Irish High Court rules arbitral award may constitute a debt for the purposes of bankruptcy proceedings

In Des Hennessey v Building Contractors Ltd v O'Beirne [2015] IEHC 596, the Irish High Court considered whether the arbitrator had been validly appointed and whether the petitioner was entitled to enforce an arbitral award as a debt through the bankruptcy summons procedure.

Speedread
The Irish High Court has rejected an application to dismiss a bankruptcy summons based on an alleged defect in the appointment of the arbitrator and that the alleged debt that was due was on foot of a taxation of an order for costs made by that arbitrator. The court held that the issue as to the validity of the appointment of the arbitrator had already been raised by the respondents and dealt with by the arbitrator, who had ruled that he had jurisdiction to hear the dispute. That decision had not been appealed and, therefore, it was not open to the respondents to raise it again as an issue for trial. In addition, the debt sued upon arose out of a compromise agreement reached between the parties. The precise figure was arrived at following an agreement that the costs should be taxed.

The court further held that the respondent's argument that an arbitral award cannot be relied on as a debt for the purposes of obtaining a bankruptcy summons because it is not being enforced as permitted under section 23 of the Arbitration Act 2010 had no merit. Section 8 of the Bankruptcy Act 1988, as amended, merely requires that there is a debt due and owing and that the debt be a liquidated sum.

This decision demonstrates the finality of arbitral awards where they are not appealed within the strict statutory time-limit. It also shows that an arbitration award can constitute a debt for the purposes of bankruptcy proceedings.

Background
Section 6 of the Arbitration Act 2010 (AA 2010) provides that the UNCITRAL Model Law has the force of law in Ireland. Article 16 of the Model Law confers competence on an arbitral tribunal to rule on its own jurisdiction.

Article 34(2)(1) allows an award to be set aside if the party making the application furnishes proof that the composition of the arbitral tribunal was not in accordance with the agreement of the parties. Under Article 34(3), an application to set aside may not be made after three months have elapsed from the date on which the party making that application had received the award.

Section 23 of the AA 2010 provides that an arbitral award shall be enforceable in Ireland either by action or by leave of the High Court, in the same manner as a judgment or order of the court with the same effect.

Facts
The respondents (Michael and Anne O'Beirne) and the petitioner (Des Hennessey Building Contractors Ltd) had entered into a building agreement on 17 July 2009, which contained an arbitration clause providing that either party could request the President of the Royal Institute of the Architects of Ireland (RIAI) to appoint an arbitrator after consultation with the President of the Construction Industry Federation (CIF).

On 20 March 2013, due to a disagreement about the appointment of an arbitrator, the President of the RIAI nominated Mr James O'Donoghue to act as arbitrator. On 10 April 2013 and 17 May 2013, the respondents' solicitors wrote to a director of the RIAI (Mr Graby), enquiring whether the President of the RIAI had consulted with the President of the CIF prior to the nomination of the arbitrator. Mr Graby replied simply that the President of the RIAI had appointed the arbitrator, and that the RIAI would not engage in any further correspondence on the matter.

On 2, 17 and 19 June 2013, the respondents' solicitors wrote to the President of the CIF asking whether he had been consulted by the President of the RIAI in relation to the nomination of Mr Donoghue as arbitrator. On 20 June 2013, the CIF stated that the inquiry should properly be referred to the RIAI. The respondents made no further inquiries until July 2014. On 9 April 2013, the respondents' solicitors wrote to the arbitrator raising the issue as to whether or not he had been properly nominated by the President of the RIAI. The arbitrator dealt with this by way of a preliminary application. On 23 June 2013, he held that no evidence was presented by the respondents of any lack of compliance with the provisions of the arbitration clause on the part of the President of the RIAI and that he was duly appointed. Therefore, he ruled that he had jurisdiction to act as arbitrator. The respondents did not appeal this ruling.

The substantive arbitration hearing commenced on 20 November 2013, but on 21 November 2013 counsel for the parties informed the arbitrator that they had reached a settlement of the matters in dispute, and requested the arbitrator to publish a final award by consent setting out the terms of that settlement.

The final award, published by the arbitrator on 17 December 2013, provided that the respondents would pay €100,000 in full and final settlement of the claim, as well as all costs, which were subsequently certified by the Taxing Master as amounting to €75,567.22.

On 8 July 2014, the respondents' solicitors wrote to both the President of the RIAI and the President of the CIF making an access request under section 4 of the Data Protection Acts 1988 and 2003, for a copy of any information they held about the respondents in relation to the arbitration matter. They also requested information concerning any consultation between the RIAI and the CIF in regard to the nomination of the arbitrator. In July 2014, the RIAI and the CIF confirmed that no consultation had taken place between them regarding the nomination of the arbitrator in this matter. The respondents failed to pay the taxed costs and the petitioner served a notice requiring payment prior to the issue of a bankruptcy summons upon each of the respondents.

The respondents accepted that they were out of time to appeal the ruling by the arbitrator that he was properly appointed and had jurisdiction to conduct the arbitration under Article 16. They also accepted that they were out of time to apply to set aside the final award under Article 34. However, they claimed that the bankruptcy summons should be dismissed on two grounds:

  • The arbitral award was unenforceable because the arbitrator had been invalidly appointed and, therefore, did not have jurisdiction to determine the dispute.
     
  • The petitioner could not enforce the arbitral award as a debt through the bankruptcy summons procedure.

Decision
The High Court rejected the respondents' application to dismiss the bankruptcy summons, ruling that the issues raised were not real and substantial and did not have any real prospect of success.

The appointment of the arbitrator
The respondents argued that whilst the time to challenge the arbitral award under Article 34 had passed, the failure to appoint the arbitrator in accordance with the terms of the arbitral agreement remained a matter that could be raised by them by way of opposition and/or defence to enforcement of the award. Costello J noted that Article 16(3) of the Model Law affords a party 30 days to appeal an arbitrator's decision on his jurisdiction and no such appeal was brought. On the contrary, the respondents submitted to the jurisdiction of the arbitrator and proceeded to engage in the arbitration process.

Further, they had a period of three months under Article 34(3) of the Model Law to apply for the arbitration award to be set aside and again failed to do so.

Costello J held that one of the objectives of the Model Law is to promote the finality of arbitral awards and to limit the grounds of challenge to arbitral awards. It does not facilitate revisiting issues that have been determined in the course of the arbitral process. Accordingly, where a challenge to jurisdiction has been raised and rejected, unless the ruling has been overturned on appeal, that is the end of the matter. It cannot be revived as a ground an application to set aside an award, or be raised as a defence to proceedings seeking to enforce the award.

Whilst Article 36 of the Model Law provides that recognition or enforcement of an arbitral award may be refused where the composition of the arbitral tribunal was not in accordance with the agreement of the parties, it does not apply in respect of an award in arbitral proceedings that takes place in Ireland (section 23(4), AA 2010). Accordingly, Article 36 was not applicable in these proceedings.

Bankruptcy summons procedure
The respondents argued that the effect of section 23 of the AA 2010 is that an arbitral award may only be enforced by one of two methods: a direct action on the award itself or by way of application to the High Court seeking leave to enforce the award in the same manner as a judgment or order of the High Court. As the petitioner had not sought leave of the High Court to enforce the award, the respondent argued that the only method of enforcement open to the petitioner was direct action upon the award itself. They submitted that the bankruptcy proceedings did not constitute such a direct action, as it was not a process for the recovery of a debt, but rather a procedure to bring about an act of bankruptcy, which affects the status of the debtor (citing In Re Debtor's Summons against Moore [1907] 2 I.R. 151). Therefore, the respondents argued that the arbitral award could not be enforced by way of a bankruptcy summons. The petitioner, in turn, submitted that it was not enforcing an arbitral award pursuant to section 23, but rather bringing proceedings pursuant to section 8 of the Bankruptcy Act 1988 (BA 1988), as amended. It argued that the fact that the debt arose as a result of an arbitration was not relevant. All that was required was that there was a debt due by the person sought to be summoned for an amount greater than €20,000 and the amount was a liquidated sum.

Costello J agreed with the petitioner's arguments, finding that the real issue was whether section 23 prohibits a party who has obtained an arbitral award from seeking not to enforce the award, but to bring about an act of bankruptcy. She held that section 23 simply establishes that an arbitration award may be enforced. Furthermore, there is no qualification in section 8 of the BA 1988, as amended, of the nature of the debt which must be owed by the debtor to the creditor, other than that it be a liquidated sum for more than €20,000.

Costello J concluded that the respondents' argument that an arbitral award cannot be relied upon as a debt for the purposes of obtaining a bankruptcy summons, because it is not being enforced as permitted under section 23, had no real merit.

Comment
This decision highlights the strict time limits for challenging arbitral awards and the finality of such awards, particularly in relation to arbitral proceedings which take place in Ireland, where Article 36 does not apply. It further helpfully clarifies that section 23 of the AA 2010 does not prevent an arbitral award being enforced as a debt in bankruptcy proceedings.

Case: Des Hennessy Building Contractors Ltd v O'Beirne [2015] IEHC 596 (Bailii)

This note was first published by Practical Law Arbitration.  Rerpoduced with permission of the publisher. 

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For further information please contact Davinia Brennan or Joe Kelly.

Date Published: 27 October 2015