"May" or "Shall": what should be used in an arbitration clause?
29 February 2016
The Privy Council decision in Anzen Ltd & ors v Hermes One Ltd  UKPC 1, 18 January 2016, has important implications for the drafting of arbitration clauses. The Privy Council held that an arbitration clause providing that "any party may submit a dispute to arbitration" was not a binding agreement to arbitrate. Instead, (i) in the first instance, either party could commence litigation, but (ii) this was subject to an option, exercisable by either party, to submit the dispute to arbitration, whereupon a binding agreement would come into existence and any litigation would have to be stayed.
The arbitration clause appeared in a shareholders agreement between Anzen Ltd (Anzen) and Hermes One Ltd (Hermes). It provided that "if a dispute arises out of or relates to this Agreement or its breach… and the dispute cannot be settled within twenty (20) business days through negotiation, any party may submit the dispute to binding arbitration" in London by a sole arbitrator under the ICC Rules. The clause contained various other provisions about the conduct of the arbitration. There was no express suggestion in the shareholders agreement that either party was entitled to submit disputes to litigation.
The shareholders agreement was governed by English law, while the case concerned an application for a stay under the Arbitration Ordinance in the British Virgin Islands (BVI). It therefore raised issues of both English and BVI law. Nevertheless, even on the BVI law issues, the Privy Council's reasoning is likely to be adopted in future English law cases. Consistent with this, the judgment draws on English and other common law authorities on points of both English and BVI law.
Hermes initiated court proceedings in the BVI. Where there is a binding arbitration agreement, a respondent party is entitled to a stay of court proceedings on the ground that disputes must be submitted to arbitration. The UK Supreme Court has made clear that a party does not have to commence arbitration proceedings in order to obtain a stay in these circumstances, because a binding arbitration agreement is as much an agreement not to submit disputes to the courts as it is a positive agreement to submit them to arbitration (AES UST-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC  UKSC 35).
Anzen duly applied for a stay. It did not commence arbitration proceedings. Hermes argued that Anzen was not entitled to a stay because there was no binding arbitration agreement. Instead, Hermes argued, the arbitration clause contained permissive language (in particular, the word "may"), which only gave Anzen an option to arbitrate, and which did not prevent Hermes from commencing court proceedings. Hermes accepted that Anzen would have exercised that option, and would be entitled to a stay, if it had commenced arbitration proceedings but asserted that, since it had not commenced an arbitration, it was not entitled to a stay. Hermes' argument was successful before the BVI courts.
Lord Mance and Lord Clarke jointly gave the Privy Council's decision. The Privy Council considered three possible interpretations of the arbitration clause:
- Analysis I: if either party wishes to have a dispute resolved, it must do so through arbitration.
- Analysis II: either party may submit a dispute to litigation, but the other party has an option of submitting the dispute to arbitration, with the option exercisable by commencing an ICC arbitration (the analysis preferred by the BVI courts).
- Analysis III: either party may submit a dispute to litigation, but the other party has an option of submitting the dispute to arbitration, which is exercisable either by making "an unequivocal request to that effect" and/or by applying for a stay.
"May" v "Shall"
The Privy Council rejected Analysis I. It accepted that a clause providing that disputes "shall" or "should" be submitted to arbitration created a binding agreement to arbitrate disputes and, equally, not to litigate them. It held, by contrast, that "clauses depriving a party of the right to litigate should be expected to be clearly worded", and that "there is an obvious linguistic difference between a promise that disputes shall be submitted to arbitration and a provision… that 'any party may submit the dispute to binding arbitration'". Accordingly, the clause in this case was not a binding agreement to arbitrate disputes (and not to litigate them). Instead, it allowed either party to commence court proceedings, save that the other party had an option to submit the dispute to arbitration which, once exercised, created a binding arbitration agreement.
The remaining question was how the option to "submit the dispute to binding arbitration" could be exercised (ie whether Analysis II or Analysis III should be preferred). The Privy Council preferred Analysis III, ie that it could be exercised by applying for a stay. The Privy Council's view appears to have been driven by its discomfort with Analysis II, which would have required a party to go to the effort and expense of commencing an arbitration (after engaging in 20 business days of negotiations) even if its sole aim was to prevent the other party from having the dispute heard before the courts.
Comment: The short point to be derived from this case is that, in order to have a binding arbitration agreement, mandatory language "shall" or "must" should be used. According to the Privy Council, permissive language "may" creates an option to arbitrate, exercisable by either party. It is only once the option is exercised that a binding arbitration agreement comes into existence.
In a sense, the practical effect of the distinction drawn by the Privy Council between "may" and "shall" could be regarded as slight. Where there is a binding arbitration agreement, and one party commences court proceedings in breach of that agreement, the other party can obtain a stay of those proceedings, even if it has no intention of commencing an arbitration. See the AES UST-Kamenogorsk case. Similarly, if the arbitration clause is drafted like the clause in Anzen v Hermes with permissive language, and one party commences court proceedings, the other party should still be able to obtain a stay of those proceedings by exercising its 'option' to arbitrate.
However, although most cases with equivalent language in the dispute resolution clause should ultimately end up in arbitration, there could well be practical implications if an "option" to arbitrate has to be exercised. On a general level, the decision creates a risk of unnecessary court proceedings as a prelude to arbitration. Those proceedings could potentially be before any court with competent jurisdiction if, as was the case here, there is no court jurisdiction clause. This generates uncertainty and risk, along with unnecessary expense and delay.
More specifically, the decision has an impact on the rights of the party which does not commence litigation. Where there is a binding arbitration agreement, court proceedings would amount to a breach of the arbitration agreement. This would give rise to a claim for damages for breach of the arbitration agreement relating to (for example) any costs incurred by the innocent party in the court proceedings. Moreover, an anti-suit injunction might be available to restrain the litigating party from continuing court proceedings. By contrast, where there is only an "option" to arbitrate, litigation is permitted until the "option" has been exercised and, therefore, there is no breach of the arbitration agreement until then, and no claim for damages. Since litigation is permitted, an anti-suit injunction may not be available. Instead, the relevant party may be forced to apply for a stay in whichever jurisdiction court proceedings have been commenced.
In view of the potential impact of the drafting distinction drawn by the Privy Council, it is worth reconsidering the merits of the decision. There is some room for debate on this point.
First, the Privy Council did not consider the possibility that the word "may" was used to provide that, after the 20-day negotiation period had expired in relation to a dispute, either party could submit that dispute to a binding process of dispute resolution – which, in this case, had to be arbitration – but was not obliged to do so (if, for example, it wished to continue negotiations). In other words, the Privy Council did not consider that the discretionary language arguably applied to the timing of the submission to arbitration, rather than a choice between arbitration and litigation. The Privy Council apparently considered that the word "must" should have been used if the parties wished to enter into a binding arbitration agreement. However, arguably that would instead have had the effect of requiring the parties to submit the dispute to arbitration immediately after 20 days had expired, even if they wished to continue negotiations.
Secondly, it is not clear that the parties in this case had any intention of allowing each other to submit disputes to the courts. One would expect a commercial agreement like the shareholders agreement to have made provision for court litigation if it were permitted, probably through a jurisdiction clause (just as they included a detailed arbitration clause). Yet the shareholders agreement made no reference at all to court proceedings.
Thirdly, the "option" to arbitrate propounded by the Privy Council is, at best, an imprecise one, with no clear provision as to the timing or manner of its exercise. In particular, it is not clear how long the party, which does not commence litigation, has to exercise the option. Potentially it could require a dispute to be submitted to arbitration even after litigation was well advanced – unless some term were implied into the clause to prevent this. It is uncertain how this issue should be addressed.
How should parties draft their arbitration clauses in light of this decision? It is important to ensure that arbitration clauses contain language making clear that disputes "must" or "shall" be submitted to arbitration, if that is the parties' intention. That may be a matter of checking that "may" does not appear in your model arbitration clauses. However, the drafting may not be that simple. For example (and as suggested above), in cases where parties want to provide for an initial period of negotiations in the event of a dispute, failing which either party may submit the dispute to arbitration, it may be necessary to make clear separately that, where a dispute is submitted to binding dispute resolution, it must be submitted to arbitration as set out in the contract in question.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey email@example.com, or tel +44 20 3088 3710.