By Daniel Harrison

“Non-exclusive” arbitration clauses provide that disputes “may” be referred to arbitration (rather than “shall” or “should” be so referred). The Privy Council clarified the nature of these clauses in a recent case but uncertainties about their effect still remain.

Ultimately, parties would be well-advised to avoid “non-exclusive” arbitration clauses and opt for exclusive arbitration clauses, if what they really want is for their disputes to be resolved by arbitration. If the parties choose a “non-exclusive” arbitration clause, then they should make sure that they avoid issues by making express provision for the litigation costs in the event of a stay and expressly naming a litigation forum.

Facts of the case

Anzen and Hermes One were parties to a shareholders’ agreement relating to a BVI company, which contained a “non-exclusive” arbitration clause.

Hermes One claimed that it had suffered unfair prejudice due to Anzen’s management of the affairs of the company and started proceedings in the BVI High Court.[1]  Anzen applied to stay the proceedings, relying on the arbitration clause, but the court dismissed the application.  It found that the “non-exclusive” arbitration clause meant that Anzen could only stay the court proceedings by starting arbitration proceedings, which it had not done.

On appeal, the Privy Council considered whether the BVI court had erred as to the meaning of the arbitration clause.

The Privy Council decision

The Privy Council considered three possible interpretations of an arbitration clause providing that “any Party may submit the dispute to binding arbitration”

  1. The parties are prohibited from starting litigation, meaning that this is no different from an “exclusive” arbitration clause where the parties agree that they “shall” or “should” arbitrate their disputes.
  2. Any party is allowed to start litigation, but another party could start arbitration proceedings, at which point the court proceedings are to be stayed
  3. Any party is allowed to start litigation, but another party can force a stay of those court proceedings by either “making an unequivocal request to that effect” or applying to the court for a stay.

The Privy Council dismissed Option 1 on the basis that depriving a party of the right to bring court proceedings required clear language and the use of the word “may” was not clear.  Option 2 was unworkable; it was two onerous to expect a party to start arbitration proceedings in order to stop the court proceedings when it would simply be seeking a declaration of no liability.

It considered Option 3 to be the most preferable; Anzen only needed to  “insist on arbitration, by starting arbitration proceedings, applying to the court to stay proceedings, or “making an unequivocal request to that effect”. Notice to the other side would be sufficient for such a request.

What are the implications for this decision?

Although a “non-exclusive” arbitration clause may be valid in the manner described by the Privy Council in this case, it poses significant uncertainties for parties

  1. Liability for costs On one hand, the party that started litigation may argue that it should not be liable for costs because it was entitled to start litigation at the time. On the other hand, the party that stays the litigation may argue that the other party should be liable for costs because the litigation was unnecessary
  2. Proper litigation forum If the parties do not identify an agreed forum for litigation (in addition to the forum for arbitration), then either party could find itself brought into proceedings in an unfavourable jurisdiction and this may have complicated and costly consequences.

As noted above, parties should opt for exclusive arbitration clauses, if what they really want is for their disputes to be resolved by arbitration.

(Privy Council judgments do not bind English courts, but are highly persuasive. Indeed, an English court may be particularly persuaded by this judgment since the Privy Council in this case comprised five judges of the UK Supreme Court).

Case: Anzen Limited and others (Appellants) v Hermes One Limited (Respondent) (British Virgin Islands) [2016] UKPC 1

This post was prepared with the assistance of Mihail Krepchev in the London office of Latham & Watkins.

[1]              BVI HC (COM) 2014/001.