When Parties May Arbitrate – Interpreting Ambiguous Agreements

What makes arbitration attractive as a dispute resolution mechanism is that parties to an agreement can design their own dispute resolution process—one suitable to their relationship and industry requirements—and potentially avoid some of the drawbacks of litigation.

However, in doing so you must be careful to ensure that the agreement is clear enough that intentions will be honoured if a court is called upon to interpret the agreement. The following examples illustrate potential pitfalls when things are ambiguous.

A 2016 decision of the U.K. Privy Council in Anzen v. Hermes One Ltd. considered an unusual arbitration clause in a shareholders’ agreement that provided if a “dispute can­not be settled within twenty (20) business days through negotiation, any Party may submit the dispute to binding arbitration” [emphasis added]. While most arbitration clauses use language that is clearly manda­tory, the use of “may” in this clause left the meaning ambiguous.

The underlying action was for a stay of pro­ceedings since there was a valid and binding arbitration provision. The issue in Anzen was whether a defendant was required to actually start arbitration in order for the court to stay the proceedings, or whether it was enough for the defendant to give notice invoking the arbitration clause. Without the litigation, the defendant would apparently have had no need to start arbitration since they had no claim against the plaintiff.

In deciding the issue, the Privy Council first had to consider whether this clause should be interpreted as making arbitration mandatory, or if it required the consent of both parties to arbitrate. Some U.S. decisions previously inter­preted clauses providing that parties “may” submit disputes to arbitration as mandatory, requiring the use of arbitration even if neither party elects it. The Privy Council rejected this approach citing, among other things, a 1999 decision of the Ontario Court of Appeal in Canadian National Railway Company v. Lovat Tunnel Equipment Inc.

The relevant clause in the contract in Canadian National Railway provided that “[t]he parties may refer any dispute under this Agreement to arbitration.” Justice Finlayson rejected the contention that this clause required the agreement of both par­ties to use arbitration. The Privy Council, rely­ing on this decision among others, came to the same conclusion with respect to Anzen.

The Privy Council also noted it made little commercial sense for a court to require a defendant that may never have otherwise needed to start arbitration to do so for no other purpose than to apply for a stay of proceedings.

Parties who have a right to invoke an arbitration clause like this one, or who are party to any arbitration agreement, must be cautious in that taking certain steps in litigation started by the other party may negate their ability to apply for a stay of proceedings on the basis of an existing agreement to arbitrate. Section 15(1) of the B.C. Arbitration Act provides that “a party may apply for a stay before filing a response to civil claim… or taking any other step in the proceedings.”

Though Canadian courts will gener­ally interpret arbitration clauses and legislation to make arbitration viable, an ambiguously drafted clause may leave the parties stuck with an ill-suited and expensive procedure, since they will likely be unable to come to a further agreement on the arbitration process once a dispute has arisen.

A court in a less arbitration-friendly juris­diction could even have decided not to give binding effect to an arbitration agreement drafted using permissive language like that in Anzen. Those seeking to ensure arbitration will be enforced as a dispute resolution mechanism in a commercial agreement should consult experienced counsel before the agreement is drafted.

For more information on incorporating arbitration clauses into agreements and avoiding related pitfalls, please contact Scott.

Allison Morrell, Articled Student, assisted with the research and writing of this article.