Not so fast: Disputed debts and arbitration clauses as a shield against insolvency proceedings

Desmond Odhiambo, Partner in the Dispute Resolution practice at Cliffe Dekker Hofmeyr (CDH) Kenya, writes about why businesses are embedding mediation and arbitration clauses in their contracts.

Can a contractor pursue insolvency proceedings where the debt is disputed and an arbitration clause exists? This was the central issue before the Court of Appeal in Kwale International Sugar Company Limited v Epco Builders Limited & 2 Others [2025] KECA 227 (KLR), a case with implications for contractors, employers and legal practitioners navigating construction disputes.

In 2012, Kwale Sugar contracted Epco Builders (Epco) to construct a sugar factory under a KES 2.22 billion Engineering, Procurement and Construction (EPC) agreement. A dispute arose over alleged non-payment of KES 712 million. Epco issued a statutory demand and subsequently filed an insolvency petition seeking liquidation of Kwale Sugar. Kwale Sugar applied to set aside the demand and strike out the petition, arguing that the debt was genuinely disputed; the parties were bound by an arbitration clause; and the demand was defective under the Insolvency Regulations.

The High Court dismissed the application. On appeal, the Court of Appeal upheld the outcome but clarified important legal principles at the intersection of insolvency law and construction contracts.

Kwale Sugar had cited personal bankruptcy provisions instead of the corporate insolvency rules. The court found this error non-fatal, confirming that courts will prioritise substance over form in the absence of prejudice.

The Court of Appeal criticised the High Court’s remarks that the debt was undisputed, noting that such conclusions should be reserved for full hearings or arbitration. Courts should be cautious not to prejudge contested issues during interlocutory proceedings.

While acknowledging the existence of the arbitration clause, the court held that it does not oust the jurisdiction of insolvency courts. Insolvency proceedings are collective in nature and serve a public interest function that may override private dispute resolution arrangements.

The court held that defects in the statutory demand, such as form irregularities, will not invalidate it unless actual prejudice is demonstrated. In this case, no prejudice was shown.

For contractors, certificates are persuasive but not talismanic. Their legal effect depends on the contract’s terms, and they will not cure fundamental issues of non-compliance, missing support or unresolved set-offs. Insolvency should be reserved for clear cases of non-payment, not deployed as leverage in a live valuation dispute.

The message to debtors is equally clear: a technical objection is strongest when coupled with a coherent evidentiary record showing why the sum claimed is not presently due under the contract.

The consequences are practical. For employers, an arbitration clause is valuable only if it is invoked promptly and carried on the back of documentary substance, such as engineer or architect determinations, measurement records, variation orders, defect notices, correspondence evidencing reconciliation and a credible set-off schedule. Paying the undisputed slice protects credibility and undercuts any narrative of inability to pay, while reserving genuine disputes for the agreed dispute-resolution forum. For more on what constitutes a genuine dispute, see our previous alert here.

For project owners, contractors and funders, the case reinforces the value of disciplined paperwork: interim payment certificates (IPC) packs tied to contract mechanisms, site diaries, measurement sheets, variation order (VO) approvals, notices and reconciliations. In a payment standoff, those records, rather than the insolvency court, will decide who ultimately pays whom, and how much.

Debt disputes must be resolved on merits, not prematurely at interlocutory stages. Arbitration does not override insolvency jurisdiction, especially where the debt is not genuinely contested. Genuine disputes on substantial grounds must be resolved through appropriate forums like arbitration or full trial. Form defects in statutory demands will not invalidate proceedings unless actual harm is proven.

The Kwale Sugar decision reinforces the principle that insolvency proceedings must be reserved for clear cases of inability to pay and cannot be used as leverage in unsettled construction disputes.

It also clarifies the boundaries between private dispute resolution mechanisms and public insolvency processes. Where debts are genuinely disputed on substantial grounds, the appropriate forum remains the agreed dispute resolution mechanisms, not the insolvency court.

The writer is a Partner in the Dispute Resolution practice at Cliffe Dekker Hofmeyr (CDH) Keny