Section 16 of the Indian Arbitration & Conciliation Act, 1996 ('the Act') provides for the principle of separability, as per which an arbitration clause enshrined in a contract is considered a separate agreement in itself. India is gearing up to showcase its arbitration-friendly character which is evident from amendments brought in the arbitration act as well as from the catena of judgments propounded by the national courts. This article would be focusing on a very important and practical issue which lurches in the mind of every party to arbitration and thus requires clarity i.e. the fate of an arbitration clause enshrined in an agreement that has been assigned via a Deed of Assignment.
Practice of assignment of contract is very common. It is when there is a transfer of rights & obligations (with the consent of counterparty to the contract) from a party to a contract to another entity which is not a party to that contract.1 Businesses usually assign their rights under a contract to another party vide a registered Deed of Assignment. Rights under a contract can be assigned unless the said contract is personal in nature or the said rights are unassignable under law or under an agreement between the parties. A benefit under a contract can always be assigned.2 It is always open for the parties to enter into an agreement prohibiting assignment.
However, issue arises when such a contract has an arbitration clause. What is the fate of such an arbitration clause when the underlying contract itself is assigned to a third party? This leads to a usual jurisdictional objection if an arbitration is invoked, as the third party was originally not a party to the arbitration agreement. The party challenging the jurisdiction of the Tribunal can argue that as arbitration agreement is in itself a separate agreement, separable from the main agreement that has been assigned, the third party was not the one with which the arbitration agreement was entered into i.e. there was no agreement to resolve any disputes with the third party through arbitration.
The Bombay High Court in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors.3, gave a finding that in case of assignment of a contract, the arbitration agreement enshrined within the agreement is also assigned. The relevant excerpt of the judgment is reproduced herein below -
"77. In my view, there is no substance in the submission of the learned senior counsel for the respondent that even if the two contracts were assigned in favour of the petitioner, the arbitration agreement forming part of such contracts was not assigned. The judgments relied upon by the learned senior counsel for the respondent interpreting section 16 of the Arbitration & Conciliation Act, 1996 are not relevant to decide whether arbitration agreement can be assigned or not. Under section 16 of the Arbitration & Conciliation Act, 1996, it is provided that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It is provided that the arbitral tribunal has power to rule on its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement and for that purpose, the arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. Merely because a party has appointed an arbitrator or has participated in the appointment of an arbitrator, he is not precluded from raising a plea of jurisdiction in the arbitral proceedings. The scheme of section 16 permitting a party to raise such an objection of jurisdiction though he had participated in the appointment of an arbitrator in an arbitration, without intervention of the Court is totally different and is limited only for that purpose. In my view, the judgments interpreting section 16 of the Arbitration Act would not apply in case of an assignment of a contract including arbitration agreement.
...
80. In view of the assignment of the said two contracts in favour of the petitioner, the arbitration agreement contained therein also stood assigned in favour of the petitioner. The petitioner had thus locus standi and had rightly invoked the said arbitration agreement. The impugned order holding that arbitration agreement was not assigned in favour of the petitioner shows patent illegality."
Calcutta High Court discussed in great detail the issue of assignment of arbitration agreement in Hindustan Steel Works Construction Ltd. v. Bharat Spun Pipe Co.4, has held, while relying on Russel on Arbitration, that the arbitration clause was not personal in nature thus there was nothing to prevent the assignment of such a contract as the restriction only applies if the contract is in the nature of a personal covenant. The relevant excerpt is reproduced herein below-
"5. Therefore, from the observations of the courts both of England and in this country, it appears to me, that the correct position in law seems to be that whether the contract is assignable or not depends upon the nature of the contract. A contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assignability would depend upon the terms and the language used in a contract. Fourthly, and this is important for our purpose, existence of an arbitration clause per se does make neither the contract non-assignable or assignable. But in a particular case the arbitration clause may be so worded as to afford an indication about the contract being personal or not. But apart from that the existence of arbitration clause does not, in my opinion, affect either the rights or the assignability of the contract if it is otherwise assignable. This is the position as a result of the principles of the different judicial authorities before the Appeal Court in England and the Supreme Court in India. This again, in my opinion is corroborated by Section 34 of the Arbitration Act, 1940 which is in pari materia with Section 4 of the Arbitration Act, 1950 of England so far as relevant from this aspect of the matter and which re-enacts part of Section 4 of the Act of 1889 upon which Master of the Rolls Lord Creene M.R. relied in the case of (1946) 2 All ER 54 (supra).
6. On this aspect it may be appropriate to refer to the statement of law as stated by the learned editor of Russel on Arbitration, 18th Edition at page 143.
"3. Person claiming through or under a party.
Assignee of contract.
An arbitration clause will bind a valid assignee of a contract containing it; and the presence of an arbitration clause will not normally cause a court to hold that a contract is not assignable."
7. Looking at the contract containing arbitration clause in this case it appears to me that the contract was not personal. It was for performance and for supply of some materials. It was an agreement between the buyer and seller. There is nothing in the facts of the case or on the terms of the contract or in the arbitration clause, which make it necessary to hold that it was upon personal qualification or quality of Shrigopal Modi that the Hindustan Steel Works Construction Ltd. was induced to enter into this transaction. Furthermore, the arbitration clause in its nature also does not in my opinion contain any special clause which indicated any personal nature of the covenant. In the aforesaid view of the matter this is not a contract which by the nature of the contract or by the terms of the contract could not be said to be one which is not assignable and the existence of the arbitration clause itself or its term also do not indicate any contrary intention. There was, therefore, nothing in law which prevented effectual assignment of this contract."
At this juncture, the discussion in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc.5, as to whether even non signatories to the Arbitration Agreement can be referred to Arbitration is of prime importance. The Court while analyzing the circumstances wherein a third party (non-signatory) to an arbitration agreement can referred to arbitration cite assignment of underlying contract containing the arbitration agreement as one of such circumstance. The relevant portion is reproduced herein for better understanding -
"70. Normally, arbitration takes place between the persons who have, from the outset, been parties to both the arbitration agreement as well as the substantive contract underlining (sic underlying) that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy onus lies on that party to show that, in fact and in law, it is claiming "through" or "under" the signatory party as contemplated under Section 45 of the 1996 Act. Just to deal with such situations illustratively, reference can be made to the following examples in Law and Practice of Commercial Arbitration in England (2nd Edn.) by Sir Michael J. Mustill:
"1. The claimant was in reality always a party to the contract, although not named in it.
2. The claimant has succeeded by operation of law to the rights of the named party.
3. The claimant has become a party to the contract in substitution for the named party by virtue of a statutory or consensual novation.
4. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence."
Delhi High Court followed the finding given in its earlier judgment of Bestech India Private Ltd. v. MGF Developments Ltd.[6], wherein it held that if the contract is assignable then the arbitration agreement enshrined in the contract will follow the assignment, in its recent judgment in Kotak Mahindra Bank v. S. Nagabhushan & Ors.7 while deciding an application under Section 34 of the Act. The Court was faced with the issue of arbitration agreement enshrined in a loan agreement that was assigned to a third party and held that post the assignment of the loan agreement the rights under the arbitration agreement being in the nature of remedy for enforcement of rights under the agreement are assignable as well.
In cases of the contract being assigned after invocation of arbitration, the assignee can substitute itself in the pending proceedings in the place of the assignor based on a valid Deed of Assignment. The Bombay High Court while deciding on an enforcement proceeding in Agri Marketing Co. SARL v. Imperial Exports Ltd.8/sup> held that in such a case, the assignee can take over the assignor's proceedings without there being a need to start afresh.
Thus, in light of the above cited court findings, it is clear that an arbitration agreement can be assigned and a non-signatory to an arbitration agreement can be referred to arbitration if the agreement which contained the arbitration agreement was assigned.
Footnotes
1 Refer Kapilaben and Ors. v. Ashok Kumar Jayantilal Sheth through POA Gopalbhai Madhusudan Patel and Ors. 2019 SCC OnLine SC 1512, wherein the Court has categorically held that a party to a contract cannot assign its obligations/liabilities without the consent of the other party.
2 Khardah Company Ltd v. Raymon & Co (India) Private Ltd., AIR 1962 SC 1810
3 2016 SCC Online Bom 5069
4 1974 SCC OnLine Cal 59
5 (2013) 1 SCC 641
6 (2009) 161 DLT 282
7 2018 SCC OnLine Del 6832
8 2001 SCC OnLine Bom 841
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
