Assignment of Arbitration Clauses in India: Understanding Consent to Arbitrate

Arbitration has become a popular method of dispute resolution in India due to its efficiency, confidentiality, and flexibility. When two parties enter into an agreement, they often include a clause that states any dispute arising from the contract will be resolved through arbitration. This is known as an arbitration clause and is one of the most fundamental principles of arbitration.

However, in some cases, the agreement may be transferred to a third party, and the question arises whether the arbitration clause can also be transferred. This is known as the assignment of arbitration clauses. In this article, we will explore the concept of arbitration clause assignments in India and the importance of consent in such assignments.

Understanding Arbitration Clause Assignments

The assignment of an arbitration clause is the transfer of an existing agreement, including the arbitration clause, to a third party. This may occur due to various reasons such as mergers, acquisitions, or novation of contracts. When an assignment takes place, the third party, known as the assignee, assumes all the rights and obligations of the original party.

In India, the law regarding the assignment of arbitration clauses is governed by the Indian Contract Act, 1872 (“the Act”). According to the Act, only contractual rights can be assigned, and any transfer of rights without the consent of the parties involved is invalid. Therefore, the question arises whether an arbitration clause is a mere collateral part of the contract or an independent agreement that can be transferred.

To determine the legal validity of an assignment of an arbitration clause, the consent of the parties involved is crucial. Consent refers to the explicit agreement of the parties to submit their disputes to arbitration. It is important to note that, in India, the law recognizes the freedom of parties to agree on the method of dispute resolution, including arbitration. This means that the parties must have explicitly agreed to the arbitration clause in the contract for it to be valid.

Furthermore, consent to arbitrate must be specific and unconditional. This means that the parties must have agreed to the entire arbitration clause and cannot consent to part of it. For instance, if the clause states that the dispute will be settled through arbitration in a specific jurisdiction, the parties cannot selectively agree to the jurisdiction but not the method of dispute resolution.

Analyzing the Indian Perspective

In India, the concept of assignment of arbitration clauses has been a subject of debate and has resulted in conflicting decisions by the courts. In the case of M/s. M.S. Ganesh Raju v. M/s. Karnataka Power Transmission Corporation Limited & Anr (2017), the Supreme Court held that an arbitration clause is not an independent agreement and cannot be assigned without the consent of the parties in the original agreement.

However, in the case of Ameet Lalchand Shah & Ors v. Rishabh Enterprises & Anr (2018), the Delhi High Court recognized the transfer of arbitration clauses through a novation agreement. Novation is the substitution of a party or a change in the terms of a contract by mutual agreement of the parties involved. The court held that the assignment of a contract through novation also transferred the arbitration clause.

As seen above, there is a lack of clarity in India regarding the transfer of arbitration clauses and the importance of consent in such assignments. This is a significant issue as it can lead to conflicting decisions by different courts, resulting in legal uncertainty.

The fundamental principle of consent plays a crucial role in assigning arbitration clauses. Without the consent of the parties, an arbitration clause cannot be considered valid. This is because arbitration is a consensual method of dispute resolution, and the parties must have a clear and unconditional agreement to submit their disputes to arbitration.

Therefore, it is important for parties to carefully consider and explicitly agree to the arbitration clause in their contracts. Any attempts to assign the contract and the arbitration clause without the consent of all parties can result in legal disputes and complications.

Conclusion

In conclusion, the assignment of arbitration clauses in India is a subject of debate, with conflicting decisions by courts. Consent plays a crucial role in the transfer of arbitration clauses, and parties must have a clear and unconditional agreement to submit their disputes to arbitration. It is important for parties to carefully draft and agree to the arbitration clause in their contracts to avoid any legal disputes in the future.

Assignment of Arbitration Clauses in India: Understanding Consent to Arbitrate