Assignment in Arbitration: Scope and Issues in India

[Krishan Singhania is Managing Partner and Alok Vajpeyi an Associate at Singhania & Co]           

Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It can broadly be divided into three stages, first being the pre-arbitration stage (prior to the time when the dispute arises), second is during the course of arbitration proceeding and last is following the passing of arbitral award.

The term ‘assignment’ is defined as the transfer by a party of all its rights to some kind of property, usually intangible property such as rights in a lease, mortgage, agreement of sale or partnership. The arbitration clause/agreement provides the right to arbitrate to the concerned parties of that agreement. Therefore, the question arises as to whether such right can be transferred through assignment to some other party. The authors in this post have discussed the scope of assignment in arbitration and the issues that arise in making such assignment.

Assignment in Arbitration: An Overview

Arbitration is a separate contract by the separability principle as envisaged under section 16(1)(b) of the Arbitration and Conciliation Act, 1996. An assignment of a contract might result from a transfer either of the rights or of the obligations thereunder. As a result, obligations under a contract cannot be assigned except with the consent of the promisee and then it is a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless a contract is personal in nature or the rights are incapable of being assigned. This view has been upheld in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors., 2016 SCC Online Bom 5069. The Bombay High Court in its judgment stated that the arbitration clause does not take away the right of assignment of a party to a contract if it is otherwise assignable. The Court noted that there is a clear distinction between assignment of rights under a contract by a party who has performed its obligations thereunder and the assignment of a claim. The latter is a mere claim which cannot be assigned in law. It was further held in this case that once the other party has accepted the assignment and had insisted for compliance of rights, duties and obligations, the assignee steps into the shoes of the assignor and will be entitled to all rights, obligations and benefits including the arbitration agreement forming part of the said agreement.

Alternatively, parties may expressly prohibit assignment. The benefits of the contract are not then assignable. In such a case, a purported assignment by one party of the contract is invalid as against the other party, but it is valid and enforceable between the assignor and the assignee. The terms of a contract could be expressed, or may be implied as it is legitimate to take the surrounding circumstances into account. 

Taking into consideration the general principles relating to the concept of assignment in arbitration, it is to be considered whether the situation for assignment remains same throughout different stages of arbitration (pre-arbitration, during the course of the arbitral proceedings and following the passing of arbitral award).

Pre-Arbitration

The Calcutta High Court in Hindustan Steel Works Construction Ltd. v. Bharat Spun Pipe Co., AIR 1975 Cal 8, while deciding the application for setting aside an arbitral award, discussed the scope of assignment and held 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. Lastly, existence of an arbitration clause per se does make neither the contract non-assignable or assignable.

The Delhi High Court in Kotak Mahindra Bank v. S. Nagabhushan & Ors., 2018 SCC OnLine Del 6832, while deciding the application under section 34 was faced with the question whether there was valid assignment of arbitration agreement or not. The arbitrator decided that since the claimant is not signatory to the arbitration agreement the matter cannot be decided through arbitration. However, the Court held that the loan agreement by its very nature was assignable. The Court viewed that once the rights under the loan agreement are assigned in favour of the petitioner, the rights under the arbitration agreement, being only in the nature of a remedy for enforcement of such rights, are equally assignable and have been duly assigned in favour of the petitioner in the present case by way of the assignment agreement. The Court followed Bestech India Private Ltd. v. MGF Developments Ltd. (2009) 161 DLT 282 and held that if a contract is assignable, an arbitration clause will follow the assignment of the contract.         

During the Course of the Arbitral Proceedings

The Bombay High Court in Agri Marketing Co. SARL v. Imperial Exports Ltd., (2002) 2 Bom CR 646, while deciding the enforcement application of an arbitral award, stated that the right under an arbitration clause is assignable even after arbitration proceedings have commenced and that the assignee may simply take over the assignor’s proceedings without the need to start afresh. However, the right was subject to two important qualifications:

(i) the notice to the arbitrator must be given within a reasonable time;

(ii) absolute assignment of clause:

(a)  in writing.

(b) with notice to the other party (and the arbitrators).

Following the Passing of Arbitral Award

By virtue of section 36 of the Arbitration and Conciliation Act, 1996, on expiry of the period for an application of setting aside, an arbitral award shall be enforceable in accordance with the provisions of Civil Procedure Code, 1908 in the same manner as a decree of a court. Therefore, the award is assignable according to the provisions of the Civil Procedure Code, 1908 dealing with assignment of decree.

Champerty & Assignment

A claim for damages for breach of contract, after breach, is not an ‘actionable claim’, within the meaning of section 3 of the Transfer of Property Act, 1882, but a mere right to sue within the meaning of section 6(e) of that Act, and it cannot therefore be assigned. Rights of action arising out of or incidental to rights of property can be assigned with the property transferred. An assignment of a bare right of action may also be upheld if the assignee has a genuine commercial or financial interest in taking the assignment; but a step towards the sale of bare cause of action to a third party who had no genuine commercial interest in the claims will be void as champertous since it involves trafficking in litigation.

The Privy Council has generally held that champertous agreements are void in England as it violates the statute of champerty. However, it also recognized that this principle is inapplicable in India. The courts have looked the champertous agreements with caution as they may violate the public policy of the country. But the Indian courts have not faced any situation where the issue involved the funding arrangement with any party to the arbitration proceedings.

Conclusion

The concept of assignment in arbitration is based on the principles of transfer of contractual rights. Assignment can be undertaken during any of the stages and this is beneficial to the parties involved in arbitration. Assignment may be beneficial in various ways. Prior to the dispute if there is some acquisition which occurs or the party does not want to further invest in the project then it can assign the contractual rights (including right to arbitrate to the other parties). During the proceedings, the stressed companies with no real assets but pending arbitration claims can assign their claim to the party whom the debt is own. However, all of this will depend on the agreement of the concerned parties.

It is to be noted that Indian courts have held that assignment of claim is not allowed. However, assignment has been allowed during the arbitral proceedings. This is contradictory, since the pending arbitration proceeding will be considered as a claim only. The courts or the legislature should address this issue.

Therefore, Indian courts may have taken the view that assignment in arbitration is permissible. However, its scope is not clarified and therefore it should be included in the Arbitration and Conciliation Act, 1996 as well, so that the unaddressed issues can be settled and assignment becomes a right in the hand of a party having a legitimate claim. Such a statutory recognition will introduce certainty in the arbitral regime of the country and will help India in its stride to become a hub for international arbitration.

Krishan Singhania & Alok Vajpeyi

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