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Warning for Invoice Finance Providers – The Importance of Checking Dispute Resolution Clauses in underlying contracts

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The Courts have issued a further warning that when reviewing fundamental contracts you should always check and consider the dispute resolution clauses as these can delay and increase the costs of recovering debts.

In the recent case of Philpott and another v Lycee Francais Charles De Gaulle School [2015] EWHC 1065 (Ch) (06 March 2015), the High Court held that the liquidators, who had made an application for directions in relation to the recovery of a book debt, were bound by the arbitration clause in the governing contract between the company and the debtor.  The debtor sought a stay of the liquidator’s action on the basis that the arbitration clause was binding and continued to apply after an administration and liquidation. 

The case concerned a dispute over an alleged debt due to the company from the debtor of approximately £650,000 and an alleged debt due from the company to the debtor of approximately £270,000.  The debtor sought to rely on the terms of the governing contract between the parties, in particular the arbitration clause, whilst the liquidators made an application to court for directions and an account for insolvency set-off pursuant to rule 4.90 of the Insolvency Rules 1986. 

The court confirmed that an arbitration clause will not become inoperative and will remain binding on the parties following a liquidation, or voluntary set off, referring to section 9(4) of the Arbitration Act 1996 Act which provides: 

“On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.” 

The case highlights the importance of always checking the provisions relating to dispute resolution or arbitration in underlying contracts as the implications of failing to do so can lead to extensive delays and increased costs. 

If you have any queries or require any legal advice in respect of this matter, then please do not hesitate to contact a member of the Asset Based Lending team at Clarion. 

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