The case concerned unpaid fees which Fieldfisher LLP were claiming from their former client. Fieldfisher LLP had applied for an administration order against that client for fees claimed to be due under a conditional fee agreement entered into between them previously, following successful litigation on which Fieldfisher LLP had acted. The court accepted that Fieldfisher LLP was a creditor of the company with sufficient standing to apply for an administration order given the level of fees in question (which were claimed to be significant). Whilst liability for those unpaid fees and the exact amount payable was disputed, the court was satisfied the evidence before it indicated there may be an arguable case that those fees were properly due and payable to Fieldfisher LLP. However, the conditional fee agreement which the parties had entered into at the outset of the litigation proceedings and which set out the basis on which Fieldfisher LLP's professional fees were payable by the client included a mediation and arbitration clause. That meant the court was unable to assess whether the former client was, or was likely to be become, unable to pay its debts as they fell due in accordance with the relevant provisions of the Insolvency Act 1986 without undertaking further investigation. The court therefore took the view that, unless the circumstances of the case were wholly exceptional, which it concluded they were not, the court could not exercise its discretion to make an insolvency order without considering the provisions of the Arbitration Act 1996. The court took the view that, because the parties had agreed to arbitrate any dispute between them under the conditional fee agreement, one party could not avoid the arbitration process by initiating insolvency proceedings against the other. The court therefore dismissed the application and refused to grant the administration order which Fieldfisher LLP had requested.
Whilst the case has no legal authority in Scotland, it is a helpful reminder of the possible barriers which might be faced by creditors seeking to enforce contractual rights by way of insolvency proceedings.
We regularly act for banks, financial institutions and other creditors in documenting the commercially agreed terms of new financings and our litigation team regularly deals with creditors' claims on and prior to insolvency of debtors. One of the areas on which lawyers often see arbitration clauses arise is construction contracts. It is important therefore that any construction contract, or indeed any other agreement, which is one of a number of contracts on a wider financing includes the correct enforcement options to suit the underlying nature of the deal. For example:
if the agreement in question is based on a standard template or a house style and contains an arbitration and/or mediation clause as standard, it is important to properly consider that clause and not to simply assume that because arbitration appears in the document that it is the right option in the circumstances. The creditor, particularly if the creditor is a bank or financial institution, is likely to want to enforce its contractual rights, and in particular its security interests, by way of insolvency proceedings without the need to worry about whether some of the other transaction documents might contain barriers to that process;
the person drafting the documents should consider what other agreements are being entered into on the transaction and what provisions they contain with regard to what should happen when a dispute arises; and
the person drafting the documents should consider from the outset what the creditor is likely to want to happen if it all goes wrong. It is impossible to provide for every eventuality but proper care and attention should be given to the boilerplate and enforcement provisions in all agreements to make sure that all reasonably foreseeable events and possibilities are provided for in the final versions of each agreement.