Arbitration And Litigation And Bankruptcy, Oh My!

What happens when a party who has agreed to arbitrate its dispute goes bankrupt? If the arbitration process compromises the efficiency of the receivership process, the Court may decide to deal with the dispute and the entire bankrupt estate through one court action. As each arbitration agreement is different, the Court must consider each dispute's unique facts and circumstances to determine if arbitration would help or hinder the bankruptcy proceedings.

Over the past number of years, economic conditions have resulted in many insolvencies. Consequently, companies are spending more time and resources on risk management in their contracts. One risk management strategy is requiring mandatory arbitration in the event of disputes. These clauses state that if a dispute arises, the parties will resolve it using an agreed-upon arbitration mechanism rather than conventional litigation. Bankruptcy proceedings are normally handled through a single judicial proceeding. So,