How to avoid disputes about dispute resolution clauses

Wednesday 24 February 2016

Authors: David Friar and Sophie East

​​Many dispute resolution clauses say that a dispute “must” be referred to mediation or arbitration, and not court. But what about a clause that says that a dispute “may” be referred to mediation or arbitration? Does it prevent a party from choosing to bring court proceedings?

Is a party required to arbitrate instead of bringing court proceedings?

The Privy Council ruled last month that there is a clear difference between “must” and “may”.1 If the contract says that “any party may submit a dispute to binding arbitration”, then that party has a right – but not an obligation – to arbitrate.  The party can instead choose to bring court proceedings.

Can the other party stop court proceedings and require arbitration?

But what happens if one party does bring court proceedings? Can the other party stop the proceedings and require the party who brought the proceedings to instead bring an arbitration? You might think that it was too late to do this – once a party has chosen court proceedings, the other party cannot force them to take a different route.

However, the Privy Council rejected this. It ruled that both parties have an option to require arbitration, and that this option can be exercised before or after litigation is commenced. A party who has brought court proceedings can be required to stop their court proceedings and instead submit the dispute to arbitration.

Our view

The Privy Council’s interpretation makes the “may” in the dispute resolution clause much more like a “must”. This is because either party can elect an arbitration rather than court proceedings, even if court proceedings have already been commenced.

The case also illustrates the pitfalls of drafting dispute resolution clauses with permissive language such as “may”. These clauses are unclear, and often result in a dispute about the resolution clause, causing delay and adding additional cost to the dispute. The scope for disputes about disputes clauses can be reduced significantly if the clause instead uses clear and mandatory language, such as “must”.

For more tips on drafting dispute resolution clauses, click here.


1 Anzen Ltd v Hermes One Ltd [2016] UKPC 1.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Friar

    Partner Auckland
  • Sophie East

    Partner Auckland
  • Jenny Stevens

    Partner Wellington
Related areas of expertise
  • Litigation and dispute resolution