Assignment of Arbitration Agreements

by Madhav Ved & Apurva Thakur

Madhav Ved is an Advocate at Bombay High Court, and Apurva Thakur is an Assistant Professor at SVKM’ s Pravin Gandhi College of Law, Mumbai, at the time of this Publication.

Abstract

The present article examines a recent decision of the Bombay High Court on the issue of assignment of an arbitration agreement, as part of a master assignment agreement. The authors argue that the decision leaves critical aspects unexamined which may lead to practical difficulties, thereby undermining the doctrine of party autonomy in arbitration law.

Introduction

The Hon'ble Bombay High Court, in a recent judgement of Siemens Factoring Pvt. Ltd. v. Future Enterprises Pvt. Ltd., [1] held that an arbitration agreement contained within a contract is enforceable by the assignee of such contract. It also held that the arbitration agreement will travel with the assignment contract to bind the assignee to arbitration.

Brief Outline of Facts

The Applicant, Siemens Factoring Pvt. Ltd. (Siemens) executed an Assignment Deed dated 27th January 2020 with LIQ Residuals Pvt. Ltd. (LIQ). LIQ was in the business of renting and leasing equipment and entered a Master Rental Agreement (MRA) with the Respondent, M/s Future Enterprises Pvt. Ltd. (Future). Under the MRA, certain equipment was rented by Future from LIQ. Subsequently, LIQ addressed letters to Future informing it that the rent and receivables under the MRA had been assigned to Siemens. In furtherance of this letter, a sale of receivable agreement along with a power of attorney was executed by LIQ in favour of Siemens. It must be clarified that while Future was not a party to this agreement, the CEO of Future had acknowledged this exchange of letters.

Future defaulted on its obligations under the MRA and Siemens issued a legal notice demanding payment of INR 4,88,06,155/- along with on 21st June 2022. Thereafter, Siemens preferred an application under Section 11 of the Arbitration and Conciliation Act 1996 (“Arbitration Act”) for appointment of an arbitrator.

Other significant facts include, first, the MRA contained a specific clause which allowed assignment of interest by LIQ to a third party. Second, the assignment clause specifically prohibited Future from further assigning its interest to a third party. Third, an additional and separate clause allowed LIQ to assign its rights under the MRA as a security to any Bank or Financial Institution (Siemens being an NBFC was covered under this clause). Apart from the said clauses, the description of parties also defined LIQ to mean the parties, executors, administrators, substitutes, successors, and permitted assignees.

It was argued by Future that the arbitration agreement was entered between Future and LIQ, therefore no valid arbitration agreement existed under Section 7 of the Arbitration Act between Future and Siemens. In other words, unless the agreement was incorporated by specific reference as required under Section 7(5), the same could not be held as valid and subsisting. The position of law is now settled in line of judgements[2] on reference to an arbitration agreement versus incorporation of an agreement by reference. While the former does not constitute a valid arbitration clause, the latter has been held to constitute a binding agreement under Section 7(5).

Ruling

The Court inter alia relied on DLF Power Limited vs. Mangalore Refinery and Petrochemicals Limited[3] and held that that the Arbitration Agreement was valid, and that the arbitration agreement stood assigned by virtue of the execution of the Agreement for Sale of Receivables executed between LIQ and Siemens. The Court further observed that the notification of assignment issued to Future separately carved out a clause for arbitration, which the Court observed conclusively bound Future to any arbitration initiated by Siemens under the MRA. The Court also observed that Future had acted upon the notification of assignment by making payments to Siemens in terms of the MRA and could not therefore resile from its obligations thereunder, including being bound by the arbitration clause.

Analysis and Comments

A provision which seems to have gone unnoticed or rather not agitated by either party is that Siemens is a Non-Banking Financial Company (NBFC) registered as a Factoring Company under the Factoring Act[4]. This is significant because the transaction carried out was not a simplicitor agreement to assign but such an agreement regulated by the Factoring Regulation Act. Such an assignment is squarely regulated by Section 7 of the Factoring Act, which inter alia, states that upon execution of an assignment agreement, the rights, remedies and securities shall vest in the assignee. It further states that the assignee shall be entitled to exercise all rights and remedies whether by way of damages or otherwise, or whether a notice of assignment is given or not. Thus, Section 7 gives a statutory mandate to the otherwise contractual assignment of assets.

Illustratively, Party A based in Delhi, and Party B based in Chennai, have agreed to arbitrate at a neutral seat at Mumbai. However, if an assignment of rights is made by A to a Party C in Mumbai, the rationale of choosing a neutral venue would be subverted. Unless a fresh agreement to arbitrate is executed between the B and C, B would be compelled to submit to Arbitration.

By allowing the right to invoke arbitration via Assignment Agreement the courts have certainly taken a pro-arbitration approach, but the question that remains unanswered is, whether a party who agreed to arbitrate its disputes with a certain other party, can be compelled to submit to arbitration with any other third party and to terms which were not agreed to by the parties? An agreement to arbitrate primarily being an obligation rather than a right in strict sense, without quid pro quo, must be scrutinized carefully. The Authors are of the view that the objection against participating in arbitration under an assignment agreement can be sufficiently taken before the arbitral tribunal and the Court seized of an application under Section 11 need not delve into a detailed inquiry. Upon a prima facie observation, if the Court is of the view that the parties intended to assign all rights, duties, obligations and remedies under the agreement, reference to arbitration must be made. Having said that, it may be advisable to specifically refer to and incorporate an arbitration clause in the assignment agreement, pari materia to the clause in the former agreement, to steer clear of a possible objection at reference stage as well as in due compliance of Section 7(5).

*All errors are attributable entirely to the author.

[1] Commercial Arbitration Application No.174 of 2022 dated 23rd February 2023. [2] MR Engineers & Contractors (P) Ltd vs. Som Datt Builders Ltd. (2009) 7 SCC 696 [3] DLF Power Ltd. v. Mangalore Refinery & Petrochemicals Ltd., 2016 SCC OnLine Bom 5069 [4] Factoring Regulation Act, 2011