Can an Arbitration Clause in a Partnership Agreement be used to avoid Employment Tribunal Claims?

In the case of Clyde & Co LLP v Van Winkelhof [2011] EWHC 668, the High Court has decided that an arbitration clause in a Members' Agreement was unenforceable where it forced arbitration before a departing partner’s complaints of discrimination and whistle blowing could be continued in the Employment Tribunal.

Partnership agreements for professional services firms often include provisions which force partners in dispute with their firm to seek to resolve the dispute by means of formal arbitration.  The benefit to the firm is that:

  • arbitration stops the dispute from being heard in a public forum, such as the High Court or an Employment Tribunal;
  • it is often cheaper to resolve a dispute through arbitration compared to the courts;
  • the firm can exercise some control over the dispute resolution process through the drafting of the arbitration clause; and
  • failure to arbitrate might cause the defaulting partner to be in breach of the partnership agreement, which can affect how much money they receive on leaving their firm. 

However, in the Clyde & Co case the arbitration clause could not be relied upon to prevent the partner from pursuing her statutory claims in the Employment Tribunal.

Background

Ms Van Winkelhof was a senior equity partner in the law firm Clyde & Co. The Firm’s Members’ Agreement contained a detailed dispute resolution procedure which started with the Management Board trying to resolve the dispute and, after other steps, concluded with formal arbitration to finally resolve the dispute. 

Ms Van Winkelhof was expelled from the Firm. She did not follow the Firm’s dispute resolution procedure and instead lodged complaints of sex discrimination and whistle-blowing in the Employment Tribunal.  In response, Clyde & Co sought an injunction to force Ms Van Winkelhof to comply with its dispute resolution procedures before she could continue the Tribunal proceedings. 

An individual can only contract out of their ability to pursue most statutory employment claims, such as discrimination, whistle blowing and unfair dismissal, where certain specific statutory requirements are met. If the statutory contracting out requirements are not met, the limitation placed on those claims will be void. In this case the Court had to consider whether the Firm’s dispute resolution procedure was void under the contracting out prohibitions in the Employment Rights Act 1996 (regarding the complaint of whistle blowing) and the Equality Act 2010 (regarding the discrimination claim).

Decision and its implications

The High Court decided that the Firm’s dispute resolution clause could not force a stay of the Employment Tribunal proceedings: it was void under the relevant statutory contracting out provisions because it stopped her from bringing or continuing any proceedings under the Employment Rights Act and also excluded or limited the provisions of the Equality Act.

The decision is another reminder for those dealing with partnership disputes that statutory employment rights can override the provisions set out in a written partnership agreement. Whilst arbitration and other Alternative Dispute Resolution provisions remain useful because they can be used to resolve contractual disputes and certain statutory claims (for example failure to comply with the Protection from Harassment Act 1997), many statutory claims such as discrimination, whistle blowing and equal pay can only be waived if the matter is settled through ACAS or under a carefully drafted compromise agreement. If the correct form of settlement is not used, it will not be binding and the departing partner could receive their settlement monies and still sue in the Employment Tribunal.

Employers often have stated policies that certain enhanced termination payments are conditional upon employees entering into a compromise agreement on terms acceptable to the employer. In some industries, there is an increasing trend for draft compromise agreements to be attached as an appendix to the employment contract so that both parties agree at the outset of the relationship that the employee will receive enhanced termination payments if when their employment ends they enter into the compromise agreement and waive all claims against their former employer. It seems unlikely that this will be a route many partnerships will want to pursue because partners have more limited rights than employees, but as more and more partners sue their former firms in the Employment Tribunal we may start to see this creeping into partnership agreements.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.