Out-Law / Your Daily Need-To-Know

Intersection of arbitration and insolvency focus of new toolkit

Out-Law News | 24 Mar 2021 | 4:25 pm | 2 min. read

The International Bar Association (IBA) recently published a toolkit on insolvency and arbitration designed to guide parties, counsel and arbitrators in situations where a party involved in domestic or international arbitration is or becomes subject to insolvency proceedings.

The toolkit was published by a sub-group of the IBA’s Committee on Arbitration, to examine the intersection of insolvency and arbitration and to address the fact that different jurisdictions are dealing with this sometimes conflicting intersection in different ways.

The subcommittee said that arbitrators are in a difficult position when there are parallel insolvency proceedings in local courts. It said this raises questions about whether a tribunal has jurisdiction to continue the arbitration, the debtor's legal capacity to arbitrate, and enforceability of any award.

The toolkit emphasises the fact that different jurisdictions take different approaches to these questions, with some jurisdictions prohibiting arbitration involving insolvent parties, orimposing some limitations on arbitration in these circumstances, and others having no restrictions or no well-defined regime.

There is no harmonisation of national approaches, meaning these issues are dealt with on a case by case basis with sometimes quite opposite outcomes, as was seen in a case between Elektrim and Vivendi in 2008 and 2009. On the basis of the same facts two arbitral tribunals, and subsequently the Swiss Supreme Court and the English High Court, disagreed on the effects the insolvency of a party has on its capacity to continue taking part in an arbitration.

The IBA's Insolvency and Arbitration Group has identified a need for guidance in identifying the legal issues that may arise in this area and evaluating possible solutions.

"While no single set of principles could encompass the wide variety of scenarios in which arbitration and insolvency will overlap, the toolkit helpfully includes a series of 19 survey-based national reports supported by an explanatory report that provides context behind each survey question," said arbitration expert Scheherazade Dubash of Pinsent Masons, the law firm behind Out-Law. "The toolkit is rounded off by a practical checklist for use by, arbitrators, parties and counsel to evaluate the potential impacts of a national insolvency on their arbitration and the many often complex questions to be considered when a party in arbitration goes insolvent."

"The toolkit is also particularly valuable because insolvency laws are considered mandatory and might be reflective of public policy considerations in many jurisdictions, leading to potential issues at the enforcement stage," said arbitration expert Alexander Shchavelev, also of Pinsent Masons. "Recognising and addressing the potential impact of insolvency on the proceedings as early as possible is often the key to avoiding potentially irreversible consequences. The questions in the survey cover a wide range of very detailed legal issues to be considered in this context but cannot and do not intend to give answers to the practical implications in a particular case."

Shchavelev said that all involved should go through the list and evaluate how their role and responsibilities in an arbitration may be impacted because the issues are often not apparent at first sight.

He said: "For instance, arbitral institution have to make sure if they can proceed with the constitution of the arbitral tribunal? Do any restrictions apply to the deposit made by the insolvent party? Counsel should ask themselves if there is any obligation to inform the others involved? What impact has the insolvency on the engagement and the fee arrangement, including third-party funding?"

"Arbitrators should clarify if their fees and expenses are subject of the insolvency proceedings. And opposing parties should determine if they are subject to any restrictions stemming from insolvency of the opposing party," he said. "The toolkit comes at a good time because the impact of the Covid-19 pandemic is likely to increase the frequency with which these issues arise at both national and international level."