Assignment of Arbitration Clauses in India: Unveiling Consent and Efficacy

Introduction

In India, the question of whether an arbitration agreement transfers along with an assigned contract has long been debated. This analysis explores Indian judicial approaches—both traditional and modern—towards the assignment of arbitration clauses, highlighting how consent is identified and the practical versus strict interpretive perspectives courts adopt.

Understanding Arbitration Agreements in India

Arbitration clauses, under the Arbitration and Conciliation Act, 1996, must be in writing and may be drafted as standalone agreements or embedded in contracts. Courts universally accept the separability principle (Section 16), where the arbitration agreement is treated independently from the main contract. This separability enables arbitral tribunals to rule on their jurisdiction, even if the underlying contract is disputed.

A key issue arises when a contractual party assigns rights and obligations: Is the arbitration agreement automatically transferred, or does it require separate consent? This question has divided Indian courts into two schools of thought.

The Strict Requirement: Specific Consent Required

Some courts insist that arbitration clauses do not transfer unless the assignee expressly agrees to arbitrate. They treat such clauses as distinct agreements requiring specific consent.

Key Judgments:

• Delhi Iron & Steel Co. v. U.P. Electricity Board: The Delhi High Court held an arbitration clause separate from the main contract. Assignment of the contract doesn’t automatically transfer the clause unless the assignee consents explicitly.

• Vishranti CHSL v. Tattva Mittal Corp.: Reaffirmed that, absent manifested consent to the arbitration clause, assignment does not bind the assignee.

These decisions rest on the principle that one cannot be compelled to arbitrate without clear and demonstrated agreement to do so.

Practical Majority View: No Separate Consent Needed

The majority of Indian courts, however, have embraced a pragmatic and business‑oriented approach: when a contract is assigned with all its rights and obligations, the arbitration clause too is considered “transferred”, especially if the assignee acts under it.

Notable Cases:

• DLF Power Ltd. v. Mangalore Refinery & Petrochemicals Ltd. (Bombay High Court): Assignment of contractual rights and obligations—such as payments or extensions—authorizes the assignee to trigger arbitration since they “step into the shoes” of the assignor.

• Bestech India v. MGF Developments Ltd. (Delhi High Court): Emphasized that conduct post-assignment—like pursuing arbitration—signals acceptance of the arbitration clause.

• Rajesh Gupta v. Mohit Lata Sunda (Delhi High Court): Found that knowledge and acceptance by parties of assignment manifests implied consent and satisfies the arbitration agreement’s transfer.

• Tomorrow Sales Agency v. SBS Holdings Inc.: Applied broader doctrines—agency, assumption, assignment—to bind non-signatories to arbitration.

This consensual theory of arbitration derives consent from a party’s conduct, rather than requiring formal written consent every time.

Reconciling Consent with Business Efficacy

An emerging trend emphasizes business efficacy and commercial reasonableness over formal symbolism. Recent High Court decisions, like Lords Inn Hotels (Bombay High Court), weigh contractual intent and commercial purpose when interpreting arbitration clauses.

Likewise, following international precedent (e.g., France, Singapore, UK, Switzerland favoring automatic transfer), Indian courts are increasingly adopting an “automatic transfer” approach unless explicitly excluded.

Section 7(5) of the Arbitration Act indicates that consent may be shown through the written assignment itself. If the assignment incorporates dispute resolution provisions without objection, courts are leaning toward finding implied consent, aligning with contractual intent and commercial pragmatism.

Supreme Court Jurisprudence: Cox & Kings Judgment

The Supreme Court’s recent decision in Cox & Kings Ltd. v. SAP India Pvt. Ltd. (2023) underscores this shift. Although the Court didn't explicitly decide on consent for assignment, it held that arbitration agreements may extend to non-signatories. This implicit acknowledgment supports the view that specific consent at the time of assignment is not mandatory.

Additionally, Chloro Controls v. Severn Trent (2013) and others highlight binding non-signatories either through implied consent or doctrines like agency, estoppel, and group-of-companies.

Comparative & International Insights

Globally, differentiations exist:

• Automatic‑transfer jurisdictions: Switzerland, UK, France, Singapore normally allow arbitration clauses to transfer with contract assignment.

• Other jurisdictions: Countries like Sweden require explicit notice before an arbitration clause becomes binding.

• U.S. courts: Diverge, with early cases supporting automatic transfer (e.g., Goldston, Ross), and later ones requiring express consent (Lachmar).

  
  

Indian jurisprudence reflects a hybrid approach—initially cautious but steadily moving toward practical inference of consent unless contradicted.

Final Analysis: What This Means in Practice

1. Default Indian position: If a contract—including arbitration clause—is assigned with all rights and obligations, and the assignee acts under it, the clause is likely considered transferred.

2. Exception for strict view: Where parties specifically exclude arbitration clauses from assignment, or the assignee never acts under the contract, a court may decline to bind arbitration.

3. Best practice: Draft clear assignments with express provisions on arbitration—either consciously assigning the clause or excluding it—to avoid later disputes.

Takeaways for Practitioners

Situation	Likely Outcome	Recommended Action
Assignment with broad obligations & conduct by assignee	Arbitration clause binds assignee by implication	Ensure assignment mentions clause; assess conduct
Assignment without clarity or assignee not acting	Courts may require fresh consent	Add express arbitration clause assignment
Intention to exclude arbitration transfer	Viable to omit clause from assignment	Explicitly exclude arbitration in writing

Conclusion

The debate on arbitration clause assignment in India reveals a gradual shift from formalism towards intent-based and conduct-driven interpretation. While a strict requirement of specific consent still lingers, the broader judicial trend is clear: if the contract—including the dispute resolution mechanism—is assigned and acted upon, arbitration clauses follow suit by implied consent.

This approach aligns with modern commercial realities and international practices and is now bolstered by Supreme Court endorsement through expansive definitions of “party” to arbitration agreements. However, explicit clarity in assignment documents remains best to prevent future legal uncertainty.