Forbearance Agreement Arbitration Issues.
1. Nature of Forbearance Agreements
A. Key Features
Temporary suspension of enforcement rights
Conditional upon debtor compliance
Often includes revised repayment terms
May incorporate or modify existing finance agreements
B. Legal Character
A binding contract supported by consideration (e.g., debtor undertakings)
Often linked to loan agreements, security documents, or restructuring arrangements
2. Arbitration Clauses in Forbearance Agreements
Arbitration provisions may:
Be new clauses in the forbearance agreement, or
Incorporate existing clauses from the underlying finance contract
Key Issue:
Whether disputes arising from forbearance are within the scope of arbitration.
3. Core Arbitration Issues
A. Validity and Separability of Arbitration Clauses
Arbitration clauses are treated as separate agreements from the main contract.
Case Law:
Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40
Established the doctrine of separability and presumption of one-stop arbitration.
Harbour Assurance Co (UK) Ltd v Kansa General International Insurance Co Ltd [1993] QB 701
Confirmed arbitration clause survives even if main contract is invalid.
B. Scope of Arbitration Clause
Disputes may include:
Breach of forbearance terms
Misrepresentation in negotiations
Enforcement of underlying debt
Case Law:
Premium Nafta Products Ltd v Fili Shipping Co Ltd (The Fiona Trust) [2007]
Broad interpretation of arbitration clauses to cover all disputes arising from the relationship.
C. Incorporation of Arbitration Clauses
Where a forbearance agreement refers to earlier contracts, the arbitration clause must be properly incorporated.
Case Law:
Aughton Ltd v M.F. Kent Services Ltd [1991] 57 BLR 1
Clear words are required to incorporate arbitration provisions.
D. Arbitrability of Disputes
Not all disputes are arbitrable.
Issues:
Insolvency-related claims
Fraud or illegality
Public policy concerns
Case Law:
Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855
Confirmed that many commercial disputes are arbitrable unless excluded by statute.
Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575
Courts may stay insolvency proceedings where arbitration clause exists.
E. Stay of Court Proceedings
If a party brings court action despite arbitration clause, courts may grant a stay.
Case Law:
Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334
Courts respect arbitration agreements and grant stays.
F. Good Faith and Negotiation Obligations
Forbearance agreements often involve:
Duties to negotiate
Good faith obligations
Case Law:
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)
Recognized implied duty of honesty in performance.
G. Enforcement of Arbitral Awards
Awards arising from forbearance disputes are enforceable under:
Arbitration Act 1996 (UK)
New York Convention 1958
Case Law:
Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs (Pakistan) [2010] UKSC 46
Courts examine validity of arbitration agreement at enforcement stage.
4. Common Disputes in Forbearance Arbitration
Breach of repayment conditions
Wrongful termination of forbearance period
Misrepresentation during restructuring negotiations
Disputes over security enforcement
Conflicts between original loan agreement and forbearance terms
Jurisdictional challenges to arbitration tribunal
5. Key Legal Principles
A. Party Autonomy
Courts respect parties’ agreement to arbitrate.
B. Kompetenz-Kompetenz
Arbitrators can rule on their own jurisdiction.
Case Law:
Fiona Trust (2007) – Reinforced tribunal competence.
C. Presumption of One-Stop Adjudication
All related disputes should be resolved in a single forum (arbitration).
D. Interaction with Insolvency Law
Arbitration clauses may conflict with insolvency proceedings
Courts balance creditor rights and collective insolvency processes
Case Law:
Salford Estates v Altomart (2014) – Stay granted despite winding-up petition.
6. Risk Allocation in Drafting
To avoid disputes, agreements should clearly address:
Scope of arbitration clause
Governing law
Relationship with prior agreements
Enforcement triggers
Good faith obligations
7. Key Case Law Summary
Fiona Trust v Privalov (2007) – Separability and broad interpretation
Harbour Assurance v Kansa (1993) – Survival of arbitration clause
Aughton v Kent (1991) – Incorporation requirements
Fulham FC v Richards (2011) – Arbitrability
Salford Estates v Altomart (2014) – Stay of insolvency proceedings
Channel Tunnel v Balfour Beatty (1993) – Stay of court proceedings
Yam Seng v ITC (2013) – Good faith obligations
Dallah v Pakistan (2010) – Enforcement scrutiny
8. Conclusion
Forbearance Agreement Arbitration Issues lie at the intersection of:
Contract law (restructuring agreements)
Arbitration law (jurisdiction and enforcement)
Insolvency law (creditor rights vs collective process)
The key judicial approach emphasizes:
Broad enforcement of arbitration clauses
Respect for party autonomy
Careful scrutiny of jurisdiction and validity
However, tensions arise where insolvency or public policy considerations limit arbitrability, making this a complex and evolving area of commercial law.
RELATED Blog
comments