When “may” means “must” - Privy Council holds ‘optional’ arbitration clause can become binding

An arbitration agreement providing that a party “may” submit disputes to arbitration has been found by the Privy Council to be binding if one party opts for arbitration. 

28 January 2016

In Anzen Limited and others v Hermes One Limited  [2016] UKPC 1, the Privy Council addressed whether an arbitration clause in a shareholders’ agreement which provided that in the event of an unresolved dispute “any party may submit the dispute to binding arbitration” constituted a binding agreement to arbitrate. It concluded that this could amount to a binding commitment to arbitrate if one party chose to rely upon it, either by commencing arbitration proceedings or by applying to stay litigation in favour of arbitration.

This judgment overturned the decision in the Court of Appeal which had upheld the decision of Bannister J in the Eastern Caribbean Supreme Court that the clause did not entitle the Appellants to a stay of proceedings commenced by the Respondent, under section 6(2) of the Arbitration Ordinance 1976, without the Appellants having commenced arbitration. 

The Privy Council considered a range of English, Commonwealth and US authorities and concluded that there were three possible analyses which could be adopted.  

  • Firstly, the words “may submit” could amount to an exclusive agreement to arbitrate all disputes. The Privy Council declined to interpret the wording in this way as “there is an obvious linguistic difference” between a promise that disputes shall be submitted to arbitration and a provision that they may be submitted to binding arbitration.
  • The second option, which the Privy Council also rejected, was that the clause is permissive, leaving it open to one party to commence litigation, but giving the other party the option of submitting the dispute to binding arbitration but only by commencing arbitration themselves. This option was rejected on the basis that the Privy Council did not believe it to “make much commercial sense” as the objecting party might have to comply with complex mandatory pre-conditions to arbitration, or the objecting party may have no real basis for commencing arbitration other than to seek a declaration of no liability for a claim brought in the litigation.
  • The third option, which was adopted by the Privy Council, was that the clause was permissive, but that either party could elect to submit a dispute to arbitration, or to challenge litigation on the basis of the arbitration agreement, and this election would have the effect of rendering the agreement to arbitrate binding. The effect of this interpretation is effectively to render the arbitration agreement binding, unless both parties elect to litigate their disputes. 

Although the Privy Council judgment is not binding as a matter of English law, it is likely to have persuasive authority if similar clauses are to be interpreted under English law. There is an evident risk that using ambiguous wording such as “may” in dispute resolution clauses will create significant uncertainty for the parties as the use of litigation will remain open until arbitration is elected. Such uncertainty may have significant cost consequences. We therefore always recommend that any arbitration agreement is clearly worded using words such as “shall”, rather than “may”, to minimize the risk of significant time and costs being expended determining the appropriate form of dispute resolution.