19/01/2016

“May” or “must” arbitrate – what’s needed for a stay? Anzen Ltd v Hermes One Ltd [2016] UKPC 1

This advice delivered on 18 January 2016 by the Privy Council (a BVI case) examines the effect of a clause in an agreement providing that in the event of any unresolved dispute “any party may submit the dispute to binding arbitration” (emphasis added).

The Board concluded that in this case, the provision conferred an option on either party to require resolution of the dispute in arbitration.  Further, once such a request had been made, the requesting party could also obtain a stay of judicial proceedings under section 6(2) of the Arbitration Ordinance 1976 (Cap 6).  It was not necessary that the requesting party in fact began an arbitration.

The decision is clearly pro-arbitration.  Had proceedings been begun in another jurisdiction, however, the word “may” and any stay provisions might not have been so favourably interpreted. To avoid this risk, contracting parties should consider spelling out their intentions rather more clearly than they did in this case.

The arbitration clause and section 6(2) of the Arbitration Ordinance

The dispute resolution and arbitration clause in the agreement between the parties provided (in its most relevant part – it concludes with detailed provisions about the operation of the arbitration):

“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. The arbitration will be held at a neutral site in London, England. …” (emphasis added)

Section 6(2) of the BVI Arbitration Ordinance 1976 (in wording paralleled by section 1(1) of the English Arbitration Act 1975 and not dissimilar to section 9 of the current English Arbitration Act 1996) provides (in most relevant part):

“If any party to an arbitration agreement … commences any legal proceedings in any court against any other party to the agreement … in respect of any matter agreed to be referred, any party to the proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to the court to stay the proceedings; and the court, [subject to limited exceptions] …, shall make an order staying the proceedings.”

The Board’s decision

Three readings of the arbitration clause were in contention.

• Analysis I – the clause was an exclusive choice to arbitrate; i.e. “may” was to mean “must”
• Analysis II – the clause was purely permissive giving either party an option to choose. arbitration and the option had to be exercised by commencement of ICC arbitration.
• Analysis III – as for Analysis II but, to exercise the option, it was only necessary to make “an unequivocal request to that effect and/or [apply] for a corresponding stay”.

The Board dismissed as “hopeless” a fourth suggestion that a stay could be granted under the Arbitration Ordinance even if there was a mere option to arbitrate but that it had not been exercised in any way.

The real issue between the parties was whether the appellant had to start an arbitration to exercise their option and obtain a stay.  Pausing for a moment, one might wonder why the appellant had not simply done so and avoided a trip to the Privy Council.  The answer may lie in the ICC Arbitration Rules which require payment of a non-refundable filing fee, an advance on the costs of arbitration and which may make it difficult to apply for negative declaratory relief (which would have been the essence of the appellant’s case).

In any event, the Board analysed all three readings in some detail.

The Board rejected Analysis I as a matter of construction and by reference to Commonwealth authority.

Two points of construction militating against Analysis I were identified.  First, causes depriving a party of the right to litigate should be clearly worded (albeit that the Board noted this presumption was tempered by the “commercial community’s evident preference for arbitration in many spheres”.   Second, there was an obvious linguistic difference between a promise that disputes “shall be submitted to arbitration” and a provision stating that they “may” be so submitted.

These arguments outweighed other construction arguments including that, by agreeing such detailed provisions in relation to the arbitration, the parties indicated a clear choice of arbitration.

English, Canadian and Singapore authorities showing that similar clauses were construed as an option not an obligation to arbitrate were found by the Board to point away from Analysis I (notably Lobb Partnership [2000] CLC 431, Canadian National Railway (1999), 174 DLR (4th) 385 and WSG Nimbus [2002] 3 SLR 603).   United States decisions in commercial cases were found to be of similar effect.

Before finally rejecting Analysis I, the Board considered Analysis II and Analysis III (discussed below), ultimately preferring Analysis II.

As a result of this conclusion, the appellant could not allege that the respondent was in breach of contract merely by suing in the BVI.

The Board preferred Analysis II to Analysis III bearing in mind, in particular, considerations of commercial sense and the consensual nature of arbitration.

The Board recognised that the words of the contract could “connote and require the actual commencement of arbitration”.  The Board concluded, however, that because practical obstacles to beginning an arbitration (e.g. difficulty in claiming negative declaratory relief) might prevent the option being exercised at all, Analysis II should be rejected as less consistent with business common sense than Analysis III (making reference to Lord Clarke’s well known statement of this principle in Rainy Sky v Kookmin [2011] 1 WLR 2900, [30]).

The Board concluded that Analysis III was workable because the provisions of the Arbitration Ordinance permitted the court to stay proceedings even when an arbitration had not been (and would never be) begun.  As a matter of general principle, the Board also felt that Analysis III better reflected the consensual nature of arbitration and that the construction of the arbitration clause should be influenced by this and the duty to cooperate (enunciated for example in section 40(1) of the English Arbitration Act 1996).