13 May 2016

Shall means shall, may means may, but an option can be exercised in several ways

Anzen Ltd & Ors v Hermes One Ltd (British Virgin Islands) [2016] UKPC 1 (18 January 2016)

Shareholders to JV agree that “any party may submit the dispute to binding arbitration”. Shareholders then get into a dispute, end up in Court and argue about stay.

The parties were shareholders in a BVI joint venture. The shareholders agreement was governed by English law. A dispute arose regarding Anzen’s allegedly unfairly prejudicial conduct in the management of the JV. Hermes commenced proceedings in the BVI courts. Anzen sought a stay of those proceedings pursuant to Section 6(2) of the BVI’s Arbitration Ordinance, which required the court to stay proceedings if it was satisfied that there was a valid arbitration agreement in respect of the matter in front of it.

Anzen relied on the dispute resolution provision at clause 19.5 of the shareholders agreement: in the event of a dispute “any party may submit the dispute to binding arbitration”.

Hermes said that Anzen could not rely on this provision to obtain a stay unless and until it had commenced an arbitration in respect of the dispute in hand. First instance and appellate courts agreed. Luckily for Anzen, the Privy Council (the “PC”) did not.

May does not mean shall.

Despite the detailed nature of clause 19.5 (which set out the applicable rules (“ICC”), the seat of arbitration, the position as to costs, etc.), the PC was unconvinced by arguments (and US case law) that “may” could be read as “shall”: “clauses depriving a party of the right to litigate should be expected to be clearly worded”.

The clause did not require all disputes to be submitted to arbitration to the total exclusion of the court’s jurisdiction. It was permissive, in the sense that it gave either party the option to submit a dispute to arbitration. Such clauses are enforceable.[1] Once the option has been exercised, then both parties are obliged to proceed with arbitration.

To be entitled to a stay, the option must be exercised

The PC was clear that Section 6(2) required more than an unexercised permissive option to arbitrate. Had then the option been exercised so as to give rise to an arbitration agreement?

Anzen did not need to commence an ICC arbitration to exercise the option

The PC took into account the fact that the party wishing to rely on its option may not wish any positive relief for itself and so would be forced to seek a declaration of no liability. It would have to follow any pre-conditions to arbitration (for example 20 days of negotiation) and pay the non-refundable ICC filing fee.  It held, therefore, that a commercially sensible interpretation[2] of the concept of “submitting a dispute to binding arbitration” did not mean that the party had to commence an arbitration.

An unequivocal request to arbitrate the dispute and/or an application for a stay of court proceedings was sufficient to exercise the option

The party must “insist” on arbitration before the other party’s promise to agree and not to litigate comes into being, but, said the PC, the party can do so by an unequivocal request, or by seeking a stay.

The PC drew support for its view from the House of Lord’s decision in Bremer Vulkan v South India Corp[3] that parties to an arbitration agreement are under “mutual obligations to one another to cooperate in the pursuit of the arbitration”.

Anzen was therefore entitled to the stay it sought.


The PC’s decision continues its line of pro-arbitration rulings, and takes much account of the position of the original defendant party. Not only may that party not wish any positive relief for itself, it may not wish for a contentious dispute resolution process at all. It seems unlikely that the parties intended that one should be forced to become the claimant protagonist against its wishes.

That said, the PC decision essentially creates a first mover disadvantage. The claimant party (C) commences proceedings in a court of competent jurisdiction as it is perfectly entitled to do. It then must wait and see if the defendant (D) decides to exercise its option to arbitrate. If D does, C must then commence an arbitration. Everyone wastes time and cost.

D cannot seek its costs of the original proceedings from C because there was at that time no obligation on C not to commence court proceedings. D cannot seek its costs of the stay application unless and until C improperly opposes the application. C cannot seek its wasted costs of its court proceedings because D was not acting improperly in only exercising its option at that point in time. C cannot seek its duplicative costs of commencing the arbitration (unless it is ultimately entitled to in the arbitration) because it is quite proper for D to require C to begin again.

To avoid wasted costs and time, C would be well advised to put D to an early election, and seek a confirmation from D as to whether or not it will elect arbitration before C issues proceedings. C, of course, then runs the risk of D commencing proceedings in another competent court not of C’s choosing where C’s only option is rely on its arbitration option (in circumstances where that court may not agree a stay and C does not want to be in arbitration in any event).

It is hard to see any way round this risk. The Court noted in NB Three Shipping Ltd v Harebell Shipping Ltd,[4] in the context of a unilateral option: “It would cease to be available if Owners took a step in the action or they otherwise led Charterers to believe on reasonable grounds that the option to stay would not be exercised”. While an option to choose arbitration is not open-ended, however, there are no grounds to require a D to exercise it earlier than it must exercise any jurisdiction challenge.

That said, the PC view that a party could exercise its option by seeking a stay appears circular: the party creates the arbitration agreement that is the basis for its application by the application itself. A more principled view would be to require notice to be given to C of D’s election of arbitration, which is then the basis to seek the stay.

Inevitably, and as all articles about similar cases conclude, the best solution for parties is to avoid ambiguous clauses and draft for certainty in the first place. Regardless of what you intended by the drafting, the Court deciding the point may not agree. You may wish to maintain the court proceedings, and believe you are entitled to, and be disappointed by the pro-arbitration decision. You may believe you have a right to arbitrate, but the Court may decline a stay.

If an option is very important for you, and you wish to defer the final decision as to forum until the particular disputes arises, consider whether you can seek it on a unilateral basis (although take care about enforceability of unilateral clauses around the world). If arbitration is the real forum of choice (as it probably was intended to be in this shareholders agreement) then say so, use “shall” and mean “must”. Alternatively, if courts are likely to be the preferred forum in most cases, consent to arbitration could be sought on an ad hoc basis as and when a suitable dispute arises.

Finally, remember that permissive arbitration agreements may not be binding in all jurisdictions. The PRC for example requires, among other things, a clear and unequivocal intention to settle disputes by arbitration.[5]

View more articles from the latest edition of Crossing Borders.

[1] See for example Lobb Partnership Ltd v Aintree Racecourse Co Ltd [2000] CLC 431.

[2] Following the approach of Lord Clarke in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, at para. 30.

[3] Bremer Vulkan v South India Corp [1981] AC 909.

[4] NB Three Shipping Ltd. v Harebell Shipping Ltd. [2004] APP.L.R. 10/13.

[5] Huang Tao, ‘The Validity of Arbitration Agreements under Chinese Law’ (KWM website, 26 June 2012), available at: http://www.chinalawinsight.com/2012/06/articles/corporate/the-validity-of-arbitration-agreements-under-chinese-law/.

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