Drafting arbitration clauses: the may vs. shall debate

Where an arbitration agreement provides that the parties "may" refer a dispute to arbitration, but does not say anything about litigation, is a party entitled to litigate instead of arbitrate? Both the English and Australian courts have addressed this issue. The answer, in England, appears to be a qualified yes. The answer in Western Australia appears to be no.

In practical terms, the decisions highlight the importance of clarity in drafting. If contracting parties want to refer disputes to arbitration and ensure that their disputes will not go to court they should make it clear, for example, by stating that all disputes "shall" or "may only" be referred to arbitration. Equally, if they do want to have the option to litigate or arbitrate, that should be clearly stated as should the mechanism for how the election between arbitration and litigation will work. Otherwise you may find yourself in lengthy satellite litigation trying to ascertain which forum has jurisdiction to enforce your contractual rights.

England and Wales

In Anzen¹ the issue came before the Privy Council on appeal from the BVI Court of Appeal. The case concerned an arbitration clause in a shareholders' agreement that provided that, in the event of an unresolved dispute "any party may submit the dispute to binding arbitration" by a sole ICC arbitrator and in accordance with the ICC’s arbitration rules. English law applied to the issue of interpretation.

The Privy Council unanimously reversed the decision of the Court of Appeal.

Essentially, the Privy Council refused to collapse "may" and "shall". It held that the words "may submit" in the clause allowed either party to submit the dispute to arbitration if a dispute arose, but did not prevent either party from initially submitting the dispute to the competent courts instead. Rather, in the event that a party (Party A) did commence court proceedings, the clause gave the party against whom Party A had brought court proceedings (Party B), the right to apply for a stay on those court proceedings and compel Party A to pursue its claim in arbitration instead.

Reasoning
In reaching this conclusion, the Privy Council considered three possible interpretations of the clause:

• "The words 'any party may submit the dispute to binding arbitration' are not only permissive, but exclusive, if a party wishes to pursue the dispute by any form of legal proceedings ([A]nalysis I).
• The words are purely permissive, leaving it open to one party to commence litigation, but giving the other party the option of submitting the dispute to binding arbitration, such option being exercisable either by:
  • commencing an ICC arbitration, as the respondent submits and Bannister J and the Court of Appeal held ([A]nalysis II); or
  • requiring the party which has commenced the litigation to submit the dispute to arbitration, by making an unequivocal request to that effect and/or by applying for a corresponding stay, as the appellants have done ([A]nalysis III).^"2

Under Analysis I, both parties would be forbidden from starting court proceedings and arbitration would be the only means of dispute resolution. The apparently permissive wording would be sufficient to oust the presumption that parties do not intend to deprive themselves of a right to litigate. This interpretation effectively collapses the meanings of "may" and "shall". It seems to follow that Analysis I would, therefore, make litigation of the dispute into a breach of contract, as would be true under a clause using "should" or "shall".

Under Analyses II and III, a right to litigate sits alongside the right to arbitrate, but is defeated once a dispute is referred to arbitration. What differentiates Analysis II and III is the defeating factor. Under Analysis II, the defeating factor is actually starting an arbitration. Party A could begin court proceedings but Party B could then force the dispute to arbitration by commencing an arbitration mirroring Party A's litigation. Under Analysis III, the threshold for defeating the right to litigate is lower: Party A could begin court proceedings but Party B could then force the dispute to arbitration by asking Party A to commence an arbitration instead of court proceedings, or by applying to court to stay Party A's litigation.

Other analyses are conceivable (not least that it simply allowed arbitration alongside litigation which, the Privy Council noted, was a proposition that had been rejected by the Singaporean High Court), but the Privy Council did not consider them in detail. The argument that such a "may" clause requires both parties to consent to arbitration before the obligation to arbitrate applies was apparently not raised in this case, but the judgment indicates that the Privy Council would have been disinclined to accede to that argument in any event.³

The Privy Council favoured Analysis III:

"A rejection of [A]nalysis II provides further reinforcement of the Board's view that [A]nalysis I must be rejected, leaving [A]nalysis III as the correct analysis. Analysis III has none of the disadvantages of [A]nalysis II. It enables a party wishing for a dispute to be arbitrated, either to commence arbitration itself, or to insist on arbitration, before or after the other party commences litigation, without itself actually having to commence arbitration if it does not wish to."⁴

Commentary
The Privy Council's decision should be read in the light of the qualification that "[a]s with any issue of construction, the language and context of the particular agreement must ultimately be decisive".⁵ This appears to leave the door open to searching analysis of such differences in wording as may be found from one clause to the next.

Moreover, strictly speaking, the decision is authority only for the proposition that Analysis II is bad, because it was not necessary to decide between Analyses I and III on the facts of the case. It is therefore still open to English lawyers to argue for Analysis I. However, the decision is strong persuasive authority for the proposition that Analysis I should be rejected. Anzen has significant implications for parties to agreements with "may" wording akin to that at issue in Anzen. Such wording does not jeopardise Party B's right to ultimately avoid litigation, but does require Party B to take a step to prevent Party A from litigating, either by asking Party A to commence an arbitration or by applying for a stay. It also means, unlike with exclusive arbitration clauses, that Party B will be unable to recover any costs it incurs in having the matter re-directed to arbitration (as they would be recoverable as damages for breach where the clause is exclusive).

The following table sets out the consequences, in the light of Anzen, of selecting "may" or "shall" in drafting an English law arbitration agreement.

Australia

In Pipeline, the agreement provided that if a dispute between the parties could not be resolved "then either party may by notice to the other party refer the dispute to arbitration".⁶ A dispute arose and could not be resolved amicably. The claimant, Pipeline Services, commenced proceedings against the defendant, ATCO, in the Supreme Court of Western Australia for breach of contract. ATCO sought a stay of those proceedings on the basis of the agreement to arbitrate. Pipeline Services argued that the arbitration clause in the contract was void because it provided "that either party 'may' refer the matter to arbitration, but neither [party was] required to do so." In rejecting that argument, the decision confirms that an arbitration clause which states that the parties "may" refer a dispute to arbitration is valid. It also suggests that the courts in Western Australia and New South Wales will take a different approach from Anzen to the use of the word "may".

Reasoning
In rejecting Pipeline Services' argument that the arbitration clause was void, the Chief Justice of Western Australia observed that "there is no uncertainty arising from the fact that the parties have agreed that they should be given the option to withdraw their claim from the dispute resolution procedure should they wish to do so."⁷ His Honour referred by way of analogy to the New South Wales case of ABB Power Plants, which concerned a dispute resolution clause providing that either party "may" refer an unresolved dispute to arbitration.⁸ The Judge observed in that case that "the use of the word 'may' … is readily explicable because a party dissatisfied with [a] breakdown in the procedure under [the relevant clause] may prefer to take the matter no further."⁹

The dispute resolution clause in Pipeline provided for escalation through several stages, including arbitration, but then in clause 25.1(b) provided that "[u]nless a party has complied with this Clause 25 that party may not commence court proceedings". Martin CJ went on to hold that "as cl 25.1(b) provides that no party may commence court proceedings without first complying with cl 25, the clause, on its proper construction, has the effect that if a party decides not to refer the dispute to arbitration, it cannot thereafter commence legal proceedings relating to that dispute".¹⁰

Comparison of the two approaches

In Pipeline Martin CJ appears to have adopted an analysis similar to Anzen Analysis I, in that a party who "may" refer the dispute to arbitration but who elects not do so has not "complied" with the clause in which that entitlement appears, and is therefore not entitled to commence litigation. Martin CJ's analysis effectively collapses "may" and "shall". Had Martin CJ adopted Anzen's Analysis III, presumably the result would have been different, as an election not to use the right to arbitrate, followed by the commencement of legal proceedings, would not have been non-compliant.

The different approach taken towards why the parties used the word "may" is also interesting. In this respect it is worth noting that in both cases, it appeared as part of a tiered dispute resolution clause:

• In Pipeline and ABB, the Australian courts appear to have taken the view that the word "may" was used instead of "shall" to ensure that, having gone through the amicable stages to try and resolve a dispute, parties are not then compelled to arbitrate/litigate – they can drop the matter if they want to.
• In Anzen, the Privy Council did consider this but did not adopt this reasoning as case law makes it clear that the word "shall" does not mean that parties are compelled to arbitrate/litigate. Instead, it took the view that "the word 'may' may be understood by parties to mean that litigation is open, unless and until arbitration is elected".

As was made clear in both cases, the decision will always turn on the particular facts. In Pipeline, it should be emphasised that Martin CJ was chiefly concerned with the proper interpretation of the particular arbitration clause under consideration. Had the parties' disputes clause not included sub-clause 25.1(b), the result of the case may well have been different.

The following table sets out a comparison of the approaches in Anzen and Pipeline/ABB.

Authors: Josh Underwood and Joseph Harrington.

<sub>Notes
1. Anzen Limited and others (Appellants) -v- Hermes One Limited (Respondent) (British Virgin Islands) [2016] UKPC 1.
2. At paragraph 9 of the judgment.
3. At paragraph 29.
4. At paragraph 35.
5. At paragraph 13.
6. Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10.
7. At paragraph 65.
8. ABB Power Plants Ltd -v- Electricity Commissioner of New South Wales trading as Pacific Power (1995) 35 NSWLR 596.
9. At page 599 of the report.
10. At paragraph 66.</sub>