[Nutan is an Advocate who practices before the High Court of Delhi and the Supreme Court of India.]
An arbitration agreement, a standalone contract, reflects parties’ mutual intent to resolve their disputes outside the traditional courts through arbitration. Under Section 16 of the Arbitration and Conciliation Act 1996 (A&C Act), it enjoys independent existence, separate from the underlying contract. Given this independent nature, a question which arises is, can an arbitration clause, when part of a contract, be automatically transferred upon assignment of that contract?
In commercial dealings, the ability of parties to transfer contractual rights and obligations to third parties is essential for flexibility in business operations. Section 37 of the Indian Contract Act 1872 recognizes this principle, permitting the assignment of contracts to third parties. However, the issue whether an arbitration agreement can be similarly assigned, given its distinct nature has been subject matter of considerable judicial debate in India.
The commercial contracts often include “successor and assigns” clauses which ensure that rights and obligations under contract bind not only the original parties but also their respective representatives, successors and assignees. Some contracts also contain specific assignment clauses outlining the procedure for transfer of rights and obligations, often with restrictions.
In one of the landmark cases on the issue of contractual assignment, Khardah Company Limited v. Rayomon & Co (India) Private Limited, the Supreme Court of India recognized distinction between assignment of “rights” and “obligations” under the contract. The court held, that as a general rule, rights are assignable unless a contract is personal in nature or such assignment is barred by operation of law or agreement between parties. In contrast, the obligations under contract cannot be assigned without the consent of the promisee, which results in substitution of liabilities and novation of contract.
A contentious issue which arises from this principle is whether parties’ mutual intent to arbitrate, usually embodied in an arbitration clause, constitutes a “right” that can be freely assigned or an “obligation” which requires fresh consent for transfer. The Indian courts have been divided on this matter. In this context, in a recent judgment delivered by Supreme Court of India in Lifeforce Cryobank Sciences Inc v. Cryoviva Biotech Private Limited (Lifeforce Cryobank case), the court implicitly recognized automatic assignment of arbitration agreement.
This post reflects on the legal intricacies surrounding assignment of arbitration agreement and argues that recent judgement in Lifeforce Cryobank case takes a step forward only to stumble backward, leaving the legal landscape uncertain.
Inconsistent Rulings on Assignability of Arbitration Agreements
In Geo Group Communications Inc v. IOL Broadband Limited, the Supreme Court of India upheld the validity of an assigned arbitration agreement. The court held that a successor-in-interest, such as a company resulting from a merger or amalgamation, is bound by all obligations and liabilities of its predecessor, including those arising from arbitration agreements. While this decision provides a strong support for assignability of arbitration agreement, multiple High Court have expressed divergent views on this issue.
For instance, in M/s Hindustan Steel Works Construction Limited v. M/s Bharat Spun Pipe Co., the High Court of Calcutta adopted a view that assignability of a contract depends on its nature, terms and the language employed. The court held that that contracts in the nature of personal covenant are not assignable. The court also clarified that the mere existence of arbitration clause per se does not render contract non-assignable unless a contrary indication exists.
In Delhi Iron and Steel Co. Limited v. UP Electricity Board and Government of NCT of Delhi v. Yasikan Enterprises Private Limited, the High Court of Delhi adopted a strict approach, holding that arbitration clauses, being personal in nature, cannot be automatically assigned without explicit consent. The court interpreted arbitration clause as an “obligation” which is not assignable as a general rule.
In contrast, the High Court of Bombay in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited (DLF Power case) adopted a flexible approach. The court recognized that mutual consent to arbitrate can be implied from subsequent conduct of the parties, even without specific consent. The court held when parties already acted upon the assignment, no separate/ fresh consent was necessary for assignment of arbitration agreement. This view has been subsequently followed by the High Court of Delhi High Rajesh Gupta v. Mohit Lata Sunda and Others, C&S Electric Limited v. Brahmaputra Crackers and Polymers Limited and Suresh Kumar Kakkar and Others v. Ansal Properties and Infrastructure Limited and Others.
Later, in Vishranti CHSL v. Tatta Mittal Corporation Limited, the High Court of Bombay distinguished its earlier judgment in DLF Power case and held that arbitration agreement may be assigned only if it is "carried forward" by specific reference in the assignment agreement. The court concluded that the assignee cannot be simply "assumed" to have consented to the arbitral agreement upon assignment of principal contract.
As evident, the judicial landscape regarding assignability of arbitration agreements remains complex and unclear. While some courts have adopted more lenient approach, favoring the automatic transfer of arbitration agreement along with the principal contract, others have insisted on specific consent for such assignment. Given these conflicting judicial views, the rights of an assignee to invoke or defend arbitration remains uncertain.
Supreme Court’s Recent Decision in Lifeforce Cryobank Case
Cyrobank Intenrational Inc. (Cyrobank) had entered into a license agreement and a share subscription agreement with the Cryoviva Biotech Private Limited (Cryoviva). These agreements provided for resolution of disputes through arbitration subject to jurisdiction of courts in Delhi.
During subsistence of these agreements, Cyrobank transferred all its assets, including intellectual property rights and underlying contracts to Lifeforce Cryobank Science Inc. (Lifeforce) With this, Lifeforce stepped into shoes of Cyrobank in relation to all subsisting contracts for use of its assets. When a dispute arose between Lifeforce and Cryoviva, Lifeforce (being an assignee) sought to invoke arbitration clause in the original contracts.
While deciding Lifeforce’s application for appointment of an arbitrator, the Supreme Court of India expressly acknowledged that “The existence of an arbitration agreement is not an issue. The issue is that it is not between the petitioner and the respondent company but between Cryobank USA and the respondents.”
Despite this observation, without any detailed findings on maintainability of such application filed by Lifeforce (assignee), Supreme court referred the dispute to arbitration while holding that:
“Be that as it may, since at the stage of consideration of a prayer under Section 11(6) of the 1996 Act the Court has to confine itself to the examination of the existence of an arbitration agreement (vide sub-section (6-A) of Section 11), it would not be appropriate for us to delve deep into the issue as it could well be considered by the arbitrator on the basis of evidence led by the parties. More so, when existence of arbitration agreement in the license agreement and share subscription agreement is not in dispute.”
Analysis
The Supreme Court’s ruling in Lifeforce Cyrobank case implicitly recognized the right of successors-in-interest (assignee) to invoke arbitration clauses, it also raised a new question about the scope of referral court’s jurisdiction vis-à-vis assignment.
The rights of assignees
While the Supreme Court did not explicitly rule in favour automatic transfer of arbitration agreements, the court’s decision suggests that assignees may initiate arbitration proceedings even when they were not original parties to the agreements. However, this right is not absolute. The opposing party may challenge the jurisdiction of arbitral tribunal at a later stage, arguing that the arbitration agreement does not extend to a successor-in-interest.
Determination of assignability by referral court
This judgment raises yet another concern by referring the determination of the parties to the arbitral tribunal. While the courts in Indian generally limit the scope of inquiry under Section 11 of the A&C Act to determine “existence of arbitration agreement”. It is intriguing whether this would not naturally extend to determination of existence of arbitration agreement “between the contesting parties”.
In multiple cases, the Indian courts have upheld the referral court’s jurisdiction to examine existence of arbitration agreement between the specific parties to the dispute. For instance, in the case of In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, the Supreme Court held that the referral court should scrutinize the “dealing between parties” for ascertaining existence of arbitration agreement. Similarly, in NCC Limited v. Indian Oil Corporation Limited, the High Court of Delhi also held that a court under Section 11 of A&C Act is required to examine whether or not an arbitration agreement exists “between the parties”. Without ruling on existence of arbitration agreement between the specific contesting parties, the appointment of arbitrator to decide any disputes between them would be a futile exercise.
This position may be different for multi-party disputes involving complex issues regarding applicability of arbitration agreement to non-signatories. In those circumstances, as explained by the Supreme Court in Cox and Kings Limited v. SAP India Private Limited and Another, it may be best to leave the determination of parties to arbitral tribunal. The arbitral tribunal may then delve into factual and legal aspects to decide whether its jurisdiction extends to non-signatory. However, adopting a similar approach for simpler two-party disputes may lead to significant delays and complications.
Concluding Remarks
The conflicting views expressed by different courts highlight the need for further clarification on the assignability of arbitration agreements and the scope of judicial intervention at the stage of referral under Section 11 of A&C Act. This legal ambiguity creates significant challenges for businesses, as they may find it difficult to enforce terms of assignment, especially in the event of a dispute.
As the legal landscape continues to evolve, it is crucial for businesses to carefully consider the implications of these developments and seek legal advice to navigate the complexities ensure that their interests are protected.