Assignment Of Arbitration Clauses In India – Discovering Consent To Arbitrate

A. The Khardah principle: Can an arbitration agreement be assigned?

“Assignment” refers to the transfer of rights, obligations, or both, from one contracting party to a third party. Notably, while Sections 37, 40 and 62 of the Indian Contract Act, 1872, along with Sections 5, 130 and 132 of the Transfer of Property Act, 1882 allude to aspects of assignment, there is no direct statutory prescription in Indian law.

In Khardah Company Ltd., the Supreme Court ruled that obligations cannot be assigned without the promisee's consent. Rights, however, are considered assignable unless the contract is 'personal' or the rights in question are inherently unassignable. In applying Khardah to arbitration agreements, a few foundational questions arise that are dealt with below.

In Shayler v. Woolf [1946 Ch. 320], the English Court of Appeal held that an arbitration clause would not make the contract in which it is contained, unassignable. The Court also observed that an arbitration agreement was assignable as “…contemplated by the Arbitration Act, 1889, Section 4…” which provides for commencement of proceedings by parties 'claiming through or under' a party to the arbitration agreement.

In India, Shayler was followed in Lotus Oil Company, which held that the arbitration clause would follow the assigned contract and is not a personal covenant. After Khardah, Hindustan Steel Works clarified that the arbitration agreement's assignability depends on the underlying contract.

Similarly, the Delhi High Court in Bestech relied on Khardah to hold that if a contract is assignable, the arbitration clause follows the assignment. In DLF Power, the High Court ruled that an arbitration agreement is a benefit, assignable with the main contract. In Siemens Factoring, the Court concluded that “since the obligations and entitlement are assigned in favour of the Applicant, there is no reason why the arbitration agreement should stand excluded (...)”. The Karnataka High Court in Kenstream Ventures held that where the new owner of the leased property stepped into the shoes of the previous owner, the arbitration clause in the lease deed would bind the new owner.

However, the Delhi High Court struck a discordant note in Delhi Iron and Steel. Relying on Khardah, the Court held that an arbitration clause is personal and cannot be assigned. The Court's reliance however is debatable since in Khardah (while dealing with a submission that an arbitration clause would make a contract 'personal') the Court only found that “an arbitration clause does not take away the right of a party to a contract to assign it if it is otherwise assignable”. Government of NCT relied on Delhi Iron and Steel to hold that the arbitration clause was “independent [and] …not assignable”.

While High Courts have, by and large, upheld the assignability of arbitration clauses, they do not offer a doctrinal ruling. Unlike the UK, where assignability has been drawn from statutory provisions, Indian courts place substantial reliance on equitable principles of estoppel to infer assignment. The rulings in Delhi Iron & Steel and Government of NCT appear to be aberrations in this position, albeit underdeveloped.

The next question is whether the arbitration clause is a right or obligation, and accordingly, what degree of consent is required from the promisor. DLF Power and Kotak Mahindra have viewed an arbitration clause as a 'right', while Delhi Iron and Steel has considered it an 'obligation'. However, the Supreme Court in M. Dayanand Reddy observed that “[an] arbitration clause does not impose on any of the parties any obligation in favour of the other party [...] It has been held [...] that an arbitration agreement in no way classifies the right of the parties under the Contract but it relates wholly to the mode of determining the rights”. The Supreme Court in Cox and Kings cites Russel on Arbitration, which opines that an assignee “may invoke the arbitration agreement to pursue a claim but will also be subject to the arbitration agreement in the event of a claim by the other party”.

Therefore, for the analysis on assignability, the classification of the dispute resolution mechanism as a right or an obligation appears academic; core considerations of consent would serve as a better guide.

B. Does consent for assignment of an arbitration clause require specific language?

In MR Engineers, while dealing with the principle of 'incorporation by reference', the Supreme Court drew a distinction between reference to another document in a contract, and incorporating a document by reference. For incorporation by reference, the Court held that the reference should clearly indicate intent to incorporate the arbitration clause.

DLF Power and Vishranti considered MR Engineers in the context of assignment of arbitration clauses.

In DLF Power, the respondent cited MR Engineers to contend that there was no separate agreement to transfer the arbitration agreement. The Court distinguished MR Engineers as being concerned with incorporation by reference under Section 7(5) of the Arbitration and Conciliation Act 1996 (“Act”) and held that the petitioner stepped into the shoes of the assignor, as its lawful successor. Relying on Khardah, the Court held that the arbitration agreement is a benefit which can and was assigned.

DLF Power was followed in Bombay Dyeing, Rajesh Gupta and Siemens Factoring. However, Vishranti took a different approach. Vishranti relied on MR Engineers to hold that the arbitration clause was separate from the contract, and arbitral intent with the assignee must be 'made manifest'. DLF Power was distinguished, holding that the question there was of selling a company division and not assignment or incorporation by reference. Vishranti (as also MR Engineers) was relied on in N Kumar Projects (2022 (5) ABR 75.) to hold that a specific reference to the arbitration clause is required for its incorporation, unless the former contract is 'standard form'.

Tata Communications, while relying on MR Engineers, departed from Vishranti, highlighting that the parties there had chosen to modify certain terms of the contract in the deed of assignment, and incorporated all remaining clauses as they were.

MR Engineers required “a special reference indicating a mutual intention to incorporate the arbitration clause from another document”. In Vishranti, the Court held two principles enunciated in MR Engineers to be directly applicable -

· where the contract makes “a general reference to another contract”, such general reference would be insufficient – the arbitration clause will require incorporation by specific reference; and

· where the contract provides that it shall be performed “in terms of another contract”, the terms of the referred contract regarding performance alone will apply, and the arbitration agreement will require separate specific reference.

Tata Communications however relied on MR Engineers to hold that if reference to a document is such as to include all its clauses, this would include the arbitration clause as well.

Interestingly, in Giriraj Garg the Supreme Court while analysing 'incorporation by reference' and MR Engineers, discussed the 'single contract' and 'two contract' principle devised by English Courts. In a 'single contract case', the arbitration clause is in a standard form contract to which there is a general reference in the contract between the parties. In a 'two contract case', the arbitration clause contained in a separate contract is referred to for the purpose of incorporation. In the latter case, the reference must be specific to the arbitration clause.

However the Court also noted the discussion in Russell on Arbitration recognizing a judicial dilution of the rule – if the contract to be incorporated is between the same parties, general words of incorporation will suffice since the parties are even more likely to be familiar with them, than in cases of incorporation of a standard term. Further, even where the contract referred to is between one of the parties to the original contract and a third party, and the contracts “were entered into in the context of a single commercial relationship”, this could be a 'single contract case' thus not requiring specific incorporation for the arbitration clause.

In cases of assignment, the third-party assignee is deemed to have acquainted itself with the terms of the contract, and steps into the assignor's shoes for all practical purposes. Cox & Kings also specifically refers to 'assignment' as an example of a non-signatory 'claiming through or under' the party to the agreement and being bound by it – particularly, the arbitration clause.

C. Specific inclusion v. specific exclusion of arbitration – which is the more appropriate test?

While determining the nature of consent required, Vishranti has considered the severability of arbitration clauses and held that since they are an “agreement within an agreement, never compulsory and entirely optional”, they need a specific reference to in the assignment document. This analysis stems from the severability principle embodied, inter alia, in Section 16(1) of the Act. The status of the arbitration clause as 'severable' is legal fiction created for a specific functional purpose – i.e. to prevent the arbitration clause being frustrated/ rendered unenforceable due to the larger contract being terminated or void.

In a commercial setting however, parties would likely only treat the arbitration clause as but another clause in the principal agreement, not distinct from other clauses. Thus the language of the assignment document can be interpreted to determine whether the arbitration clause stands excluded, rather than search for its specific inclusion. To hold otherwise may potentially extend the legal fiction in Section 16 beyond its intended purpose. Recently, in Lords Inn Hotels, the Bombay High Court has accorded primacy to business efficacy in interpreting arbitration clauses, over express wording – which would be an efficient tool to discover the intention from the assigning document from the lens of contracting business-persons. To hold otherwise would potentially extend the legal fiction in Section 16 beyond its intended purpose.

In this regard, courts have inferred an implied agreement to arbitrate in cases of:

· broad assignment clauses transferring all obligations (Bestech);

· changes to the main contract without altering the arbitration clause (Tata Communications);

· definitions in the contract covering successors or assigns (DLF Limited, Punjab State); and

· parties acting on the assignment, e.g., payments/ direct dealings with the assignee (Bestech, DLF Power).

Khardah has been applied to arbitration agreements to evaluate assignability. Case law indicates that arbitration agreements are largely considered inherently assignable. As regards Khardah's dichotomy on rights v. obligations, this distinction has little relevance for arbitration clauses.

The specific reference standard advocated for in Vishranti appears to be an over-extension of the severability principle (outside the legislative intent of Section 16 of the Act) and sets the threshold beyond Section 7(5)'s requirements. Cox & Kings traces consent of non-signatories to the arbitration agreement through Section 7 of the Act, and consent in the context of assignment too may be discovered in a similar fashion. To determine whether there indeed is continuation of the arbitration agreement to bind the assignee and the original party, it would perhaps be more appropriate to ascertain whether it has been excluded for any reason, as opposed to requiring specific reiteration. Such an approach would be consistent with the business efficacy rule of contractual interpretation.

Aditya Chatterjee is an Advocate practicing in the High Court of Karnataka, High Court of Delhi and Supreme Court of India. Tvishi Pant is an Advocate in Mumbai. Views are personal.