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Enforceability of Arbitration Clauses in Insolvency Proceedings
Many people rely on arbitration clauses or agreements as protections against having to resort to litigation if they find themselves in conflict with the other parties in an agreement. Alternative dispute resolution (ADR), such as arbitration and mediation, are often preferable to court proceedings for various reasons. ADR can be more cost-effective and efficient than litigation. Also, ADR offers disputing parties more control over the process, including scheduling, appointing arbitrators, and determining the triggers and rules regulating their arbitration.
As most arbitration clauses or agreements are part of or apply to an overarching contract or agreement, many jurisdictions apply the rule of severability to such clauses and agreements. This means that the law will recognize the arbitration clause or agreement as something that is not necessarily bound by the rest of the agreement. However, as arbitrations and other disputes often stem from a breach or action that may void a contract, it is important that the arbitration clause stands and is enforceable.
Nevertheless, while this severability and enforceability are fundamental to many business ventures, arbitration clauses and agreements often lose their standing if a business fails and faces insolvency, depending on the situation and the jurisdiction.
The Arbitration Clause & Insolvency Proceedings
Insolvency occurs when a party is no longer financially viable and cannot service their debts. While many people use insolvency interchangeably with bankruptcy, technically, in legal terms, insolvency is the state of a party’s finances. In contrast, bankruptcy is a legal process to address an insolvent party’s debts. Insolvency, or bankruptcy proceeding usually refers to when a court becomes involved with resolving a party’s debts. This could be through the insolvent party voluntarily requesting a court’s assistance or protection, or it could be when a creditor files for remedies, claiming a debtor is insolvent. In either case, as courts and court-appointed administrators are involved, either with restructuring the debtor to be able to service their debts or with liquidating the debtor’s assets to pay back creditors, the question arises as to the enforceability of existing arbitration clauses in such insolvency proceedings.
The answer usually depends on the jurisdiction. In Hong Kong, existing arbitrations stay for the proceedings’ duration, and new arbitrations must receive court approval.
In Germany, insolvency administrators are bound to arbitration clauses already agreed to by the insolvent party; however, administrators and tribunals must review any arbitrations to commence after insolvency has begun.
When a party to an ongoing arbitration is subject to bankruptcy proceedings in Singapore, a claimant could seek remedies with the court or could request the court’s permission to continue with the arbitration.
In Austria, insolvent parties must follow arbitration agreements entered into by insolvency administrators, with limited exceptions.
Once insolvency proceedings commence in France, all arbitrations are stayed until they are registered with the receiver; furthermore, insolvency proceedings do not impact arbitration clauses so that arbitrations can commence as long as they are registered, so that an insolvency judge can authorize payment of any arbitral awards.
In India, the law only specifies a stay on arbitration, remaining silent on other criteria and remedies; however, case law refers to special laws superseding general laws and has held that arbitration clauses should prevail over insolvency petitions.
Meanwhile, Under Thai law, bankruptcy courts generally supplant arbitration clauses, especially in receivership cases; current arbitrations may continue, and new arbitrations may commence under existing clauses, but both must answer to the court and the receiver’s rulings.
Arbitration Clauses are Highly Recommended
As can be seen by the discussions above, different jurisdictions handle arbitration clauses differently. This suggests that parties should not draft and include an arbitration clause into a contract or agreement. Having an arbitration clause in place provides parties to a contract an alternative to litigation that may still stand during an insolvency proceeding. To what extent, as discussed, depends on the jurisdictions and current law and legal precedents. It is highly recommended that an expert, such as those at THAC, be consulted to ensure that the proper mechanisms are in place for arbitration, even in insolvency or bankruptcy.
Look to THAC for Arbitration and Insolvency Expertise
The Thailand Arbitration Center (THAC) is a world-class dispute resolution center offering a full array of ADR expertise and support. Centrally located in Bangkok and easily accessible by public transport and major thoroughfares, parties can reach THAC whether they live in Thailand or fly to one of the Kingdom’s international airports. THAC is ideal for in-person or remote hearings, facilitating local and cross-border disputes.
THAC is also fully equipped with other online dispute resolution, including TalkDD and AMO 24/7. Furthermore, disputing parties can access expertise from experience arbitrators and mediation, skilled in ADR and a range of subject matters. Our state-of-the-art facilities also offers full administrative services to support ADR proceedings as needed. Please feel free to contact us at [email protected] or +66 (0)2018 1615. THAC is looking forward to helping you.
