One of the ongoing issues in Canadian arbitration law is whether an “opt in” arbitration clause is enforceable as a mandatory submission to arbitration. Under such a clause, one party “may” serve a notice of arbitration, and if that party does so, then arbitration shall ensue. Some Canadian court decisions, particularly older ones, held that this sort of clause is a permissive clause, not a mandatory submission to arbitration, and is therefore not enforceable. Other Canadian decisions, particularly the more recent ones, have held that this sort of clause amounts to a mandatory submission to arbitration once one party does elect to serve a notice to arbitrate.

Recently, the Privy Council examined such a clause. In Anzen Limited and others v. Hermes One Limited, the Privy Council held that the clause constituted an enforceable arbitration clause once it was properly triggered by one of the parties. The triggering of the clause did not require the defendant to itself commence arbitration but to make a sufficient election that the dispute was to be arbitrated.

This decision will be useful in interpreting Canadian arbitration clauses in building contracts because they generally use the word “may” and the issue then arises as to whether one party can enforce arbitration against the other.

The Background

The relevant portion of the clause in question read as follows:

“…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……” (underlining added)

Hermes commenced court litigation arising from a shareholders’ agreement containing this clause. Anzen did not serve a notice of arbitration. Rather, it brought a motion to stay Hermes’ action, taking the position that if Hermes wished to proceed with its claim, it was obliged to do so by way of arbitration. Hermes’ position was that Anzen was obliged to commence arbitration before Hermes’ claim should be stayed. The court’s below agreed with Hermes and dismissed Anzen’s stay motion. The Privy Council allowed the appeal.

Decision of the Privy Council

The Privy Council said that there were three ways to interpret this clause:

  1. The clause is an exclusive arbitration clause, meaning that the clause is a mandatory arbitration clause and the parties are required to arbitrate. The Privy Council called this Analysis I.
  2. The clause is a permissive arbitration clause, meaning that either party can commence litigation but if the other party wishes to arbitrate, then it must start an arbitration proceeding, in which case the litigation would be stayed by the court. The Privy Council called this Analysis II. This is the approach adopted by the courts below. Because Anzen had not itself commenced arbitration before seeking a stay of the action, those courts dismissed its stay motion.
  3. The clause was a permissive arbitration clause, meaning that either party could commence litigation but if the other party wished to arbitrate, then it did not need to start the arbitration proceeding itself but could request arbitration and then bring a motion to stay the litigation.

The Privy Council held that Alternative III was the proper interpretation of this clause. Alternative I was rejected as being inconsistent with the word “may” and the choice or election inherent in that word. Accordingly, the triggering of the clause required some election by the defendant. The question was, what kind of election: the commencement of an arbitration by the defendant, or some election short of that?

Alternative II was rejected as inconsistent with commercial common sense. It did not make sense for the defendant to be required to commence an arbitration itself when the defendant may not wish to have any proceedings, may have no claim to assert and would have to assert a negative declaration. As long as the defendant made a clear election for arbitration, that should be sufficient to trigger the arbitration clause.

Accordingly, since the defendant had by its conduct made a clear election for arbitration, the Privy Council stayed the action.

Discussion

This decision is a useful one for Canadian construction law because it confirms the line of cases that holding that using the word “may” in an arbitration clause does not mean that the arbitration clause is entirely permissive, so that agreement to arbitrate of both parties is necessary at the time the dispute arises. Indeed, the Privy Council did not even canvas this alternative.

Nor does the word “may” in an arbitration clause give rise to mandatory arbitration clause. The word is too permissive to be given that interpretation.

Rather, the word “may” will usually give rise to what might be called an “opt in” or “elective” arbitration clause, under which either party may elect arbitration. If that party does so on a proper and timely basis, then arbitration is mandatory. In this case, the dispute was whether that proper and timely basis required the defendant to itself start an arbitration. The Privy Council held that it was not.

Interestingly, one of the main decisions upon which the Privy Council relied is the decision of the Ontario Court of Appeal in Canadian National Railway v Lovat Tunnel Equipment Inc. (1999), 174 D.L.R. (4th) 385. In that case, the arbitration clause simply said that “the parties may refer any dispute under this Agreement to arbitration, in accordance with the Arbitration Act of Ontario.” In staying the action, Ontario Court of Appeal held that the words “ the parties may” meant that:

“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.”

This issue is of importance to building contracts in Canada. Thus, GC 8.2.6 of the CCDC 2 Stipulated Price Contract says that, after certain preliminaries including notice and mediation, “either party may refer the dispute to be finally resolved by arbitration….”

There are Canadian decisions all over the map on this issue. Some have held that the word “may” creates a purely permissive regime obliging neither party to arbitrate. Some hold that it creates a mandatory regime. The more recent decisions seem to adopt the approach in Canadian National Railway v. Lovat Tunnel Equipment Inc. Based upon the present Privy Council decision in Anzen Limited and others v. Hermes One Limited, the latter is the proper interpretation.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 11, part 3(c)

Anzen Limited and others v. Hermes One Limited, [2016] UKPC 1

Arbitration – mandatory, permissive and opt-in arbitration – motion to stay  

Thomas G. Heintzman O.C., Q.C.                                               February 20, 2016

www.heintzmanadr.com

www.constructionlawcanada.com