The English High Court finds that arbitration clause "trumps" insolvency rules

The case of Philpott & Orton v Lycee Francais Charles De Gaulle School serves as a welcome reminder that the English court will strictly enforce agreements to arbitrate by ordering a mandatory stay of court proceedings, even in contexts where court procedures may traditionally apply. Where a party argues that a matter should be settled by the court, the court will consider both as a matter of substance whether this is a dispute that the parties have referred to arbitration, and also whether the dispute can be resolved through arbitration as a matter of practice.

Background

Welconstruct Limited (the "Company") entered into a construction contract with a school (the "School") based on the JCT Intermediate Building Contract 2005 Revision 1 (the "Contract"). The Contract provided for disputes to be submitted to arbitration. The Company subsequently went into administration followed by voluntary liquidation. Both the School and the Company submitted competing positions regarding the final account, which led the liquidators to apply to the court for directions.

The School objected to the liquidators' application on the basis that the arbitration clause was binding and continued to apply after an administration and liquidation. It argued that pursuant to s. 9(5) of the Arbitration Act 1996, the court had to order a mandatory stay of the court proceedings unless it was satisfied that the arbitration agreement was null and void, inoperative or incapable of being performed. The liquidators argued that proof of debt proceedings fall within the domain of the court and are governed by the procedure set out in the Insolvency Rules 1986. In particular, Rule 4.90(3) of the Insolvency Rules provided that where there were mutual dealings in a liquidation, an account had to be taken of what was due from each party to the other so that the claims could be set off against one another. Although the rule was silent as to the exact procedure to be adopted, case law made it clear that the court had ample power to give directions for the taking of an account.

The question framed by the court was whether the Arbitration Act "trumped" the "taking of an account under the court's directions", as envisaged by the Insolvency Rules.

Decision

The judge considered that the arbitration agreement did not become inoperative following a liquidation, or in consequence of the statutory set-off. Instead, he was mindful of the principle that parties are free to decide how their disputes should be resolved, subject only to such safeguards as are necessary in the public interest. In this case, the exercise of "taking of the account" meant no more than the calculation of the balance due in accordance with relevant principles of insolvency law, which fell within the remit of the arbitration clause, just as a claim by the liquidators against the school to recover an outstanding sum would plainly fall within the scope of the arbitration clause. Therefore, the procedure contained in the Insolvency Rules was not incompatible with referral of the matter to arbitration proceedings. Accordingly, it was necessary to follow the intention of parliament as laid down in the Arbitration Act and refer the matter to arbitration.

The judge also confirmed that the fact that the school had submitted a "proof of debt" claim did not mean that it had submitted to the jurisdiction of the court pursuant to s9(3) of the Act. Therefore the school had not deprived itself of its entitlement to a stay.

Comment

This case demonstrates that a court will uphold an agreement to arbitrate subject only to limited exceptions. Where an argument of arbitrability is raised, the court will consider both as a matter of substance whether this is a dispute that the parties have referred to arbitration, and also whether the dispute can be resolved through arbitration as a matter of practice. Here, the judge held that the underlying dispute could easily be determined by arbitration, following which the net balance would be a matter of simple calculation. This approach provides certainty for parties that their agreement to arbitrate will be upheld and that the court will look at the substance of the dispute in order to determine the appropriate forum.

This decision also provides an interesting contrast with the case of Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 575 Civ, in which the Court of Appeal held that the mandatory stay provisions in s9(1) of the Arbitration Act do not apply to winding-up petitions brought on the basis that a company is unable to pay its debts where what is in dispute is whether the company is, in fact, unable to pay its debts.

Whilst this is a welcome development, these contrasting decisions may be a source of some uncertainty for insolvency practitioners, who will need to consider carefully the circumstances in which they should apply to the court to supervise certain procedures where the parties have submitted disputes to arbitration. This case nonetheless makes it clear that there should be no reason why book debts cannot be quantified in arbitration.

For further information, please contact Craig Tevendale, Partner, Elizabeth Kantor, Associate or your usual Herbert Smith Freehills contact