Assignment of Arbitration Agreements and the Importance of Intention

In M/s. Siemens Factoring Pvt. Ltd. v. Future Enterprises Pvt. Ltd.[1] the issue of assignment of arbitration agreements arose. Although this is not a new issue, the Bombay High Court’s conclusions reveal that the intent of the parties as derived from their conduct and the phraseology of the documents and the facts and circumstances in question is crucial.

Brief Facts
Disputes arose between Siemens Factoring Pvt. Ltd. (“the Assignee”), a non-banking financial company, and Future Enterprises Pvt. Ltd. (“the Respondent”) in relation to a Master Rental Agreement (“MRA”) executed between the Respondent and LIQ Residuals Private Limited (“LIQ”). The MRA, which contained an arbitration clause, was assigned by LIQ to the Assignee. The assignment was communicated to the Respondent by notification of assignment letters (“assignment letter”). The twist in the case was that the assignment letter contained an arbitration agreement not dissimilar to the one in the MRA. Upon an alleged default by the Respondent in respect of payments to be made under the MRA, the Assignee filed an application under Section 11 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) for appointment of an Arbitrator. The Respondent opposed the Application on the ground that there was no valid arbitration agreement between the Assignee and the Respondent as per Section 7 of the A&C Act. The Respondent contended that since the arbitration agreement in the assignment letter was not signed by the Assignee, there was no arbitration agreement as between the Assignee and the Respondent. The Assignee contended that pursuant to the assignment, it had stepped into the shoes of LIQ in the MRA, including the arbitration agreement contained therein. The issue before the Court was whether the assignment of LIQ’s rights to the Assignee included assignment of the arbitration agreement contained in the MRA.

Key Findings of the Court
The Court delved into the facts of the case and the specific clauses of the documents to examine the “true intent of the documents”.

The MRA defined ‘LIQ’ to mean and include its successors in business and permitted assigns. Under the MRA, subject to an acknowledgement by the Respondent, LIQ was permitted to assign its rights to any Bank or financial institution which provided it financial assistance.

The assignment letter addressed to the Respondent referred to the MRA, the assigned rental payments, specified the Assignee, and stated that the Assignee had stepped into the shoes of LIQ under the MRA. The Respondent signed the assignment letter acknowledging the aforesaid.

In light of the above, the Court held as follows:

• It was not a disputed position that the arbitration agreement in the assignment letter was not signed by the Assignee.
• However, the Respondent did not dispute the assignment in favour of the Assignee and accepted that the assignment has been acted upon by making payments to the Assignee.
• An arbitration agreement is assignable just as any other contract.
• Through the assignment letter, the Assignee had stepped into the shoes of LIQ for receipt of the rental payments and naturally for all rights accruing in relation thereto, including the right to enforce the said obligations. Accordingly, by such assignment, the Assignee was entitled to enforce all rights and remedies of LIQ, as assigned to it, including the right to invoke arbitration.

Accordingly, the Court concluded that it was the intent of the parties for the assignment of rights to include assignment of the arbitration agreement. The Court therefore proceeded to appoint an Arbitrator to adjudicate the disputes.

Analysis
Section 7 of the A&C Act requires an arbitration agreement to be in writing and to be such that the intention of the parties to refer their disputes to arbitration is evident. Although Section 7 does not deal with whether an arbitration agreement can be assigned, considering that the arbitration agreement is a contractual mechanism and considering that the arbitration agreement is enforceable as against the legal representatives of the deceased party (Section 40) and as against receivers of an insolvent party (Section 41), it is not difficult to draw the conclusion that an arbitration agreement can be assigned. Even the language in various provisions such as Section 8 of the A&C Act, which permits parties or ‘any person claiming through or under him’ to refer a dispute to arbitration, buttresses this point.

The Court’s emphasis on establishing intention of the parties in light of the facts of the case is nonetheless significant. The fact that the MRA defined parties to include their assigns, that the MRA permitted assignment of all of the rights and obligations in favour of third parties, and that the Respondent acknowledged and acted upon the assignment letter, clearly indicated an intention to be bound by the assignment, including the obligation to refer disputes with the Assignee to arbitration.

When juxtaposed against cases where the assignment created no privity of contract between the original party and the assignee, it becomes clear that the intent of parties is critical in determining whether the arbitration agreement has been assigned. Similarly, where specific rights are assigned, the courts may interpret this to exclude the assignment of the arbitration agreement.

Concluding Thoughts
From the current view of the Court, it is clear that assignment of arbitration agreements can and will be viewed in the context of specific facts and interpretation of the contracts in question to establish mutual intention. It is important to carefully define the term ‘parties’ while drafting contracts. Contracts that define parties to include their legal successors and permitted assigns, when assigned, are likely to be assigned in toto, such that any arbitration agreement contained therein, will also stand assigned. Also, typically assignment clauses are included in most standard form contracts. The breadth of the language therein will determine the likelihood of assignment of the right to arbitrate. However, this by itself may or may not be sufficient. The actual assignment and the underlying intent can arguably exclude the assignment of the arbitration agreement.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ashna Contractor, Senior Associate – Email – ashnacontractor@elp-in.com
Harshvardhan Nankani, Senior Associate – Email – HarshvardhanNankani@elp-in.com

 References:
 [1] Pronounced on 01 March 2023 by the Bombay High Court in Commercial Arbitration Application No. 174 of 2022.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.