[Chiranth Mukunda is a 2nd Year B.A., LL.B. (Hons.) Student at National Law School of India University, Bengaluru]
In DLF Limited v. PNB Housing Finance Ltd (22 March 2024), while considering a petition under section 11 of the Arbitration and Conciliation Act 1996 ( A&C Act), the Delhi High Court observed that an assignee would be bound by the arbitration agreement in a claim brought by the other party to the agreement. In addition, the Court observed that “assignee can invoke the arbitration agreement to pursue a claim and can be compelled to arbitrate a dispute raised by another party.” [emphasis added] This the Court inferred from the Supreme Court’s observations in Cox and Kings that the assignee takes the assigned right with both the benefit and burden of arbitration clause.
This post argues that the above simplified position does not reflect the true complexities of law of assignments’ interaction with arbitration. It is a well-established rule that assignment can only transfer contractual rights, benefits and entitlements and not obligations, liabilities or burdens, and that assignment of the latter of which would require the parties’ consent, in effect necessitating a novation. It is also settled through a series of case law that: (a) there is nothing inherent in an arbitration clause in the contract which affects the assignability of the contract if it is otherwise assignable; and (b) the assignment of the contract will also result in assignment of the arbitration clause in favour the assignee, which entitles the said third party assignee to rely on the arbitration clause. However, the difficulty arises as to when the assignee can be “burdened” or “obligated” or “compelled” to arbitrate, and the rationale behind the same, considering the rule of assignment that only benefits can be assigned and consensual nature of arbitration.
Propositions and their Backing under Indian Law
It is useful to highlight the different contexts in which the assignee can said to be bound by the arbitration clause of the assigned contract:
First, the assignee seeks to invoke the arbitration clause. [right to arbitrate question]
Second, the assignee seeks to initiate proceedings in a national court to enforce the benefits/rights of the contract to which it is subject and within the scope of the arbitration clause in the main contract instead of proceeding to arbitration. [burden question]
Third, related to second, without asserting any contractual claims or commencing legal proceedings, the assignee is sought to be “compelled” to arbitrate by the other party (obligor) with regards to, for example, the existence or extent of contractual right/benefit of the assignee.
In respect of the first proposition, it is clear that the assignee can invoke the benefit of the arbitration clause as “a person claiming through or under a party”. As held in Cox and Kings, assignment forms a typical scenario where a third-party person (assignee) can claim through or under the party to the agreement (assignor), and the said assignee exercises the right only in a derivative capacity (para 130). The use of the phrase “parties or any person claiming through or under” in sections 8, 35, and 45 of A&C Act reflect this development. Hence, privity of contract does not pose a problem. When the assignee seeks to rely on the arbitration clause, the consensual nature of arbitration does not pose an obstacle, as the consent of the assignee can clearly be inferred from its choice to exercise its assigned contractual rights. However, it needs emphasis that this legislative recognition is limited to the third-party assignee’s right to stand in the shoes the party (assignor) and agitate the party’s right (in derivative capacity) to initiate and/or resolve the dispute through arbitration.
Legislative Limitation
Importantly, these sections in A&C 1996 are silent about when the assignee will be burdened by the arbitration clause if it does not wish to initiate or resolve through arbitration and goes to a national court to claim its contractual rights (second proposition) or, alternatively, when the assignee has obligation and can be compelled to defend a claim bought by the other party through arbitration (third proposition). The language of the provisions which uses the phrase “claiming under or through” supports this claim. For example, section 45 (same can be said about section 8), which deals with the power of judicial authority to refer parties to arbitration on the finding of prima facie existence of arbitration agreement, mandates the exercise of this power “at the request of one of the parties or any person claiming through or under him, [and] refer the parties to arbitration” [emphasis added]. Firstly, as evident, it contemplates the exercise of right to arbitrate (initiation) by the assignee to arbitrate disputes with the other party, and hence satisfies only the first proposition. Secondly, more importantly for our purpose, the referral court can only refer the parties to arbitration.
The Supreme Court in Cox and Kings repeatedly emphasised that the concept of “party/parties” defined in section 2(1)(h) of the A&C Act is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement (para 136). Does it mean that the referral court cannot refer the assignee who is not a “party” but a person “claiming under or through the party” to arbitration? What needs recognition is that this legislative limitation is specific to A&C Act. The common law position is that an assignment of contractual rights does not make the assignee a party to the contract. However, section 82(2) of the UK Arbitration Act 1996 provides that references to a “party” to an arbitration include persons claiming under or through a party to the agreement, with assignees being such “persons”. Similarly, section 6(5)(a) of the International Arbitration Act (IAA) in Singapore provides that “party” includes persons claiming through or under the party for the purpose of stay of court proceedings to enforce the arbitration agreement under sections 6 and 7 of the IAA. In addition, section 11 of the A&C Act, which deals with the court appointment of arbitrators, also refers only to a party’s failure or request. Therefore, in contradistinction to the A&C Act, the UK Act and Singapore Arbitration Acts contemplate the assignee being both entitled and burdened to arbitrate. The latter approach would conceptually and practically make sense as it prevents the assignor from circumventing arbitration by assigning the benefits under the main contract. Hence, notwithstanding these legislative confusions in the A&C Act, the next section proceeds to analyse the principled justification given to impose the burden/obligation on the assignee to arbitrate in the second and the third proposition.
Assignee’s Burden to Arbitrate
The Supreme Court in Cox and Kings provided the rationale as that “an assignee takes the assigned right under a contract with both the benefit and burden of the arbitration clause”(para 130) by relying on the landmark UK case of Schiffahrtsgessellschaft Detlev von Appen GmbH v Voest Alpine Intertrading GmbH (The Jay Bola). Consider this context: a benefit/right of a contract which is subject to arbitration clause between A (assignor) and B is assigned to C. It is accepted that C as assignee of the contract by A including the arbitration clause will be entitled to invoke the arbitration agreement. Alternatively, if C were to initiate court proceedings instead of going to arbitration to enforce their contractual benefit/right, will it be possible to “burden” C (assignee) with the arbitration clause and grant a stay or anti-suit injunction to B? The English Court following The Jay Bola will answer in affirmative. This approach is termed as “Conditional Benefits Approach”, or as “Subject to Equities approach”.
Alternatively, consider this context: C as assignee does not seek to assert its contractual right/benefits through legal proceedings. However, B compels C to arbitrate the claims made against C. The question is whether C can be obligated and burdened with the arbitration clause. The similar situation confronted UK Supreme court in Aspen Underwriting Ltd v Credit Europe Bank NV [2020] in the context of an exclusive jurisdiction clause. There, the insurers as party to the contract between the insurers and the vessel owners (assignors) sought to compel the assignee bank to be bound by the exclusive jurisdiction clause in a claim made by the insurers against the vessel and the bank alleging misrepresentation. Drawing a parallel between exclusive jurisdiction clause and arbitration clause and following “conditional benefit approach” of The Jay Bola, the Court held that the assignee in this context cannot be burdened with the arbitration clause (or exclusive jurisdiction clause on those facts). The Court observed that the assignee would be “burdened” only if it chooses to exercise the assigned right and seeks to enforce a claim. The conditional benefit approach would only mean that the assignee is not entitled to enforce its right without also recognizing the obligation to arbitrate. If the assignee chooses not to “assert” or “enforce” the assigned right, it would relieve the assignee of the burden of the arbitration clause. The Singapore Court of Appeal in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] accepted the approach of the The Jay Bola and called it “approach of entitlement rather than obligation” (para 55).
“Conditional Benefits Approach” to Burden the Assignee
The “conditional benefits approach” has been used to provide a rationale for assignability of arbitration agreements considering the rule that only benefits and not burdens can be assigned. In context of arbitration agreements, when the benefit/obligation owed to the assignor by the other party was “conditional on” the burden of not going to the court, i.e., when the assignor’s right under the contract is intrinsically subject to the burden of arbitration clause. In that case, the successors in interests or the assignees who hold a derivative interest take that benefit subject to the same burden, i.e., conditional benefit.
This has been clarified to mean that “assignment does not allow the assignee to exercise the right without being subject to the conditions or qualifications in question” (Aspen Underwriting Ltd, para 28) based on the broader principle that you cannot pick out the good and reject the bad. It has been further formulated as that “assignee is not entitled to assert its claim inconsistently with the terms of the contract”(The Jay Bola). If the assignee seeks to assert a claim without recourse to arbitration when the main contract contains an arbitration clause, it will amount to such an assertion which is inconsistent with the terms of the contract and, therefore, not allowed. As is evident in these formulations, the burden is said to co-existent only in the eventuality of exercise/assertion of right/benefit and not otherwise. Hence, the “conditional benefits approach” acts only as a constraint on the exercise of right.
This is the reason for two different conclusions reached on the burden to arbitrate in the above-mentioned contexts. In The Jay Bola, the assignee sought to enforce its contractual assigned right in a foreign court; however, it was not allowed to do so without recognizing the obligation to arbitrate. But as in Aspen Underwriting Ltd, the assignee did not seek to assert its rights, and therefore it was held that the exclusive jurisdiction clause or arbitration clause would not bind the assignee. The reasoning evident for this distinction was the consensual nature of arbitration that in the former scenario consent of the assignee to arbitration could be inferred consent to enforce the contractual right in question which is subject to arbitration clause. This, hence, leads to the position that the assignee is only taken to submit to arbitration “at the point it elects to exercise its assigned right.”
The alternative characterization of the rule in The Jay Bola is the “subject to equities approach”. It means assignee takes the assigned right subject to and burdened by any “equities”, i.e., cross-claims or other defences which the other party might have had against the assignor. In the context of an arbitration agreement, this would mean that if A (the assignor) had initiated legal proceedings against B, the latter would have the defence to hold A to his duty not-to-litigate and submit to arbitration. Therefore, the assignee would be in the same position as if the assignee chose to assert a contractual right. This is because the assignee is the holder of a derivative interest and “liable or entitled [only] to the extent they derive their rights or entitlements from the original party to the agreement”(Cox and Kings, Para 132). However, even this approach leads to the same effect that the “burden” of the arbitration would fall on the assignee only on the assignee choosing to enforce the assigned right inconsistent with the arbitration agreement between the assignor and the other party.
Conclusion
The assignment of contractual benefits and rights is a common commercial practice. It is essential that the courts adopt a consistent stand on the entitlement and burden of the assignee with respect to the arbitration clause. As shown above, both the “conditional benefits approach” and the “subject to equities approach” would not be able to justify assignee’s impleadment when the assignee does not seek to assert its contractual right in the current position. Therefore, the Delhi High Court’s impleadment of a third-party assignee as being bound by the arbitration agreement in a claim by the other party might rest on shaky grounds. It will be interesting to see how the future courts navigate the law of assignment’s relation to arbitration agreements.
– Chiranth Mukunda