Say the ratio out loud before you open Reasoning — recalling it unprompted is exactly what the exam pays for.
Why it matters
Clauses are badly drafted. A clause that says disputes may be referred to arbitration is one of the commonest drafting failures, and this is the authority that such a clause creates an option, not an obligation. It is also the authority that the power to appoint an arbitrator carries with it the power to decide whether there is an arbitration agreement at all.
Facts
An application was made for the appointment of an arbitrator in an international commercial arbitration. The opposite party pleaded that the clause contained no mandatory provision for referring the dispute to arbitration: it used the word may and left the party free either to file a suit or to go to arbitration.
Held
Where the agreement uses the word may and gives a party the liberty either to file a suit or to go to arbitration at its choice, the appointing authority should not exercise jurisdiction to appoint an arbitrator. The authority deciding the appointment application has the power to decide whether the agreement postulates resolution of the dispute by arbitration — and s. 16, which empowers the tribunal to rule on its own jurisdiction, does not take away that power to decide whether there is a valid arbitration agreement before referring the dispute.
Reasoning
Step one — an arbitration agreement must be an agreement to arbitrate. Section 7 requires an agreement to submit disputes to arbitration. A clause preserving the right to sue records no such submission; it records a choice not yet made.
Step two — the appointment power presupposes an agreement. The existence of an arbitration agreement is a condition precedent to appointment. If there is none, there is nothing on which the power can operate.
Step three — s. 16 does not monopolise jurisdiction. Competence-competence lets the tribunal rule on its own jurisdiction; it does not require a tribunal to be constituted before anyone may ask whether a tribunal was ever agreed to.
Exam use
It opens: Draft and criticise an arbitration clause, and What is the nature of the enquiry at the stage of appointment?
State the current law carefully. Appointment under s. 11 now vests in the Supreme Court or the High Court, or a person or institution designated by that Court — not in the Chief Justice personally, which was the scheme SBP & Co. was decided on. Under s. 11(6A) the Court's enquiry at this stage is confined to the existence of an arbitration agreement, which is exactly the question Wellington Associates was answering, but the confinement is now express. The 2019 scheme for designated arbitral institutions is not in force. Cite SBP & Co. only for the character of the function.
In drafting, the lesson is a rule: write shall be referred to arbitration, and never may.
It does not decide that an optional clause is void; it decides that it does not, by itself, oblige a party to arbitrate or found an appointment.