Introduction
The Indian Arbitration & Conciliation Act, 1996 incorporates the principle of separability in Section 16, whereby an arbitration clause included in a contract is regarded as a distinct and independent agreement in and of itself. India has been making significant strides towards demonstrating its pro-arbitration stance, as evidenced by amendments made to the arbitration act, as well as a series of judicial decisions rendered by national courts. This article seeks to address a crucial and practical issue vis-à-vis the destiny of an arbitration clause that is part of an agreement that has been assigned by means of a Deed of Assignment. The question as to whether an arbitration agreement is to be treated separately from the underlying contract for the purpose of assignment has been posed to the Courts on numerous occasions. The present article analyses the decision of the Hon'ble High Court of Bombay in M/s. Siemens Factoring Pvt Ltd vs. Future Enterprises Pvt Ltd.1 clarifying the position on the assignment of arbitration clause/agreement in greater depth.
Factual Matrix
A Master Rental Agreement (hereinafter "MRA") dated 27.01.2020 was entered into between the Future Enterprises Private Limited (hereinafter "Respondent") and LIQ Residuals Private Limited (hereinafter "LIQ"), whereby the Respondent, in the role of renter, would request LIQ to rent equipment on their behalf, which LIQ would deliver to the Respondent. To this end, the Respondent executed rental schedules for distinct periods providing details of the equipment earmarked for rental and the corresponding rental payable to LIQ. The rental schedules were required to be signed by the authorized signatory of the Respondent. Furthermore, as per the terms of the MRA, the Respondent explicitly acknowledged that by forwarding rental schedules to LIQ for acceptance, it would be liable to pay the supplier for the equipment supplied.
Following the abovementioned events, LIQ informed the Respondent of the transfer of rental payments to Siemens Factoring Private Limited (hereinafter "Applicant"), a nonbanking financial company. The Respondent duly acknowledged the transfer of assignment. Thereafter, a sale of receivable agreements was executed between LIQ and the Applicant. Under these receivable agreements, LIQ was permitted to sell the receivables under the MRA and provide collateral securities to the Applicant.
Under these receivable agreements, LIQ was permitted to sell the receivables under the MRA and provide collateral securities to the Applicant. Accordingly, the Applicant was assigned the receivables, payable to them under the MRA that was executed with the Respondent.
Further, LIQ granted an irrevocable power of attorney to the Applicant, thereby authorizing the Applicant to exercise all the rights and remedies available under the MRA, including but not limited to, the recovery of outstanding dues from the Respondent and the enforcement of underlying securities. Additionally, the Applicant was empowered to exercise its rights as the owner of the equipment, including the sale of equipment. A dispute arose between the Applicant and the Respondent, the Applicant issued a legal notice demanding payment of INR 4,88,06,155/- However, the Respondent allegedly failed to comply with the demand raised by the Applicant in the legal notice. Consequently, the Applicant invoked Section 11 of the Arbitration Act and approached the High Court, seeking the appointment of a sole arbitrator to resolve the dispute between the parties.
Issue before the Court
Whether an assignee, who was not a party to the original agreement between the assignor and the alleged defaulter, has the legal right to initiate arbitration proceedings under the Arbitration Act when the assignor had assigned its rights under the contract to the assignee.
Submissions of the Parties in brief
The applicant contended that the invocation of an arbitration clause by an assignee of rights under a contract is permissible. In support of this contention, the Applicant referred to and placed reliance upon the MRA executed between the Respondent and LIQ, wherein LIQ was defined to include its successors in business, assigns, and so on. The MRA specifically covered references in the agreement or document as novated, supplemented, or replaced from time to time. The Respondent, on the other hand, opposed the relief sought by the Applicant, contending that there is no valid arbitration agreement between the Applicant and the Respondent.
The Respondent asserted that since the Applicant has not signed the assignment letter containing the arbitration clause, the arbitration cannot be invoked by the Applicant under Section 7 of the Arbitration Act, which requires an agreement in writing between the parties to evidence the intention to refer disputes to arbitration. Hence, the notification of assignment in favour of the Applicant does not amount to a binding arbitration clause.
Findings of the Hon'ble High Court of Bombay:
The Hon'ble High Court held that the MRA executed between the Respondent and LIQ contained an arbitration clause, which was extended to cover LIQ's successors in business, assigns, and others. Additionally, the Applicant, through the assignment, had the authority to enforce all of LIQ's rights, discretions, and remedies with regard to the repayment of the lease rental.
The notification of assignment letter also contained an arbitration clause similar to the one in the MRA, and even though the Applicant did not sign the notification of assignment letter, it had stepped into the shoes of LIQ by virtue of assignment and was entitled to invoke arbitration. The court held that the existence of a valid arbitration agreement between the parties could be in the form of a separate agreement or a clause within the agreement itself. In summary, the High Court rejected the Respondent's contention that the Applicant, as an assignee, cannot invoke arbitration since the arbitration clause in the assignment document is not signed by the Applicant. Therefore, the lack of a signature by the Applicant on the assignment document does not preclude it from invoking arbitration.
The High Court also distinguished the present case from the Vishranti CHSL v. Tattva Mittal Corporation Private Limited2, case relied upon by the Respondent, as the facts and circumstances were different. Additionally, the High Court relied on a previous decision in the matter of DLF Power Limited v. Mangalore Refinery and Petrochemicals Limited3 to support its finding that an arbitration agreement can be assigned in cases where there is a specific provision for assignment of rights and liabilities, and where such assignment is accepted by the Respondent. In such cases, the intention of the parties towards implementing the rights, obligations, duties, and benefits of the original contract is clear.
In conclusion, the High Court allowed the application filed by the Applicant under Section 11 of the Arbitration Act, 1996 and appointed a sole arbitrator to adjudicate upon the dispute between the parties arising out of the lease agreement. The High Court observed that when parties have agreed to arbitrate their disputes and differences, the court should adopt a pro-arbitration approach and not frustrate the arbitration proceedings unless the same is absolutely necessary.
Analysis
As stated above the Hon'ble High Court of Bombay in its earlier pronouncement in the matter of DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors.4 ruled that the judgments interpreting Section 16 of the Arbitration Act hold no relevance in deciding the issue of assignment of an arbitration agreement on assignment of rights under a contract.
The Court clarified that pursuant to Section 16 of the Indian Arbitration & Conciliation Act, 1996, an arbitration clause integrated within a contract is regarded as a self-contained covenant that operates independently of the other provisions of the contract. It is further stipulated that the arbitral tribunal possesses the authority to adjudicate on its own jurisdiction, which encompasses the power to settle any objections pertaining to the existence or legality of the arbitration agreement.
To this end, the arbitration clause that is subsumed within the contract is treated as a separate and autonomous undertaking that is distinct from the remaining clauses contained therein and it does not ipso facto give room for an assumption that the scheme of Section 16 prohibits the assignment of arbitration clause/agreement.
The abovementioned position has also been adopted by the Hon'ble High Court of Delhi when faced with the similar issue in the matters of, inter alia, Bestech India Private Ltd. v. MGF Developments Ltd.5 and Kotak Mahindra Bank v. S. Nagabhushan & Ors.6
Thus, the Hon'ble High Court of Bombay in the instant case of M/s. Siemens Factoring (supra) has gone a step ahead in clarifying the existing legal position and upheld the validity of assignment of arbitration clause/agreement on assignment of the underlying or main contract by ruling even that the lack of a signature by the Applicant on the assignment document does not preclude it from invoking arbitration in light of the intention of the parties towards implementing the rights, obligations, duties, and benefits of the original contract.
The approach of the Bombay High Court is a welcome step in creating an arbitration friendly regime and furthers the bedrock principles of party autonomy and consent of parties to arbitrate. It would be interesting to see the approach of the Constitutional Bench of the Hon'ble Supreme Court examining the threejudge bench reference in Cox and Kings v. SAP India (P) Ltd.7
It can have a bearing on the issue of assignability of arbitration clauses as the Apex Court is besieged with the question whether the "group companies doctrine" can be relied upon for interpreting implied consent or intent to arbitrate between the parties.
The decision of the Constitutional Bench would be another milestone if it embraces the pro-arbitration and consent-driven minority view of the three-judge bench as it clarifies that joining a third party to arbitration based on the convergence of a group of companies as a "single economic unit" is no longer the norm under the group of companies' doctrine. Instead, the standard is premised primarily on implied consent drawn from the acts and conduct of an entity within the group of companies.
Footnotes
1 Commercial Arbitration Application No. 174 of 2022, (01.03.2023 - BOMHC) : MANU/MH/0760/2023
2 2020 SCC OnLine Bom 7618
3 2016 SCC OnLine Bom 5069
4 Ibid
5 (2009) 161 DLT 282
6 2018 SCC OnLine Del 6832
7 2022 SCC OnLine SC 570
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