The Judicial Committee of the Privy Council Decisions

The background in greater detail

“This Agreement shall be construed in accordance with English law, without reference to its conflict of law principles. If a dispute arises out of or relates to this Agreement or its breach (whether contractual or otherwise) and the dispute cannot be settled within twenty (20) business days through negotiation, any Party may submit the dispute to binding arbitration. Such arbitration will be conducted by a sole arbitrator designated by the International Chamber of Commerce (ICC) and will be in accordance with the ICC’s arbitration rules. The arbitration will be held at a neutral site in London, England. The arbitrator will determine issues of arbitrability, including the applicability of any statute of limitation, but may not limit, expand or otherwise modify the terms of the Agreement. The arbitrator’s decision and award will be in writing, setting forth the legal and factual basis. The arbitrator may in appropriate circumstances provide for injunctive relief (including Interim relief). An arbitration decision and award will only be subject to review because of errors of law. Each Party will bear its own expenses in connection with the arbitration, but those related to the site and compensation of the arbitrator will be borne equally. The Parties, other participants and the arbitrator will hold the existence, content and result of arbitration in confidence, except to the extent necessary to enforce a final settlement agreement or to obtain and enforce a judgment on an arbitration award. The language to be used in the arbitration procedure shall be English.”

“If any party to an arbitration agreement, other than a domestic arbitration agreement, or any person claiming through or under him, commences any legal proceedings in any court against any other party to the agreement, or any person claiming through or under him, in respect of any matter agreed to be referred, any party to the proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to the court to stay the proceedings; and the court, unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings.”

The scope of the issues

a.                  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 (analysis I).

b.                  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:

i.                   commencing an ICC arbitration, as the respondent submits and Bannister J and the Court of Appeal held (analysis II); or

ii.                 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 (analysis III).

“Disputes may be dealt with as provided in paragraph 1.8 of the RIBA Conditions but shall otherwise be referred to the English courts. The construction, validity and performance of this Agreement shall be governed by English law.”

Paragraph 1.8 of the RIBA conditions provided:

“In England and Wales, … any difference or dispute arising out of the Appointment shall be referred by either of the parties to arbitration by a person to be agreed between the parties or, failing agreement within 14 days after either party has given the other a written request to concur in the appointment of an arbitrator, a person to be nominated at the request of either party by the President of the Chartered Institute of Arbitrators provided that in a difference or dispute arising out of the conditions relating to copyright the arbitrator shall, unless otherwise agreed, be an architect.”

“If the [clause] had simply consisted of the first part or words to that effect such as ‘disputes may be referred to arbitration’, there could be little doubt that the meaning was that either party was to be entitled to refer a dispute to arbitration and, once he had done so, the other party would be bound to the reference. There would be no question of both parties subsequently having to agree to such a reference. Accordingly, in the absence of indications to the contrary, the first part of clause 13.1 would strongly indicate that it was to be open to either party to refer a dispute to arbitration if he chose to do so and that, if he did so, the other party would be bound to accept that reference.”

Colman J also concluded that, although there was no reason in principle why parties to a contract should not agree to give either of them a unilateral option to elect to arbitrate or litigate any claim for relief so as to bind the other to arbitration or litigation, as the case might be, it was substantially more likely that it was the mutual intention that the words used should mean that, once a dispute had been raised, either party would be entitled to insist on its being dealt with in accordance with paragraph 1.8. He added that, while it was true that the first part of clause 13.1 was permissive, there was no reason why it should be permissive only in favour of the claimant.

“Provided that either party may elect to have the dispute referred to the arbitration of a single arbitrator in London in accordance with the Arbitration Act 1950 … Such election shall be made by written notice …”

Bingham J concluded at p 426:

“The proviso is not an agreement to agree because upon a valid election to arbitrate (and assuming the clause to be otherwise effective) no further agreement is needed or contemplated. It is, no doubt, true that by this clause the parties do not bind themselves to refer future disputes for determination by an arbitrator and in no other way. Instead, the clause confers an option, which may but need not be exercised. I see force in the contention that until an election is made there is no agreement to arbitrate, but once the election is duly made (and the option exercised) I share the opinion of the High Court of Delhi in the Bharat case [Union of India v Bharat Engineering Corp (1977) 11 ILR Delhi 57] that a binding arbitration agreement comes into existence.”

“It seems to me that clause 47.02 gives owners a right to stop or stay a court action brought against them, at their option.”

Unless the owners took a step in the action or led the charterers to believe on reasonable grounds that the option to stay would not be exercised. He went on (para 12) with reference to clause 47.10 and section 9(1) of the Arbitration Act 1996:

“The arbitration stream [clause 47.10] satisfies the requirements of an arbitration agreement since a one sided choice of arbitration is sufficient. The words of section 9(1) ‘in respect of a matter which under the agreement is to be referred to arbitration’ are to be applied when the application for a stay is applied for. Are these disputes under the agreement to be referred to arbitration? Yes, once the option which Owners have has been exercised. These are disputes which, at Owners’ option they wish to be arbitrated under the arbitration agreement. Neither the fact that the proceedings were properly brought nor that the terms of section 9(1) only applied after the option was exercised affects the conclusion. A party might commence an action in the belief that the other party would not exercise a right to apply for a stay; his action may have been proper. So here, if Owners had decided not to exercise their option. I would be sorry if any other conclusion had to be reached. Apart from anything else, one of the fundamental objectives of the 1996 Act is to give the parties’ autonomy over their choice of forum. On my view of the contract, once Owners exercise their option the parties have agreed that the disputes should be arbitrated. By refusing a stay the court would not be according to them their autonomy.”

“Thus, article 9 gives either party the option of submitting a dispute to arbitration in London, with the result that a binding arbitration agreement comes into existence when that option is exercised by giving notice of commencement of arbitration, as Union Marine has done in the present case.”

“The parties may refer any dispute under this Agreement to arbitration, in accordance with the Arbitration Act of Ontario.”

The respondent sued the appellant for damages for breach of contract. The appellant elected arbitration and sought a stay of the action. The application was refused at first instance by MacFarland J. The appellant appealed to the Court of Appeal for Ontario. The only substantive judgment was given by Finlayson JA, with whom Austin JA and S Borins JA agreed. In a section of his judgment entitled “Analysis” he said this:

“12.     It appears to me that the plain meaning of section 11 of the contract is that either party to the contract may elect to have a matter in dispute that is covered by the contract referred to arbitration. In this case, since the respondents had initiated proceedings in the courts, the appellant was presented with a choice between electing binding arbitration or acquiescing in the respondents’ decision to resort to the courts.

13.       To suggest otherwise is to render the clause surplusage. As the appellant points out, the parties to a dispute can always refer the matter to arbitration if they can agree between themselves to do so. The respondents, on the other hand, submit that the court would have to read ‘may’ as ‘shall’ to obtain the result sought by the appellant. However, this interpretation would remove all choice. The parties would be restricted to one avenue of dispute resolution that might not in every case be to the advantage of either.

14.       In my view, the correct interpretation of the clause is that ‘parties’ means ‘either party’. Thus either party may refer a dispute to binding arbitration and arbitration then becomes mandatory. Failing such an election by one of the parties, the matters in dispute can be resolved in the courts.”

23.             The decision of the Singapore High Court in WSG Nimbus Pte Ltd v Board of Control for Cricket in Sri Lanka [2002] 3 SLR 603 is also against analysis I. Clause 19 of the relevant agreement, entitled “LAW/ARBITRATION”, was in terms not dissimilar to those of clause 19.5 in the present case. It read:

“This Agreement shall be governed by and construed in accordance with the laws of England and Wales. In the event that the parties have a dispute over any term or otherwise relating to this Agreement they shall use their best endeavours to resolve it through good faith negotiations. In the event that they fail to do so after 14 days then either party may elect to submit such matter to arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (‘SIAC Rules’) for the time being in force which rules are deemed to be incorporated by reference with this clause to the exclusive jurisdiction of which the parties shall be deemed to have consented. Any arbitration shall be referred to three arbitrators, one arbitrator being appointed by each party and the other being appointed by the Chairman of the SIAC and shall be conducted in the English language.”

The Board of Control had commenced proceedings in the Colombo High Court in Sri Lanka, and WSG Nimbus sought an anti-suit injunction from the Singapore High Court. The Board of Control argued that the words “may elect” in clause 19 conferred on the parties a wide discretion enabling either of them to elect for arbitration or go to court, and that it had elected to litigate when it commenced the Colombo Court action.

“In my view, this submission hinges on taking the word ‘may’ out of the context of clause 19 and, after associating that word with notions of discretion and a lack of any mandatory meaning, these notions are then linked with the word ‘arbitration’ to arrive at the conclusion that there is no compulsory arbitration clause. But in order to arrive at the proper construction of clause 19 it is necessary to consider the provision in its entirety and see how the words relate to one another to convey the intention of the parties. Taking this approach, the first sentence deals with the governing law which is to be English law. The remainder of the clause relates directly to arbitration and on a plain reading, this is what it provides. In the event of a dispute, the parties are required first of all to use their best endeavours to resolve it through good faith negotiations. It is only if this is unsuccessful after 14 days that the right is given to either party to elect to submit the dispute to arbitration. Upon such an election, both parties are bound to submit to arbitration in Singapore in accordance with the Arbitration Rules of the SIAC for the time being in force. Arbitration shall be conducted by three arbitrators with each party to appoint one and the SIAC Chairman to appoint the third. While it is true that under clause 19, there is no compulsion to arbitrate until an election is made, once a party makes such election, arbitration is mandatory in respect of that dispute.”

a.                  J C Bonnot v Congress of Independent Unions Local 331 F 2d 355 (8th Cir 1964) (“In the event the two parties do not agree …, then either party may request arbitration and follow the following procedure”);

b.                  Austin v Owens-Brockway Glass Container, Inc 78 F 3d 875 (4th Cir 1996) (“disputes … may be referred to arbitration”); and

c.                  United States of America v Bankers Insurance Co 245 F 3d 315 (4th Cir 2001) (“If any misunderstanding or dispute arises … such misunderstanding or dispute may be submitted to arbitration for a determination [that] shall be binding upon approval by the FIA”).

The Board notes that none of these three cases was in a conventional commercial context. Bonnot and Austin were decided under collective bargaining agreements, a point on which emphasis was placed in the reasoning. The third case, Bankers Insurance, expressly endorsed the first two and was a claim by the United States against an insurance company for breaches of a Financial Assistance/Subsidy Arrangement entered into to enable insurance companies to provide flood insurance under the National Flood Insurance Program, administered by the Federal Insurance Administration. Further, the reasoning given in Austin, at p 879, and quoted in the Bankers Insurance for treating the word “may” in the relevant clauses as equivalent to “shall” was that this would render the arbitration provision “meaningless for all practical purposes”, since parties “could always voluntarily submit” to arbitration. That reasoning answers any submission that the word “may” makes subsequent mutual agreement on arbitration necessary. But it does not support analysis I, when the relevant choice is between analyses I, II and III.

a.                  City of Louisa v Newland 705 SW 2d 916 (Ky 1986), where the clause provided that “all claims, disputes and other matters in question arising out of, or relating to, the CONTRACT DOCUMENTS … may be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association”. The Supreme Court of Kentucky held:

“In regard to the use of the word ‘may’ in the arbitration provision, it is the holding of this court that the arbitration clause makes arbitration compulsory once either party demands it.”

b.                  Briggs & Stratton Corp v Local 232, International Union, Allied Industrial Workers of America 36 F 3d 712 (1994), where the clause provided that should the grievance procedure have been exhausted “either party may submit such grievance or grievances to arbitration within 60 days”. The clause was construed as providing an option to arbitrate.

c.                  Young v Dharamdass 695 So 2d 828 (Florida Court of Appeal 1997), where the clause provided that, if the parties did not agree on two issues, “either party may make a written demand for arbitration”. The court treated this as “permissive, not mandatory”.

“Failing such settlement, a controversy or claim arising out of or relating to this Subcontract may be finally settled by arbitration in accordance with the rules then in effect of the International Chamber of Commerce.”

The location of any arbitration was to be London, and the defendant commenced an arbitration there. The plaintiff argued that arbitration was optional and required mutual agreement. The court disagreed in these terms:

“Contrary to the plaintiff’s contention, the word ‘may’ does not give one party the right to avoid arbitration. See Ziegler v Knuck, 419 So 2d 818, 819 (Fla App 1982) (the use of the word ‘may’ in an arbitration clause ‘is little different than the use of the compulsory language - it creates in either party the right to insist upon arbitration; it creates in neither party the right to resist arbitration insisted upon by the other.’); Allis-Chalmers Corp v Lueck, 471 US 202, 204 n 1, … 1985) (‘The use of … ‘may’ is not sufficient to overcome the presumption that parties are not free to avoid the contract’s arbitration procedures.’); Deaton Truck Line, Inc v Local Union 612, 314 F 2d 418, 422 (5th Cir 1962) (‘Clearly, … ‘may’ should be construed to give either aggrieved party the option to require arbitration.’); see also Webster’s Third New International Dictionary (unabridged ed 1981), p 1396 (‘may’ is defined as ‘shall, must - used esp in deeds, contracts and statutes’). Thus, the United States Supreme Court, the former Fifth Circuit, and a Florida appellate court have all concluded that, notwithstanding the use of the word ‘may’ in an arbitration provision, either party has a right to insist upon arbitration.”

The court’s conclusion was that “in sum, the arbitration provision creates the right of a party to submit the matter for arbitration”. Its reasoning fluctuates between analyses I and III.

“In many instances, courts reason that the arbitration clause creates an option permitting (but not requiring) either party to initiate arbitration, and that, if the option is exercised by either party, both parties are then bound to arbitrate.”

Born then deals separately with the United States cases. Still more to the point, David Joseph QC in Jurisdiction and Arbitration Agreements and their Enforcement, 2nd ed (2010), paragraph 4.31, states, with reference to both Lobb Partnership and to WSG Nimbus that:

“Words such as ‘disputes may be referred to arbitration’ will give either party the right to refer disputes to arbitration. Once the right is invoked, however, the parties are both obliged to proceed with the reference and abide by the award.”

He also notes, appositely, that the position in the United States is not so clear-cut.

Conclusion