Stays Of Proceedings In Favour Of Arbitration: When Is The Duty To Stay Triggered?

By Alistair Abbott, Partner, Litigation and Insolvency, Forbes Hare, British Virgin Islands (01/08/2016)

The Privy Council’s judgment in Anzen Limited and others v Hermes One Limited [2016] UKPC 1 concerned whether court proceedings should be stayed in circumstances where the contract between the parties provided that “any party may submit the dispute to binding arbitration”.  The arbitration clause also contained provisions regarding the arbitral process and the form and effect of any award.

The arbitration clause was contained in a shareholders agreement governing the relationship between the shareholders in a British Virgin Islands (BVI) company, Everbread Holdings Ltd.  The court proceedings involved an unfair prejudice claim by Hermes against Anzen and others.  It was common ground that such a claim was arbitrable in principle. 

The defendants applied for a stay of the court proceedings under section 6(2) of the BVI Arbitration Ordinance Act 1976 (Cap 6), which provided: “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 defendants were unsuccessful, both at first instance and on appeal to the Eastern Caribbean Court of Appeal, on the basis that (i) the arbitration clause conferred an option upon any party to submit a dispute to arbitration, (ii) the option could only be exercised by actually referring the matter to arbitration, and (iii) the defendants had not in fact commenced arbitration proceedings.  In effect, until the option was exercised, there was no “matter agreed to be referred” and no basis for invoking section 6(2).

The Board disagreed and allowed the defendants’ appeal.  The Board identified three possible analyses:

1.                   The arbitration clause, on its true interpretation, required any dispute, if it was to be pursued at all, to be submitted to arbitration.

2.                  The arbitration clause conferred an option, leaving a party free to commence court proceedings, but the option could be exercised by the other party commencing an arbitration.

3.                  The arbitration clause conferred an option, as in 2 above, but the defendant to the court proceedings could exercise the option by simply requiring the claimant to submit the dispute to arbitration, whether by an unequivocal request to that effect or by applying for a stay of the court proceedings.

The Board considered an extensive array of authority before concluding that analysis 1 should be rejected: if the parties had intended to make arbitration the exclusive means of dispute resolution they would have used mandatory language, such as “shall”.  The parties had used the word “may”, which created an option, such that either party could elect to have a dispute referred to arbitration.  The case law of England, Canada and Singapore consistently pointed to such wording creating merely an option to refer disputes to arbitration, rather than requiring arbitration to the exclusion of other dispute resolution mechanisms.  Although US decisions did not all point in the same direction, those arising from a commercial context also supported that conclusion.

The Board also rejected analysis 2.  The Board noted that, in some cases, a requirement that the option be exercised by commencing arbitration might require a party to file a claim that sought no positive relief, and would also involve that party incurring expense in the form of arbitration fees, which the Board saw as potentially constituting a substantial obstacle.

The Board accordingly preferred analysis 3.  An unequivocal election by one party that the dispute should be submitted to arbitration was sufficient to bring the situation within section 6(2), at which point the court was required to stay the court proceedings.  If the party so electing did not itself commence an arbitration, the opposing party (the litigation claimant) would need to do so in order to have the dispute resolved.  The Board considered that requiring the claimant to do so was consistent with the mutual obligation of co-operation owed by parties to an agreement to arbitrate.

In light of the decision in Anzen it would be sensible for a would-be claimant, who prefers to litigate but is faced with an arbitration “option” similar to that in Anzen, to write a letter before action to the intended defendant, putting it on notice that a claim will be made, and requiring it to elect whether to invoke the arbitration option.  If the defendant, expressly or by conduct, represents that it will not invoke the option to arbitrate, and the claimant then incurs the cost of filing court proceedings, the defendant may be estopped from seeking a stay (by analogy with Re Value Discovery Partners LP (19 April 2013) BVIHCM (COM) 2013/0026).  Although the Anzen decision concerns section 6(2) of the Arbitration Ordinance, which has since been repealed by the BVI Arbitration Act 2013, it is unlikely that the outcome would have been any different had the case been considered under the 2013 Act, which (so far as relevant) gives effect to Article 8 of the UNCITRAL Model Law.   Article 8 provides: “A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”  Section 18(4) of the 2013 Act states “Where the Court refers the parties in an action to arbitration, it shall make an order staying the legal proceedings in that action.”  A litigation defendant who is party to an arbitration agreement would therefore still be able to require a matter (assuming it falls within the scope of the arbitration agreement) to be submitted to arbitration, despite not having actually commenced arbitration proceedings.