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arbitration clause trumps Insolvency Rules

19 March 2015

Summary

In a recent decision in the Chancery Division of the High Court, HHJ Purle QC determined that an arbitration clause remained operable and capable of being performed, notwithstanding the fact that one party to a construction contract had entered into creditors voluntary liquidation. Further, in a case that involves claims and counterclaims, the mandatory effect of an arbitration clause (as set out in section 9 of the Arbitration Act 1996) trumped the courts discretion to direct the taking of an account under Rule 4.90 of the Insolvency Rules 1986. This decision is likely to have wider implications on the resolution of construction disputes in an insolvency context. Browne Jacobson acted for the respondent employer in this (as yet) unreported case, following an application to the court by the liquidators of an insolvent contractor company.

Background

The employer entered into a contract with the contractor for the carrying out of refurbishment and extension works at a school based on the JCT Intermediate Building Contract (with contractors design) 2005 Rev 1: 2007. For reasons that remain disputed, the works were delayed and practical completion of the last section of the works was certified after the original date for completion. The parties were also in dispute regarding the value of the contractors final account, the contractors claim for loss and expense, and the employers contra claim for the deduction of liquidated damages and the existence of defects.

In September 2009, the contractor entered into administration and, subsequently, creditors voluntary liquidation in September 2010. A further dispute resulted, with the employer claiming it was a creditor of the insolvent contractor and the liquidators for the contractor claiming the employer was a debtor.

The application - interaction between Arbitration Act 1996 and Insolvency Rules 1986

The parties agreed that the contract included a binding arbitration clause. However, the parties had different views regarding the application of an arbitration clause in the context of an insolvency dispute. The applicant liquidators sought to rely upon Rule 4.90 of the Insolvency Rules, which, they argued, provides for the mandatory taking of an account by the court in circumstances where there is a claim and counterclaim. The respondent employer relied upon section 9 of the Arbitration Act 1996, which, it argued, provides that an arbitration clause is mandatory and binding on the parties unless it is "null and void, inoperative, or incapable or being performed." In light of the liquidators application, well-established law regarding the courts discretion to stay proceedings against a liquidated company did not apply.

The application requested that the court take control of the dispute outside of the scope of the arbitration clause and direct, inter alia, that the court impose a form of compulsory expert determination or court sanctioned process to reach a final and binding determination of the dispute.

The respondent employers position was that the mandatory nature of the arbitration clause must be adhered to and that, absent an agreement of the parties, the court had no jurisdiction to direct, for example, a form of compulsory expert determination as a means of final and binding determination of the dispute. Further, there was no public policy reason why the parties should not be required to adhere to the arbitration clause in the contract.

Decision

The court held that the arbitration clause remained operative and capable of being performed (as did the parties ability to adjudicate under the contract) even though the contractor had entered into creditors voluntary liquidation. Accordingly, the court considered the liquidators request for directions in the context of section 9 of the Arbitration Act 1996. It determined that Parliament had chosen to provide that arbitration clauses should have mandatory effect and, on the facts of this particular case, there were no grounds to determine that the arbitration clause fell within one of the exceptions to the application of a binding arbitration clause.

Further, the court concluded that determination of the dispute through arbitration was not inconsistent with the requirement for the liquidators to take an account under the Insolvency Rules. It held that the two processes can go hand in hand, with the arbitration clause determining the value of any credits or debits in dispute and the Insolvency Rules directing the process for taking an account following that process.

A further issue that was considered was whether the issue of a proof of debt form by the respondent employer had in some way constituted a step in the proceedings (so as to render the arbitration clause unenforceable), with the liquidators arguing that this act had triggered an obligation for the liquidators to act in a quasi-judicial capacity to accept or reject that debt. The court considered that filing a proof of debt was prudent for any potential creditor and did not give any support to the liquidators argument that it undermined the effect of the arbitration clause. Further, if the liquidators had rejected the employers proof of debt the employer would be permitted to appeal to the court to seek a stay on that decision pending the conclusion of the underlying dispute through arbitration. Rejecting the proof of debt would still leave open the liquidators claims.

Implications

The courts decision on the binding nature of the arbitration clause in the context of a dispute with a liquidated company, and the ability for the arbitration clause to work alongside the taking of an account in an insolvency context, is significant. This is likely to impact the way that parties pursue and / or defend disputes in an insolvency context going forward.

Nevertheless, the starting position for parties that are involved with construction related disputes in an insolvency context should remain that the parties endeavour to resolve the disputes without the need to take recourse to a means of final determination.

If you would like to discuss this further please contact either Mark Stubbs mark.stubbs@brownejacobson.com +44 (0)115 976 6052 or Peter Westlake peter.westlake@brownejacobson.com +44 (0) 115 976 6545.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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