I was taught that if your arbitration agreement says ‘you may refer any dispute to arbitration’, rather than ‘you shall’, you had a problem. For an arbitration clause to result in disputes ending up in a confidential and flexible arbitration rather than at court, it is best to provide for arbitration to be compulsory – not optional as the word ‘may’ suggests.

That remains the case, but the Privy Council has recently given arbitration the benefit of the doubt.

In the recent case Anzen Ltd and others v Hermes One Ltd [2016] UKPC 1, the parties had entered into a shareholders’ agreement which provided, as far as disputes were concerned, that ‘any party may submit the dispute to binding arbitration’. It also specified ICC arbitration in London before a sole arbitrator.

There was a falling out among the shareholders and Hermes, a minority shareholder, brought a claim in the British Virgin Islands against the other shareholders. Among other things, Hermes alleged unfair prejudice, deceit and breaches of contract.

As an aside, it is worth noting that everyone agreed that an arbitrator could not award everything Hermes was asking for (including winding up the company and the appointment of a liquidator). However, an arbitrator could decide on disputes regarding underlying issues of fact or law which were relevant and reach an award that could then form the basis of an application to the court for necessary orders.

In response to the court claim, the other shareholders pointed to the arbitration agreement and applied for a stay of the court proceedings pursuant to section 6(2) of the Arbitration Ordinance 1976. They also applied to strike out the claim, but that was not pursued and the focus was on the application to stay the court proceedings.

Almost two years after the application was first made in the BVI, the Privy Council’s decision was published on 18 January 2016. It disagreed with the decisions made at first instance and the Court of Appeal.

The first instance judge and the Court of Appeal found that an ‘optional’ arbitration agreement does not create an immediately binding contract to arbitrate obliging the parties to arbitrate. The effect of the ‘optional’ arbitration agreement is that, as and when one of the parties opts to arbitrate, the other parties cannot object. In other words, the ‘optional’ arbitration agreement is an offer to arbitrate which is accepted when the arbitration is started. But, the first instance judge and the Court of Appeal held, it does not go as far as requiring the parties to resolve their disputes by arbitration rather than through the court.

If one of the parties starts court proceedings (that is, it decides not to accept the offer to arbitrate), the Court of Appeal found that the other party cannot immediately object and obtain a stay of those proceedings since, unless arbitration has been commenced, there is still no binding agreement to arbitrate. To prevent the court proceedings from continuing, according to the Court of Appeal, the party should commence an arbitration (that is, accept the offer to arbitrate) and then apply for a stay of the court proceedings, which the court should grant given that there will then be a binding agreement to arbitrate to which the court can hold the parties.

In a judgment which is supportive of arbitration, the Privy Council found that there was no need for the party to start an arbitration to have the court proceedings stayed. It was sufficient for the party 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’.

The Privy Council considered that it did not make commercial sense to require a party to commence an arbitration which it may not have had any desire to pursue: ‘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.’ In order to comply with the agreement, they would also have to go through the necessary steps in the dispute resolution clause before commencing the arbitration.

Moreover, they would have to go to the trouble and expense of preparing a request to arbitrate and incurring the arbitral institution’s fees, which in this case included the payment of the non-refundable ICC filing fee of $3,000 plus any further advance to cover the costs of the arbitration requested by the ICC.

It is not often that cases involving arbitration find their way to the Supreme Court or Privy Council. The decision continues the English courts’ policy of supporting arbitration, but other jurisdictions may not be as supportive. The Privy Council did not find that it was a breach of the agreement to commence litigation in the context of an ‘optional’ arbitration agreement, so it is not clear what the cost consequences would be if one party commenced litigation and the other party insisted on arbitration only after court proceedings were under way.

Parties should steer clear of using the word ‘may’ or other permissive language in dispute resolution clauses in contracts and opt for ‘must’ or ‘shall’, assuming they would like to avoid involving the courts in deciding how they are going to resolve the substantive dispute.

If they do use the word ‘may’, the Privy Council has held that ‘may’ can mean ‘must’.

Catherine Penny is a senior associate at Stevens & Bolton, Guildford