litigation.
The Privy Council overturned the decision of the Court of Appeal of the Eastern Caribbean Supreme Court and held that the appellants were entitled under s 6(2) of the BVI Arbitration Ordinance 1976 (Cap 6) (the Arbitration Ordinance) to a stay of the litigation proceedings that the respondent had commenced against them in the BVI courts.
The appellants and respondent are shareholders in a BVI joint venture company, Everbread Holdings Ltd (Everbread), established to develop airline fare search software. The shareholders’ agreement included an arbitration clause, which provided 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 (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. Such arbitration will be conducted by a sole arbitrator designated by the International Chamber of Commerce (ICC) and will be in accordance with the ICC’s arbitration rules. …” [emphasis added]
The respondent commenced litigation proceedings in the BVI against the appellants and Everbread, claiming, among others, statutory remedies for unfairly prejudicial conduct in the management of the affairs of Everbread, damages and/or the
appointment of a liquidator over Everbread. The appellants applied to stay the litigation proceedings pursuant to the Arbitration Ordinance.
At first instance, the BVI court dismissed the stay application on the basis that: (a) the arbitration clause conferred an option on any party to the shareholders’ agreement to submit a dispute arising under or relating thereto to arbitration; (b) if one party commenced litigation in respect of such a dispute, the option under the arbitration clause was only exercisable by the other party by referring the identical subject matter to ICC arbitration; and (c) since the appellants had not done this, but had merely sought a stay of the litigation proceedings, they could not obtain a stay. The Court of Appeal of the Eastern Caribbean Supreme Court upheld this decision for essentially the same reasons.
On appeal, the Privy Council, sitting in its capacity as the final court of appeal for the BVI, overturned the decisions of both courts. In a judgment written on behalf of a unanimous Judicial Committee by Lord Mance and Lord Clarke, the Privy Council held that the words “any Party may submit the dispute to binding arbitration” are purely permissive, leaving it open to one party to commence litigation, but giving the other party the option of submitting the dispute to binding arbitration. Such an option is exercisable by requiring the party that has commenced the litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay, as the appellants did in the case at issue.
The Privy Council considered that this construction of the arbitration clause is consistent with the “hallmark of arbitration”, which is consent. Unlike litigation, parties to an agreement to arbitrate are under mutual obligations to one another to cooperate in the pursuit of the arbitration. The arbitration clause in this case contemplates a consensual approach: first, negotiation for at least 20 business days to see if any dispute can be resolved amicably; and second, if negotiations are unsuccessful, the option for either party to submit the dispute to arbitration.
The Privy Council noted that this construction of the arbitration clause enables a party that desires a dispute to be arbitrated to (a) commence arbitration itself, or (b) to insist on arbitration before or after the other party commences litigation, without actually having to commence arbitration if it does not wish to.
The Privy Council considered two alternative constructions and dismissed them both.
First, the Privy Council considered whether the parties’ arbitration clause could be read as providing that arbitration was the exclusive form of dispute resolution for their disputes. The Privy Council rejected such a construction on the basis that interpreting the words “any party may submit the dispute to binding arbitration” to preclude a party from pursuing the dispute by any other form of legal proceedings except arbitration would in effect convert the word “may” to “shall”, and clauses depriving a party of the right to litigate should be clearly worded. In this case, the Privy Council considered that it was open to the contractual parties to understand the arbitration clause to mean that litigation was available to them to resolve their disputes, unless and until one of the parties elects arbitration.
Second, the Privy Council considered whether the arbitration clause should be construed to permit a party to commence litigation, but giving the other party the option of submitting the dispute to binding arbitration, exercisable only by commencing an ICC arbitration itself. The Privy Council rejected that construction on the basis that it did not make commercial sense given that, in practice, a requirement to commence arbitration might prove a substantial obstacle. For instance, if, in this case, the appellants were required to commence an ICC arbitration in order to exercise the option of submitting the dispute to binding arbitration, they would have had to seek mirror-image declarations of non-liability and/or made their own cross-claims against the respondent in respect of the same dispute. The appellants would also have to pay a non-refundable filing fee of US$3,000, together with any advance on the costs of the arbitration under the ICC Arbitration Rules.
According to the Privy Council’s judgment, the party who commenced litigation was not in breach of the arbitration clause. Where litigation is initiated by one party only to be stayed in favour of arbitration, this would incur wasted costs for the parties, but it would not be clear which party should be liable for such wasted costs since the party who commenced litigation had not acted in breach of the arbitration clause. Further, the commencement of litigation may undermine the privacy and confidentiality of the subsequent arbitration proceedings because litigation is by default public. In view of these potential difficulties, it is advisable for commercial parties who wish to settle their disputes by arbitration to draft arbitration agreements that clearly provide exclusively for arbitration and preclude recourse to litigation, e.g., by providing that “disputes shall be submitted to binding arbitration”.