Anzen Limited and others v Hermes One Limited

This appeal raises short and interesting points on the interpretation of an arbitration clause in a shareholders’ agreement providing that in the event of an unresolved dispute “any party may submit the dispute to binding arbitration”. The respondent has commenced the present litigation in respect of an unresolved dispute, and the issue arises whether the appellants are entitled to a stay, under section 6(2) of the Arbitration Ordinance 1976 (Cap 6), without themselves having commenced an arbitration. Bannister J decided that they were not so entitled and the Court of Appeal upheld his decision. The Board’s conclusion is that the decisions below were wrong, the appeal should be allowed and a stay granted.

This can be taken from the agreed statement of facts. The appellants and the respondent are shareholders in a BVI business company known as Everbread Holdings Ltd (“Everbread”). Everbread was established to pursue the development of airline fare search software. The parties entered into a shareholders’ agreement dated July 2012 (the “SHA”).

The arbitration clause is found in clause 19.5 of the SHA and it reads:

The present proceedings were commenced by the respondent against the appellants and Everbread on 10 January 2014, claiming inter alia statutory remedies in relation to the appellants’ alleged unfairly prejudicial conduct in the management of the affairs of Everbread, damages and/or the appointment of a liquidator over Everbread amongst other forms of relief.

On 18 February 2014, the appellants applied to stay the proceedings pursuant to section 6(2) of the Arbitration Ordinance 1976 on the ground that clause 19.5 is a valid and binding arbitration provision (the “Stay Application”). Section 6(2) of the Arbitration Ordinance reads:

On 6 March 2014, Bannister J dismissed the stay application on the basis that (i) clause 19.5 of the SHA conferred an option upon any party to the SHA to submit a dispute arising under or relating to the SHA to arbitration, (ii) if one party commenced litigation in respect of a dispute, the option under clause 19.5 was only exercisable by the other party by referring the identical subject matter to ICC arbitration, and (iii) since the appellants had not done this, but had merely sought a stay of the proceedings, they could not rely on section 6(2) of the Arbitration Ordinance. The Court of Appeal on 11 June 2014 dismissed the appellants’ appeal, essentially for the same reasons.

It is common ground that an arbitrator could not award all the relief sought by the respondent, including in particular an order for the winding up of Everbread or for the appointment of a liquidator. However, it is also common ground that an arbitrator could determine disputes regarding underlying issues of fact or law relevant to the subsequent pursuit in court of such orders: Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855; [2012] Ch 333. In the light of this common ground, and subject to appropriate reservation of the respondent’s right to apply to the court for orders, after the making of any award on such underlying issues, the present appeal has been focused on the single question of the correctness of the decisions of the judge and Court of Appeal on the points summarised in para 6 above.

At the outset of the appeal, Mr Michael Black QC for the appellants argued that, even if any agreement to arbitrate depended upon the exercise of an option which had not been exercised, the language of section 6(2) of the Arbitration Ordinance could still entitle the appellants to a stay. That was and is, the Board considers, a hopeless submission. Even if one could in loose terms describe a conditional agreement to arbitrate as an arbitration agreement, the Board would not regard it as such within the meaning of section 6(2). In any event, unless and until any option required to be exercised has been exercised, there is no “matter agreed to be referred” within the language of section 6(2).

On this basis, the key to this appeal lies in the construction of clause 19.5. The following possible analyses require consideration:

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).

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 (analysis 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 (analysis III).

What the respondent does not suggest is that its commencement of litigation pre-empts and prevents any exercise by the appellants of the option to arbitrate. Further, the Board understands the respondent to accept that, if the appellants had commenced (or perhaps do still in the future commence) an ICC arbitration in respect of the underlying disputes, the appellants would then also be entitled to a stay of the present proceedings.

The appellants in turn were minded in oral submissions to accept before the Board that it would be possible for them to commence either an ICC arbitration in which they sought mirror image declarations of non-liability and/or made their own cross-claims against the respondent in respect of the same dispute. They went further, and, as the Board understood it, were prepared to concede that they could simply have submitted the respondent’s claims against them to the ICC arbitrator, who would then under the ICC Arbitration Rules have been able to draw up terms of reference determining which party should act as claimant(s) and which as respondent(s) in the arbitration. The Board expressed doubt about the correctness of at any rate this latter concession, and it was effectively withdrawn by the appellants in a post-hearing exchange of written submissions on this aspect. The ICC Arbitration Rules postulate that a person requesting arbitration is itself a claimant making claims, to which the respondent will have to respond: see eg article 4.1.1, 1.3(c), (d) and (f) and 1.4 as well as article 5.1(c) and 23.1(c). To request ICC arbitration of the respondents’ claims, the appellants would have to be prepared to specify why such claims should be rejected, and to seek negative declaratory relief. They would also have to pay a non-refundable filing fee of US$3,000 (under Appendix III article 1(1)), plus any advance to cover the costs of the arbitration which the ICC requested under article 36 of its Arbitration Rules.

Arbitration clauses commonly provide that unresolved disputes “should” or “shall” be submitted to arbitration. The silent concomitant of such clauses is that neither party will seek any relief in respect of such disputes in any other forum: AES UST-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35; [2013] 1 WLR 1889, para 1; see also The Angelic Grace [1995] 1 Lloyd’s Rep 87, where the Amended Centrocon arbitration clause provided: “[a]ll disputes from time to time arising out of this contract shall be referred to arbitration … in London”, and Millett LJ said this in a well-known passage in relation to litigation begun outside the Brussels Regulation/Lugano Convention sphere:

As with any issue of construction, the language and context of the particular agreement must ultimately be decisive. But clauses depriving a party of the right to litigate should be expected to be clearly worded - even though the commercial community’s evident preference for arbitration in many spheres makes any such presumption a less persuasive factor nowadays than it was once. The consequence of the appellants’ case would, at least in theory, be that the respondent’s commencement of litigation was a breach of contract, for which the appellants proving loss could without more claim damages - though the prevalence of clauses providing that arbitration “shall” take place and the infrequency of claims for their breach may again reduce the weight of this factor. The fact remains that there is an obvious linguistic difference between a promise that disputes shall be submitted to arbitration and a provision, agreed by both parties, that “any party may submit the dispute to binding arbitration”. This clear contrast and the evident risk that the word “may” may be understood by parties to mean that litigation is open, unless and until arbitration is elected, are, in the Board’s view, important pointers away from analysis I.

This is not to say that there are no arguments that could be made in favour of analysis I. The very detailed nature of clause 19.5 is one. Would the parties really have gone to such trouble to identify the time for, place, scope of and issues in the arbitration, to limit any review to errors of law, to provide that each party would bear its own costs in the arbitration and share the arbitrator’s, and that the existence, content and result of the arbitration should be held in confidence, if they had contemplated that either party could commence litigation as an alternative form of dispute resolution? Of course, it is common ground that a defendant to litigation has at the least an option, exercisable in accordance with either analysis II or analysis III, of forcing a claimant who commences litigation to arbitrate. But that could be unsatisfactory, if, as the respondent submits, analysis II applies and the appellants can only exercise such option by themselves initiating an arbitration. To do this, they would have to attempt settlement or at least wait 20 days, under the agreed provision about timing (“If a dispute arises … and … cannot be settled within … 20 business days, any Party may submit the dispute to binding arbitration).

The Board turns to the authorities to see what guidance may be found. It was at one time thought that it was an essential ingredient of an arbitration clause that in order to be valid it must give bilateral rights of reference: Baron v Sunderland Corp [1966] 2 QB 56 per Davies LJ at 64. However that is no longer the case: Pittalis v Sherefettin [1986] QB 868, where the Court of Appeal held that that was wrong. As Fox LJ put it, parties are entitled, if they so choose, to confer a unilateral right to insist on arbitration. He said that he could see no reason why, if an agreement between two persons confers on one of them alone the right to refer the matter to arbitration, the reference should not constitute an arbitration.

There have been a number of subsequent English cases in which words introducing arbitration in terms of choice, election or option have been construed. In Lobb Partnership Ltd v Aintree Racecourse Co Ltd [2000] CLC 431, clause 13.1 of the contract provided:

One party gave notice of intention to arbitrate and, when this was rejected, obtained the nomination of an arbitrator by the President of the Chartered Institute. Colman J rejected the other party’s submissions both that the clause was too vague and that it contemplated arbitration only if both parties agreed at the time when a dispute arose. Significantly for present purposes, he said this, p 434:

Other English authorities affirm the validity of a provision entitling either party to elect or opt for arbitration, but do so again in a context where (unlike the present) the contract expressly contemplated court proceedings, if neither party chose arbitration. Thus, in the earlier case of Westfal-Larsen and Co A/S Ikerigi Compania SA (“The Messiniaki Bergen”) [1983] 1 Lloyd’s Rep 424, cited by Colman J in Lobb Partnership, clause 40(a) of a charterparty provided for the application of English law while clause 40(b) provided that any dispute arising under the charter “shall be decided by the English courts to whose jurisdiction the parties agree”, but continued:

Likewise, in NB Three Shipping Ltd v Harebell Shipping Ltd [2004] EWHC (Comm) 2001, clause 47, entitled “Law, jurisdiction and arbitration”, provided for English law and gave the owners the right to start proceedings in a wide variety of jurisdictions whereas the charterers’ right to commence proceedings was limited by clause 47.09 to the courts of England. Clauses 47.02 and 47.10 provided, so far as relevant:

Only the owners could therefore bring arbitration proceedings. The charterers sued and the owners sought a stay in favour of arbitration under clause 47.10. Unsurprisingly, Morison J held that “Charterers can gain no advantage from ‘jumping the starting gun’”, as he put it. More specifically, he said (para 11):

More recently, in Union Marine v Government of Comoros [2013] EWHC 5854 (Comm), article 8 of the contract provided for any dispute to be submitted to “the competent national jurisdiction in the matter”, but article 9 then provided that “notwithstanding” the provisions of article 8 “the parties are able to decide to submit any dispute between them to an arbitrator of their choice in London”. A question arose whether this gave a unilateral option or merely contemplated that both parties might agree on arbitration when a dispute arose. All that Leggatt J in the event had to decide was that the former was sufficiently arguable to justify him appointing an arbitrator. But he did express some views obiter. He said that he had concluded on the basis of the material before him, not only that there was an arguable case that there was an arbitration agreement but that there appeared to be no realistic prospect of successfully arguing the contrary, and in this connection he remarked (para 17):

A clear authority against analysis I is the Canadian case of Canadian National Railway and Others v Lovat Tunnel Equipment Inc (1999), 174 DLR (4th) 385. Section 11 of the relevant contract, entitled “DISPUTES”, provided:

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:

The judge, Lee Seiu Kin JC, rejected this argument, saying:

United States authority points on the other hand in inconsistent directions. One strand of authority would assimilate clauses providing that there “may” be arbitration with those providing that there “shall” be arbitration: that is as reflecting analysis I or, put bluntly, a choice between “arbitrate or abandon”. See for example:

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”);

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

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”).

Other United States cases point away from analysis I. See:

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:

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.

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”.

Two further United States cases appear to the Board to contain less than entirely satisfactory reasoning. In Conax Florida Corp v Astrium Ltd 499 F Supp 2d 1287 (2007) (Florida District Court), the clause provided that in the event of a dispute the parties “shall undertake to make every reasonable effort to reach an amicable settlement” and continued:

Finally, in Retractable Technologies Inc v Abbott Laboratories Inc, a decision of the Fifth Circuit on 2 June 2008 (Reference 07-40277), the contract provided that any dispute between the parties “shall” be presented to the presidents of the parties or their designees but that, if that failed, the dispute “may” be resolved by arbitration in the manner described in an attached document, which did not contain any right for either party to demand or initiate arbitration. The majority held that the contract only provided for arbitration if there was subsequent mutual agreement to arbitrate, adding that the word “may” preserved other options to resolve disputes, including litigation. Why all three of analyses I, II and III were rejected is unclear. The dissenting judge, on the other hand, said that there had been “dozens of cases” in which courts had held that “may” is synonymous with “shall” or “must”, adding that both parties unambiguously had given their permission for the other to initiate arbitration if that party so desired and that only if neither party desired arbitration could litigation take place.

The Board was referred to a number of academic writings on the significance of the word “may”, mostly directed to the suggestion (not raised in relation to clause 19.5) that the word should be understood to require subsequent mutual agreement. But Born’s International Commercial Arbitration, Volume 1 International Arbitration Agreements, 2nd ed (2014), notes (at p 789) in general terms, though with reference in footnote 853 to the English cases of Westfal-Larsen and NB Three Shipping, that:

Taking stock here, the Board considers that there are a number of significant pointers against analysis I. They include primarily (a) the considerations identified para 13 above and (b) the reasoning in English authority, particularly Lobb Partnership, in the Canadian case of Canadian National Railway and in the Singapore case of WSG Nimbus. But a background consideration is (c) the frequency with which the word “may” is used by the commercial community when arbitration is intended as an express alternative to litigation, and the absence in any common law jurisdiction, outside the United States, of any suggestion that it has ever been seen as mandatory, prior to either party insisting on arbitration. A number of United States authorities on commercial arbitration in fact point in the same direction, while the United States authorities reading “may” as “shall” come from a different non-commercial context and adopt reasoning which is less persuasive at any rate in the present commercial context.

These considerations all lead up to the conclusion that analysis I should be rejected. But, before confirming that conclusion, it seems desirable also to look at the alternatives, analyses II and III. Strictly, if analysis II is rejected, it is, on the particular facts of this case, immaterial which of analyses I and III applies. On analysis I, the court proceedings should not have been begun at all. On analysis III, they were properly begun, but they should be stayed, as regards all the arbitrable claims that they raise, now that the appellants have invoked arbitration. However, any choice between analyses I and III is of potential general importance and it is right for the Board to reach a decision on it.

The choice between analyses II and III depends upon the meaning to be attached in the context of clause 19.5 to the concept of submitting a dispute to binding arbitration. In other contexts, this might no doubt connote and require the actual commencement of an arbitration. But the Board does not consider that it must always do so. Analysis II is in the Board’s view capable of giving rise to evident incongruity. Like analysis III, it purports to give each party a right to have an unresolved dispute submitted to arbitration. But it not only allows one party to commence litigation, it then only requires the dispute to be arbitrated if the other party commences an arbitration in which that other party may seek no positive relief. The party commencing litigation may have no interest in pursuing or ability to pursue arbitration in the manner or forum prescribed here by clause 19.5. If unable to litigate, it might have let matters lie. Nonetheless, according to analysis II, the other party could only end the litigation by itself commencing an arbitration. All it may be able to seek in any such arbitration would be a declaration of no liability in respect of any claim made by the first party in the litigation. But in practice the requirement to commence an arbitration might prove a substantial obstacle, for reasons like those applicable in the present case and mentioned in para 11 above. Analysis II does not therefore seem to the Board to make much commercial sense, and, as Lord Clarke said in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, para 30: “… where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.”

The better view of the words “any Party may submit the dispute to binding arbitration” is therefore that they are not inextricably linked to the actual commencement of arbitration. There is no doubt that the court has under section 6(2) of the Arbitration Ordinance power to order a stay pending arbitration, even though neither party has actually submitted, or will necessarily ever submit, the dispute to arbitration, and even though the clause postulates some further step (such as here attempting settlement, or at least waiting, for 20 days after the dispute arises) before commencement of any arbitration. This was decided by the House of Lords in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334, under the wording of section 1(1) of the then English Arbitration Act 1975, which paralleled in material respects that of section 6(2) of the Arbitration Ordinance. In that case, the arbitration agreement actually provided for further steps to be taken (by way of remitting the dispute to a panel of three experts), after which (it went on) either party, if dissatisfied with the decision of the panel, “may” notify the other “that the dispute … is to be referred to arbitration”. So here, section 6(2) is wide enough to permit a stay, even though neither party may actually submit the dispute to arbitration.

In the Board’s view, analysis III is also to be preferred to analysis II as a matter of general principle. The hallmark of arbitration is consent. In Bremer Vulkan Schiffbau und Maschinenefabrik v South India Shipping Corp Ltd [1981] AC 909, the House of Lords drew a significant distinction between litigation and arbitration. Parties to an agreement to arbitrate are, it held, under mutual obligations to one another to cooperate in the pursuit of the arbitration. Section 40(1) of the current English Arbitration Act 1996 makes the duty express, by providing that: “The parties shall do all things necessary for the proper and expeditious conduct of the arbitral proceedings”. Of course this duty postulates that arbitral proceedings are already on foot. But it seems to the Board that a similar conception can and should influence the construction of clause 19.5, which contemplates a consensual approach, first involving negotiation for at least 20 business days to see if any dispute which has arisen can be resolved amicably and then, if negotiations are unsuccessful, enables either party to submit the dispute to arbitration. An analysis whereby notice will trigger the mutual agreement to arbitrate a dispute appears to the Board to fit better into a consensual scheme than one which requires the artificial construction, and commencement of arbitration in respect of, a cross-claim.

A rejection of analysis II provides further reinforcement of the Board’s view that analysis I must be rejected, leaving analysis III as the correct analysis. Analysis III has none of the disadvantages of analysis 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. It comes close in effect to analysis I, save that, unless and until one party insists on arbitration, there is no promise by the other party not to litigate.

The Board will for these reasons humbly advise Her Majesty that the appeal should be allowed, and a stay of the present proceedings should be ordered, with the reservation indicated in para 7 above.