Contractor employing subcontractor to carry out works – Subcontract containing arbitration clause – Contractor terminating contract – Subcontractor claiming damages for breach of contract – Court ordering bankruptcy order against subcontractor and appointing trustee in bankruptcy – Trustee obtaining legal aid and issuing proceedings in High Court – Whether sufficient reason not to refer matter to arbitration – High Court ordering stay of proceedings and referring matter to arbitration – Court of Appeal upholding decision
The defendant was contracted by Breckland District Council to demolish and rebuild a number of houses and entered into a subcontract for groundworks. The subcontract required all disputes to be referred to arbitration. After five months the defendant entered into a dispute with the subcontractor in respect of delay which the subcontractor claimed was caused by the defendant. The defendant then terminated the contract. The subcontractor claimed £70,000, which included payment for work done, the value of materials left on site and a sum for loss of profit. A creditor obtained a bankruptcy order against the subcontractor and a trustee in bankruptcy was appointed. The trustee was granted legal aid and issued a writ against the defendant in the High Court.
The defendant applied for the proceedings to be stayed pursuant to section 4 of the Arbitration Act 1950. The trustee claimed that if the subcontract had not been terminated it was unlikely that the subcontractor would have become bankrupt and because he was unable to fund arbitration proceedings, but had been granted legal aid for High Court proceedings, the effect of granting the stay would be to stifle the trustee’s claim. The judge granted the stay and held that it had not been shown that there was a reasonable probability that the defendant’s breach of contract had caused the trustee’s inability to arbitrate and accordingly there was no sufficient reason why the matter should not be referred to arbitration. The trustee appealed on the ground that the judge had applied the wrong standard of proof. He contended that the standard of proof was whether the evidence established a triable issue that the defendant’s breach of contract had caused his inability to arbitrate. The appeal was dismissed.
Held The appeal was dismissed.
1. The authorities did not demonstrate a consistent approach. The appropriate standard of proof was not the civil standard of proof , because that would have involved a mini trial to decide whether the plaintiff was probably going to succeed, and the test as whether there was a serious issue to be tried was too low a standard of proof. The correct test was whether the plaintiff had shown a reasonable prospect of success: see per Sir Gordon Willmer in Fakes v Taylor Woodrow Construction Ltd [1973] 1 QB 436.
2. It had not been shown that the subcontractor would have been made bankrupt even if the subcontract had been completed and the subcontractor had been paid the agreed price. Therefore the trustee had no reasonable prospect of success in establishing that his inability to arbitrate had been caused by the alleged breaches of contract and accordingly there was no sufficient reason why the matter should not be referred to arbitration.
3. The trustee not the plaintiff had issued the proceedings in the High Court and obtained legal aid. The matter could be referred to arbitration and funded by the creditors who would be the recipients of damages. There was no reason why, in all the circumstances, the trustee should not be held to the bargain made by the subcontractor with the result that there was to be a stay and reference of the matter to arbitration.
Sinclair Cramsie (instructed by Nicholsons, of Lowestoft) appeared for the appellant; Chris Smyth (instructed by Mears Hobbs & Durrant, of Lowestoft) appeared for the respondent.
