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When a “may” is (almost) a “must” in an arbitration agreement

Critics have lamented that the English courts have not kept pace with trends in the world of arbitration. Any lingering doubts, however, should be quashed by the Privy Council’s decision in Anzen Limited and others v Hermes One Ltd. In Anzen, the court interpreted an optional arbitration clause with the word “may” liberally; granting a stay of litigation proceedings in favour of arbitration even though the applicant itself did not intend to commence an arbitration. Crucially, its decision was underpinned by the reality of commercial parties’ preference for arbitration.

In Anzen, the respondent, Hermes One, commenced litigation proceedings in the BVI courts seeking (among other things) statutory relief in relation to conduct which was alleged to be “unfair prejudice”. So far as relevant, Clause 19.5 of the relevant shareholder agreement read:

“…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…”

The Board was asked whether the seemingly equivocal expression “any Party may submit the dispute to binding arbitration” would entitle one party to seek a stay of litigation proceedings, critically, where the other party had not commenced arbitration or had no intention to. (It should be noted that the clause was detailed, which was another argument in favour of a stay.)

The Board saw three options, namely, to hold that:

  • The clause was exclusive, meaning any litigation commenced would be a breach of the arbitration agreement (Analysis 1).
  • A stay would be granted if the appellants commenced arbitration proceedings (Analysis 2).
  • A stay would be granted so long as the appellants made an unequivocal request for the dispute to be submitted to arbitration (Analysis 3).

The Board’s rejection of Analysis 1 is unsurprising. Such a position would contradict the plain words of the clause and more drastically, lead to the logical consequence that the respondents would be liable for damages for breach of the arbitration agreement. More interesting is the choice between Analysis 2 and 3, and whether it was necessary for a party to commence arbitration to invoke a stay. The Board ultimately preferred Analysis 3, holding that once an election was made, arbitration was mandatory, even if the electing party did not itself commence arbitration.

The Board’s decision is well supported by the prevailing comparative jurisprudence on optional arbitration clauses. In Westfal-Larsen v Ikerigi Compania Naviera, the parties agreed that:

“any dispute arising under this charter shall be decided by the English Courts to whose jurisdiction the parties agree… provided that either party may elect to have the dispute referred to arbitration.”

Bingham J held that until an election to arbitrate was made, there was no obligation to do so, but once an election was made, a binding arbitration agreement came into existence. The Board also referred to the Singapore case of WSG Nimbus v Board of Control for Cricket in Sri Lanka. The clause there provided that after 14 days of good faith negotiations “either party may elect to submit” their dispute to arbitration. The Singapore High Court held that “there is no compulsion to arbitrate until an election is made, [but] once a party makes such election arbitration is mandatory…” A similar result ensued in the English Commercial Court’s 2013 decision in Union Marine v Government of Comoros.

But beyond judicial precedent, the emphasis on commercial parties’ preference for arbitration was striking. Indeed, where clauses are equivocal, the court’s task is to construe the text in a manner most consistent with “commercial sense”. In Canadian National Railway Co v Lovat Tunnel Equipment Inc (relied on by the Board), Findlayson JA acknowledged that there was a “clear shift in policy towards encouraging parties to submit their differences to…mechanisms outside the regular court stream”, and that between two interpretations, “the courts should lean towards honouring [the] option [favouring arbitration]”.

Likewise, in NB Three Shipping v Harebell Shipping Ltd, Morison J rejected the argument which undermined the shipowners’ right to elect arbitration, holding that this “contradict[ed] commercial sense”. To this end, Analysis 3 was most sensible since its interpretation of Clause 19.5 was more consistent with “commercial reality”. Analysis 2 went against business common sense, as it prejudiced a party who did not wish to litigate or arbitrate (especially where it was a defendant without counterclaims) by requiring it to commence arbitration. The Board acknowledged that “in practice, the requirement to commence an arbitration might prove a substantial obstacle” both in terms of procedural hurdles under the relevant arbitration rules and costs.

Anzen follows a rich vein of pro-arbitration decisions by the highest courts of the UK in recent years. By emphasising the importance of taking a commercial view toward arbitration clauses in Fiona Trust & Holding Corp and others v Privalov and others, the House of Lords made clear that spurious attacks on the arbitration agreement would be given short shrift. In Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP, the Supreme Court issued an anti-suit injunction in support of arbitration, even though the appellant had no intention to commence arbitration (holding, in the process, that an arbitration agreement contained a negative right to compel the other party not to resolve the dispute other than through arbitration).

As an aside, it is not surprising that Anzen and Ust-Kamenogorsk carry the same tenor in emphasising the negative rights latent in an arbitration clause (Lord Mance was responsible for both judgments). The upshot of these cases is the clear judicial imprimatur of “the commercial community’s evident preference for arbitration in many spheres”, which points to a presumption in favour of arbitration agreements where such an outcome does not do violence to the text.

Three Crowns LLP Nelson Goh

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