Between The Lines - April 2023 - Arbitration & Dispute Resolution

KEY HIGHLIGHTS

Bombay High Court: Arbitration clause can be invoked by assignee of rights under contract.
NCLT: Dissenting secured creditor cannot be treated higher than other creditors under Section 53 of the IBC just because they enjoy security interest.
Bombay High Court: "One-ness of interest"- the touch-stone for defendant to be transposed as plaintiff in case of part abandonment of suit claim.

I. Bombay High Court: Arbitration clause can be invoked by assignee of rights under contract.

The High Court of Bombay ("High Court"), by a judgment pronounced on March 1, 2023, in the matter of Siemens Factoring Private Limited v. Future Enterprises Private Limited [Commercial Arbitration Application No. 174 of 2022] has held that assignee, having stepped into the shoes of the assignor, can invoke arbitration clause in terms of the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

Facts

Future Enterprises Private Limited ("Respondent") is engaged in a variety of household, consumer and fashion products and operates retail stores throughout India. The Respondent had entered into a Master Rental Agreement dated January 27, 2020 ("MRA") with LIQ Residuals Private Limited ("LIQ") for renting equipment, whereby the Respondent, in the capacity of renter, would forward a request to LIQ for renting an equipment and LIQ would get the equipment delivered to the Respondent.

Further, the Respondent executed rental schedule for distinct periods on February 14, 2020, February 28, 2020 and March 4, 2020, comprising of details of the equipment to be rented out and rental payable by the Respondent to LIQ. Pertinently, the signed rental schedule provided that it must be signed by the authorized signatory of the Respondent. Further, by virtue of entering into the MRA, the Respondent acknowledged that by forwarding a rental schedule for acceptance by LIQ, it shall pay the supplier towards the equipment supplied by it.

Subsequently, by virtue of distinct notification of assignments contained in letters dated February 17, 2020, February 20, 2020 and March 4, 2020, LIQ informed the Respondent, about the aforementioned assignment of rental payments in favour of Siemens Factoring Private Limited ("Applicant"), a non-banking financial company, and the assignment was acknowledged by the Respondent.

As per the Applicant, pursuant to the aforementioned assignment, a sale of receivable agreements was executed between the Applicant and LIQ on February 12, 2020, February 27, 2020 and February 29, 2020. In terms of the afore-mentioned receivable agreements, LIQ could sell the receivables under the MRA and provide collateral securities to the Applicant. Consequently, the Applicant was assigned the receivables by LIQ, payable to them under the MRA executed with the Respondent.

Further, LIQ also executed irrevocable power of attorney in favour of the Applicant. Hence, according to the Applicant, it was authorized to exercise all its rights and remedies under the MRA, including the recovery of dues from the Respondent and for enforcement of underlying securities and exercise their rights as the owner of the equipment including sale of the equipment.

Thereafter, when dispute arose between the Applicant and the Respondent, the Applicant issued a legal notice dated June 21, 2022 upon the Respondent, for payment of a sum of INR 4,88,06,155/- (Rupees Four Crores Eighty-Eight Lakhs Six Thousand One Hundred and Fifty-Five Only) as on June 20, 2022 along with applicable interest thereon. However, according to the Applicant, the Respondent wilfully neglected and failed to comply with the demands raised by the Applicant in the aforementioned legal notice. In view thereof, the Applicant approached the High Court under Section 11 (Appointment of arbitrators) of the Arbitration Act, seeking appointment of a sole arbitrator to adjudicate the dispute between the Applicant and the Respondent.

Issue

Whether the assignee of rights under contract is legally entitled to invoke arbitration under the Arbitration Act, considering that the assignee was not a party to the original agreement between the assignor and the alleged defaulter.

Arguments

Contentions raised by the Applicant:

On the issue as to whether arbitration clause can be invoked by assignee of rights under contract, the Applicant referred to and relied upon the MRA executed between the Respondent and LIQ, wherein LIQ was defined to mean and include its successors in business, assigns and so on. Further, the MRA specifically covered reference in agreement or document as novated, supplemented or replaced from time to time. The Applicant further submitted that in terms of the MRA, the equipment financed under the MRA were to remain the property of LIQ and/or its assigns. Further, the Applicant also drew the attention of the High Court to Clause 8 of the MRA titled 'Assignment and Sub Letting' and Clause 27 of the MRA titled 'Assignment and Agency'.

Further, it was submitted by the Applicant that, basis perusal of the notification of assignment letter, even though not signed by the Applicant, it is clear that the Applicant has stepped into the shoes of LIQ, thereby leading to assignment of all liabilities and entitlements in terms of the MRA and also covers the right to invoke arbitration.

Contentions raised by the Respondent:

The Respondent opposed the relief sought by the Applicant on the ground that there is no valid arbitration agreement between the Applicant and the Respondent, in the absence of which, the Applicant is not entitled to invoke arbitration under the Arbitration Act. Further, the Respondent submitted that it cannot be assumed that the Applicant, which is an assignee of LIQ, has accorded its consent to the arbitration agreement. It was further submitted that since the Applicant has not signed the assignment letter containing an arbitration clause, the arbitration cannot be invoked by the Applicant, considering that Section 7 (Arbitration agreement) of the Arbitration Act necessitates an agreement in writing between the parties, from which, the intention to refer the disputes to arbitration must be evident. In view of the aforesaid contention, the notification of assignment in favour of Applicant does not amount to a binding arbitration clause. In other words, the Respondent's submission is that in the absence of an existing arbitration agreement between the Applicant and the Respondent, the Applicant could not have invoked arbitration, and hence, the relief of appointment of sole arbitrator under Section 11 of the Arbitration Act cannot be granted.

Observations of the High Court

The High Court examined the notification of assignment letter and inter alia observed that the notification of assignment also consists of an arbitration clause, similar to the arbitration clause as stipulated in the MRA, except that the arbitration clause provided in the notification of assignment letter contemplates appointment of sole arbitrator by the Applicant. The High Court further observed that notwithstanding the contention raised by the Respondent that the notification of assignment letter which is not signed by the Applicant does not amount to a binding arbitration agreement in terms of Section 7 of the Arbitration Act; however, basis perusal of the MRA, it is clear that LIQ shall, on one hand, mean and include its successors in business, assigns and so on and the Respondent on the other hand. Hence, the arrangement between the parties would extend to their executors, administrators, substitutes, successors and permitted assigns. Hence, upon perusal of the clauses of MRA and the notification of assignment which was duly communicated to the Respondent and acknowledged by it, the High Court observed that the Applicant has stepped into the shoes of LIQ and stands substituted in its place. Further, by virtue of assignment, the Applicant is entitled to enforce all rights, discretions and remedies of the LIQ, as assigned to it, in respect of repayment of lease rental.

Further, on the issue as to whether the Applicant can invoke the arbitration when the arbitration clause contained in the notification of assignment is not signed by the Applicant, the High Court observed that the Applicant, by virtue of being an assignee, has stepped in the shoes of LIQ under the MRA, and is therefore entitled to invoke arbitration. Further, on the aspect of existence of a valid arbitration agreement between the parties, the High Court observed that an arbitration agreement can be a separate agreement between the parties agreeing that the disputes and difference arising between themselves to be referred for arbitration or an arbitration agreement may be in form of a clause contained in the agreement itself.

Therefore, the High Court dismissed the contention of the Respondent that the Applicant is not entitled to invoke arbitration because the arbitration clause comprised in an assignment document does not bind the Applicant, especially when the Respondent does not dispute the assignment of rights in favour of the Applicant. Hence, considering that the rights are specifically assigned in favour of the Applicant, the arbitration clause permitting the parties to refer the disputes for arbitration, can be invoked by the Applicant. Further, the High Court observed that merely because the notification of assignment is not signed by the Applicant, cannot be a bar against the Applicant from invoking arbitration.

Further, the High Court observed that the case of Vishranti CHSL v. Tattva Mittal Corporation Private Limited [ARBAP No. 3311 of 2020], which was relied upon by the Respondent to support its contention that it cannot be assumed that the Applicant had consented to the arbitration agreement, is not applicable to the facts and circumstances of the present case. Furthermore, the High Court analyzed an earlier decision of the High Court, in the matter of DLF Power Limited v. Mangalore Refinery and Petrochemicals Limited [2016 SCC OnLine Bom 5069] and arrived at the conclusion that an arbitration agreement can be assigned and particularly, in those cases where there is a specific provision for assignment of rights and liabilities and such assignment was duly accepted by the Respondent, the intention of the parties towards implementation of the rights, obligations, duties and benefits of the original contract is clearly evident.

The High Court observed that in the clauses of the MRA, it was permissible for LIQ to assign its rights under the MRA, in favour of any bank or financial institution, and the Respondent would acknowledge the assignee as the new owner of the equipment. Further, the High Court reiterated its observation that whether the notification of assignment letter was signed or not cannot be a determinative factor to decide whether the Applicant can invoke arbitration. Further, the High Court observed that the arbitration clause contained in the letter of assignment clearly stipulates that the Applicant has stepped into the shoes of LIQ and is therefore entitled to exercise and enforce all rights, discretions and remedies of the LIQ as assigned to them including the rights in respect of the payment of lease rental. Further, the High Court also observed that the letter of assignment was forwarded by LIQ and acknowledged by the Respondent, which amounts to acceptance that the Applicant has now stepped into the shoes of LIQ.

In view of the aforementioned facts and circumstances, the High Court arrived at the conclusion that from the intention of the parties, it can be clearly inferred that pursuant to assignment of rights and liabilities by LIQ in favour of the Applicant, the right to invoke arbitration also stands assigned. Therefore, when dispute arose between the Applicant and the Respondent with respect to payment of lease rental, the Applicant was entitled to invoke arbitration. Therefore, the High Court rejected the contention of the Respondent that there is no arbitration agreement between the Applicant and the Respondent and observed that there was no need for a separate execution of arbitration agreement the Applicant and the Respondent, considering that all the rights including the right to invoke arbitration had already been assigned by LIQ in favour of the Applicant and the same was acknowledged by the Respondent.

Decision of the High Court

In view of the abovementioned observations, the High Court was pleased to appoint a sole arbitrator to adjudicate the disputes having arisen between the parties.

VA View:

By way of the present judgment, the High Court has clarified a pertinent question of law that the Respondent cannot oppose the appointment of arbitrator(s) by resorting to the defense that the assignee of rights under contract cannot invoke arbitration under the Arbitration Act, merely because the assignee was not a party to the original agreement between the assignor and the alleged defaulter.

This judgment may be considered an important precedent which will preclude any defaulting party under a contract from trying to wriggle out of its legal obligations/liabilities, by opposing the appointment of arbitrator(s) and commencement of arbitration proceedings, and therefore secure the ends of justice and equity.

Pertinently, this judgment also clarifies the legal position that once the legal rights under a contract, including the right to invoke arbitration, has been assigned in favour of the assignee and the same has been acknowledged by the other party to the contract, there is no legal requirement for execution of a separate arbitration agreement between the assignee and the such other party.

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India: Between The Lines - April 2023