Drafting arbitration clauses: the may vs. shall debate

Where an arbitration agreement providesthat the parties "may" refer a dispute toarbitration, but does not say anythingabout litigation, is a party entitled tolitigate instead of arbitrate? Both theEnglish and Australian courts haveaddressed this issue. The answer, inEngland, appears to be a qualified yes. Theanswer in Western Australia appears to beno.

In practical terms, the decisions highlightthe importance of clarity in drafting. Ifcontracting parties want to refer disputes toarbitration and ensure that their disputeswill not go to court they should make itclear, for example, by stating that alldisputes "shall" or "may only" be referredto arbitration. Equally, if they do want tohave the option to litigate or arbitrate, thatshould be clearly stated as should themechanism for how the election betweenarbitration and litigation will work.Otherwise you may find yourself in lengthysatellite litigation trying to ascertain whichforum has jurisdiction to enforce yourcontractual rights.

England and Wales

In Anzen¹ the issue came before the Privy Council onappeal from the BVI Court of Appeal. The caseconcerned an arbitration clause in a shareholders'agreement that provided that, in the event of anunresolved dispute "any party may submit the disputeto binding arbitration" by a sole ICC arbitrator and inaccordance with the ICC’s arbitration rules. English lawapplied to the issue of interpretation.

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

Essentially, the Privy Council refused to collapse "may"and "shall". It held that the words "may submit" in theclause allowed either party to submit the dispute toarbitration if a dispute arose, but did not prevent either party from initially submitting the dispute to thecompetent courts instead. Rather, in the event that aparty (Party A) did commence court proceedings, theclause gave the party against whom Party A hadbrought court proceedings (Party B), the right toapply for a stay on those court proceedings andcompel Party A to pursue its claim in arbitrationinstead.

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

• "The words 'any party may submit the dispute tobinding arbitration' are not only permissive, butexclusive, if a party wishes to pursue the disputeby any form of legal proceedings ([A]nalysis I).
• The words are purely permissive, leaving it opento one party to commence litigation, but givingthe other party the option of submitting thedispute to binding arbitration, such option beingexercisable either by:
  • commencing an ICC arbitration, as therespondent submits and Bannister J and theCourt of Appeal held ([A]nalysis II); or
  • requiring the party which has commenced thelitigation to submit the dispute to arbitration,by making an unequivocal request to thateffect and/or by applying for a correspondingstay, as the appellants have done([A]nalysis III).^"2

Under Analysis I, both parties would be forbidden fromstarting court proceedings and arbitration would bethe only means of dispute resolution. The apparentlypermissive wording would be sufficient to oust thepresumption that parties do not intend to deprivethemselves of a right to litigate. This interpretationeffectively 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 sitsalongside the right to arbitrate, but is defeated once adispute is referred to arbitration. What differentiatesAnalysis II and III is the defeating factor. UnderAnalysis II, the defeating factor is actually starting anarbitration. Party A could begin court proceedings butParty B could then force the dispute to arbitration bycommencing an arbitration mirroring Party A'slitigation. Under Analysis III, the threshold fordefeating the right to litigate is lower: Party A couldbegin court proceedings but Party B could then forcethe dispute to arbitration by asking Party A tocommence an arbitration instead of court proceedings,or by applying to court to stay Party A's litigation.

Other analyses are conceivable (not least that itsimply allowed arbitration alongside litigation which,the Privy Council noted, was a proposition that hadbeen rejected by the Singaporean High Court), but thePrivy Council did not consider them in detail. Theargument that such a "may" clause requires bothparties to consent to arbitration before the obligationto arbitrate applies was apparently not raised in thiscase, but the judgment indicates that the Privy Councilwould have been disinclined to accede to thatargument in any event.³

The Privy Council favoured Analysis III:

"A rejection of [A]nalysis II provides furtherreinforcement of the Board's view that [A]nalysis Imust be rejected, leaving [A]nalysis III as the correctanalysis. Analysis III has none of the disadvantages of[A]nalysis II. It enables a party wishing for a disputeto be arbitrated, either to commence arbitration itself,or to insist on arbitration, before or after the otherparty commences litigation, without itself actuallyhaving to commence arbitration if it does not wishto."⁴

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

Moreover, strictly speaking, the decision is authorityonly for the proposition that Analysis II is bad,because it was not necessary to decide betweenAnalyses I and III on the facts of the case. It istherefore still open to English lawyers to argue forAnalysis I. However, the decision is strong persuasiveauthority for the proposition that Analysis I should berejected. Anzen has significant implications for parties toagreements with "may" wording akin to that at issuein Anzen. Such wording does not jeopardise Party B'sright to ultimately avoid litigation, but does requireParty B to take a step to prevent Party A fromlitigating, either by asking Party A to commence anarbitration or by applying for a stay. It also means,unlike with exclusive arbitration clauses, that Party Bwill be unable to recover any costs it incurs in havingthe matter re-directed to arbitration (as they would berecoverable as damages for breach where the clause isexclusive).

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

Australia

In Pipeline, the agreement provided that if a disputebetween the parties could not be resolved "then eitherparty may by notice to the other party refer thedispute to arbitration".⁶ A dispute arose and could notbe resolved amicably. The claimant, Pipeline Services,commenced proceedings against the defendant, ATCO,in the Supreme Court of Western Australia for breachof contract. ATCO sought a stay of those proceedingson the basis of the agreement to arbitrate. Pipeline Services argued that the arbitration clause inthe contract was void because it provided "that eitherparty 'may' refer the matter to arbitration, but neither[party was] required to do so." In rejecting thatargument, the decision confirms that an arbitrationclause which states that the parties "may" refer adispute to arbitration is valid. It also suggests that thecourts in Western Australia and New South Wales willtake a different approach from Anzen to the use of theword "may".

Reasoning
In rejecting Pipeline Services' argument that thearbitration clause was void, the Chief Justice ofWestern Australia observed that "there is nouncertainty arising from the fact that the parties haveagreed that they should be given the option towithdraw their claim from the dispute resolutionprocedure should they wish to do so."⁷ His Honourreferred by way of analogy to the New South Walescase of ABB Power Plants, which concerned a disputeresolution clause providing that either party "may"refer an unresolved dispute to arbitration.⁸ The Judgeobserved 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 relevantclause] may prefer to take the matter no further."⁹

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

Comparison of the two approaches

In Pipeline Martin CJ appears to have adopted ananalysis similar to Anzen Analysis I, in that a partywho "may" refer the dispute to arbitration but whoelects not do so has not "complied" with the clause inwhich that entitlement appears, and is therefore notentitled to commence litigation. Martin CJ's analysiseffectively collapses "may" and "shall". Had Martin CJadopted Anzen's Analysis III, presumably the resultwould have been different, as an election not to usethe right to arbitrate, followed by the commencementof legal proceedings, would not have been non-compliant.

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

• In Pipeline and ABB, the Australian courtsappear to have taken the view that the word"may" was used instead of "shall" to ensurethat, having gone through the amicablestages to try and resolve a dispute, partiesare not then compelled to arbitrate/litigate –they can drop the matter if they want to.
• In Anzen, the Privy Council did consider thisbut did not adopt this reasoning as case lawmakes it clear that the word "shall" does notmean that parties are compelled toarbitrate/litigate. Instead, it took the viewthat "the word 'may' may be understood byparties to mean that litigation is open, unlessand until arbitration is elected".

As was made clear in both cases, the decision willalways turn on the particular facts. In Pipeline, itshould be emphasised that Martin CJ was chieflyconcerned with the proper interpretation of theparticular arbitration clause under consideration. Hadthe parties' disputes clause not included sub-clause25.1(b), the result of the case may well have beendifferent.

The following table sets out a comparison of theapproaches 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>