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Assignment of Arbitration Agreements

23/01/2023 by Aceris Law LLC

The assignment of a contract containing an arbitration agreement to a third party raises several questions. [1] The first question is whether the arbitration agreement is automatically transferred. [2] If so, what is the legal basis for such a transfer ? [3] Other issues concern the validity of the assignment of the main contract itself and whether evidence of the intent of the various parties is required to validate the assignment of the arbitration agreement. [4]

In this post, we will explore some of the issues that commonly arise in the contractual assignment of arbitration agreements.

Assignment arbitration agreement

The Applicable Law to the Question of the Assignment of Arbitration Agreements

The assignment of an arbitration agreement begs the question of the applicable law to its assignment. Such a determination may be made by the pertinent State court or the arbitral tribunal. Depending on whether the case is brought before a State judge or arbitrators, the conflict of law analysis may vary. [5] The most typical laws considered for the issue of the assignment of arbitration agreements are the following: [6]

  • the law of the court where the proceeding is brought (i.e., the lex fori );
  • the law of the seat of the arbitration (i.e., the lex loci arbitri );
  • the law governing the underlying contract (i.e., the lex causae ); and
  • the law applicable to the arbitration agreement (i.e., the lex compromissi ).

Unlike State courts, arbitrators do not have a lex fori , as their jurisdiction is based on the parties’ consent or, to some extent, on the lex arbitri . [7]

Some authors suggest that State courts will determine the law applicable to the assignment by way of their own conflict of law rules. [8] For instance, in Switzerland, the question of whether the parties are bound by the assignment is determined by the law governing the arbitration agreement under the Swiss conflict of laws rules. [9]

On the other hand, the lex fori  may encourage forum shopping in a search to find a more favourable legal framework for the assignment. [10] In addition, the judicial forum will not necessarily have a real connection with a dispute that would justify the application of its own law. [11]

Lex Loci Arbitri

The lex arbitri is understood as the law of the seat of arbitration. It should not be confused with the law establishing the framework of the arbitral proceedings, known as the lex arbitri. [12]

The New York Convention and the UNCITRAL Model Law give the lex loci arbitri a prominent role. Therefore, it is sometimes argued that it shall govern questions pertaining to the arbitration, including the question of the assignment of the arbitration agreement. [13]

Nevertheless, the lex loci arbitri does not govern the arbitration agreement itself. It is also difficult to understand the connection between the seat of the arbitration and the issue of assignment. Moreover, parties usually seek a neutral seat for their arbitration, considering, among other factors, the proximity, convenience, and pro-arbitration reputation of one jurisdiction. It is difficult to see how these factors would be relevant to determine the law governing the assignment of the arbitration agreement. [14] Thus, the lex loci arbitri may not be seen as the deciding law governing the assignment of an arbitration agreement.

It may be argued that issues concerning the assignment of arbitration agreements should be regulated by the law governing the underlying contract or the lex causae .

Indeed, the use of the lex causae ensures that questions arising out of the assignment of the arbitration agreement and the underlying contract will be treated by the same legal framework. Additionally, only this rule ensures the parties’ typical expectation that the arbitration agreement will be transmitted in the same conditions as the underlying contract. [15]

This also avoids the difficulties associated with dépeçage , which can be defined as the use of different legislations to address various issues of the same contract. [16]

Lex Compromissi

A traditional rule is to subject the assignment to the law governing the arbitration agreement itself. Today, it is widely accepted that the arbitration agreement is governed by its own law, which may be chosen by the parties or defined by rules of conflict of laws. [17]

The advantages of applying the lex compromissi to the question of the assignment are: [18]

  • it is in line with other general approaches in private international law; and
  • it provides a clear answer to the question of which law applies to the assignment of arbitration agreements.

The applicability of the lex compromissi , on the other hand, may lead to a situation where the arbitration agreement and the underlying contract are governed by different laws giving rise to the problems associated with dépeçage. [19]

Substantive Law Governing the Assignment of the Arbitration Agreement

French courts have created a substantive rule, or a “ règle matérielle ”, whereby the arbitration agreement binds the assignee and the obligor based on the parties’ intent. Arbitral tribunals applying this rule need not rely on any national law, as the assignment will be transmitted based on the consent of the parties to the assignment. [20] Consequently, the validity of the assignment cannot be challenged on the ground that the assignment of the main contract is invalid.

In practice, French courts or arbitral tribunals will ascertain whether the assignor and assignee have consented to the transfer of the arbitration clause. [21] Under this approach, the validity of the assignment of the arbitration agreement will be analysed apart from the underlying contract. This may lead to a peculiar situation where the assignee becomes bound by the arbitration agreement but does not acquire rights or obligations under the underlying contract if the assignment of the main contract is deemed invalid. [22]

The Principle of Automatic Transfer of Arbitration Agreements

Most international instruments, such as the New York Convention and the UNCITRAL Model Law, are silent to the question of assignment. [23] However, many scholars, courts, and arbitral tribunals advocate for the principle whereby the assignee of the underlying contract becomes bound by the arbitration agreement once the assignment takes place. [24]

This ensures predictability and fulfils the expectation of the original obligor, who expects that disputes will be resolved by arbitration. In this regard, many scholars support the view that the fact that the assignee may be unaware of the existence of the arbitration agreement should be of no relevance in the context of an assignment. [25]

Nevertheless, some courts have departed from the principle of automatic transfer. In Bulgaria, for instance, the Supreme Court of Cassation set aside an arbitral award on the ground that the sole arbitrator lacked jurisdiction to decide a dispute arising out of a rental agreement where the debtor did not expressly agree to the assignment of the arbitration agreement. [26]

In Switzerland, the Supreme Court found that a sole arbitrator correctly declared himself incompetent over a dispute arising from an assigned contract. Interestingly, this contract expressly prohibited the assignment of the agreement without the other party’s written consent. [27] Thus, whereas under Swiss law, an arbitration clause is transferred to the assignee without the need for the consent of the debtor, in this specific case the arbitration agreement suggested that the arbitration clause was intended to be effective between the original parties only. [28]

The Principle of Separability in the Context of an Assignment of an Arbitration Agreement

Separability is a theory in which the arbitration clause is an independent agreement from the underlying contract itself. In the context of an assignment, this would mean the transfer of an arbitration agreement would not operate automatically in case of an assignment of the main contract.

Many authors suggest that the separability principle is not absolute, however. In this respect, it has been accepted that the arbitration clause is separated from the underlying contract to the extent that it helps to ensure and promote the effectiveness of arbitration. [29] In other words, the arbitration agreement does not need to be treated separately from the main contract for the purpose of a contractual assignment.

[1]             J. Waincymer, Chapter 7: “Part II: The Process of an Arbitration: Complex Arbitration” in Procedure and Evidence in International Arbitration (2015), pp. 517-518.

[2]             Garnuszek, “The Law Applicable to the Contractual Assignment of an Arbitration Agreement” in Michael O’Reilly (ed), The International Journal of Arbitration, Mediation and Dispute Management , 82(4), p. 349.

[3]             Ibid.

[4]             Waincymer, supra fn. 1, pp. 517-518.

[5]             See , Garnuszek, supra fn. 2, p. 350.

[6]             Id. , 349.

[7]             Id. , 350.

[8]             I. Chuprunov, “Chapter I: The Arbitration Agreement and Arbitrability: Effects of Contractual Assignment on an Arbitration Clause – Substantive and Private International Law Perspectives” in C. Klausegger, P. Klein, et al. (eds), Austrian Yearbook on International Arbitration 2012 (2012), p. 54.

[9]             Garnuszek, supra fn. 2, p. 352.

[10]            Chuprunov, supra fn. 8, p. 54.

[11]            Ibid.

[12]            Garnuszek, supra fn. 2, p. 354.

[13]            Chuprunov, supra fn. 8, p. 56.

[14]            Id. , p. 56.

[15]             Id ., p. 59.

[16]             Ibid .

[17]             Id. , p. 57.

[18]             Ibid .

[19]             Id. , p. 58.

[20]            Garnuszek, supra fn. 2, p. 351.

[21]            Chuprunov, supra fn. 8, p. 52.

[22]             Id. , pp. 52-53.

[23]            Id. , p. 39.

[24]            Id ., p. 31 .

[25]            Id. , p. 61.

[26]           V. Hristova, Bulgaria: Assignment of an Arbitration Clause – Is Debtor’s Consent Required? (Kluwer Arbitration Blog, 17 August 2019).

[27]            J. Werner, Jurisdiction of Arbitrators in Case of Assignment of an Arbitration Clause: On a recent decision by the Swiss Supreme Court J. of Intl. Arb. 8(2), pp. 14-15.

[28]            Id. , pp. 16-17.

[29]            Chuprunov, supra fn. 8, pp. 40-41.

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The anatomy of an arbitration agreement

Global |  Publication |  November 2022

Introduction

Governing law, choice of arbitral institution, arbitrators, multi-tiered dispute resolution.

Arbitration is an inherently flexible mechanism intended to streamline the dispute resolution process to meet the parties’ specific needs. Yet, despite free and readily available resources on the drafting of arbitration agreements (see our December 2021 article, How to draft an arbitration agreement ), courts are all too frequently asked to resolve disputes over standard aspects of an arbitration clause, and this resort to litigation effectively eliminates the benefits the parties sought to achieve through an arbitration agreement in the first place.

To quote Justice Steel in Thompson General Hospital v CSL Hospital Services Ltd. 30 BLR (2d) 280, 112 Man R (2d) 211 “if the parties, having the freedom to craft a process that perfectly suits the context of the parties and their situation, choose to relinquish this power by the use of a standard form or ‘boilerplate’ clause, they have only themselves or more properly, their solicitors to blame.”  This article dissects the ‘standard’ components of arbitration agreements and provides examples of where poor drafting has resulted in unnecessary litigation.

The scope of the arbitration agreement is intended to outline which disputes must be referred to arbitration. The scope may be broad, covering for example “any and all disputes relating to or touching upon the breach, performance or interpretation” of an agreement. Conversely, the scope may be much narrower, applying only to a specific aspect of an agreement, such as disputes over invoicing or budget approvals.

Specifying exactly what is and is not covered by the arbitration agreement is essential, requiring careful attention and precise wording. The importance of precision increases where the parties seek to introduce multiple dispute resolution mechanisms into one agreement. In Lovelock v Exportles [1968] 1 Lloyd's Rep. 163, the arbitration agreement provided that “any dispute and/or claim” was to be submitted to arbitration in England and “any other dispute” to arbitration in Moscow. Lord Denning commented that “it is beyond the wit of man…to say which dispute comes within which part of the clause” . It was so vague that it was “devoid of meaning” , effectively frustrating the intentions of the parties by requiring any dispute to instead be decided by the court.

In international arbitrations, it is common for arbitration agreements to identify the seat of the arbitration as a different jurisdiction than the actual location where the arbitration is to take place. The seat of the arbitration determines the procedural law that will apply to practical aspects of the arbitration, for example supervision and support of the arbitration and interim remedies.

In Roger Shashoua, Rodemadan Holdings Limited, Stancroft Trust Limited v Mukesh Sharma [2009] EWHC 957 (Comm), an arbitration agreement provided that the venue of the arbitration was London, but was silent on the seat . The English Court found that the seat was London, stating that “[for] a choice of place not to be given effect as a choice of seat, there will need to be clear evidence that the parties…agreed to choose another seat for the arbitration.” The Indian Supreme Court (where relief was sought by one of the parties) agreed.

While it may be assumed that an arbitration agreement contained within a main agreement will be subject to the same governing law of the main agreement, it is not always clear-cut. This is especially the case where the parties are from different jurisdictions, the main agreement is performed in another jurisdiction, or the seat of the arbitration is in a different jurisdiction to the governing law of the main agreement.

In Sulamerica CIA Nacional De Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWCA Civ 638, Lord Justice Moore-Bick explained that “although one may start from the assumption that the parties intended the same law to govern the whole of the contract, including the arbitration agreement,” other factors, such as the seat of the arbitration, may lead to the conclusion that this was not their intention. Specifying in advance the law of both the main agreement and the arbitration agreement prevents the possibility of a dispute over which law is to apply.

Selecting the appropriate arbitral institution, and thereby the appropriate procedural rules, requires an understanding of the various institutional rules. This is important for a number of reasons including the costs associated with each institution, whether the arbitration is to be confidential, any expedited procedures that the parties may wish to benefit from, and the quality-control the various institutions exercise over decisions made under their supervision. (See our May 2022 article, Choosing the right arbitral rules ).

It is also essential to understand which rules each arbitral institution can and will apply. In the Dubai International Financial Centre (DIFC) case of Limeo Investment & Real Estate LLC v Landia Educational Services S.A.L [2019] DIFC ARB 012, the parties had agreed that the “dispute shall be finally settled in accordance with the rules of the London Court of International Arbitration [LCIA]” and that the arbitration “shall take place in the LCIA Arbitration Centre in Dubai International Centre, in Dubai, the UAE”. A dispute arose as to which procedural rules applied, as (at the time) the DIFC-LCIA was a related but distinct arbitral institution to the LCIA. The DIFC Court found that the rules of the DIFC-LCIA applied, stating that: “if the choice of rules and centre provided for by the Arbitration Agreement pertain to one and the same institution, it follows that the rules which are the analogue of the DIFC-LCIA Arbitration Centre can only be those of the DIFC-LCIA.”

Choosing the number, characteristics and mechanism for appointment of the arbitral tribunal will depend on the nature, complexity, and value of potential disputes. Ensuring that the arbitration agreement is clear on these issues can prevent an unnecessary visit to court to determine who should be appointed. Being too prescriptive as to characteristics in advance may limit the parties’ options for appropriate arbitrators later on.

Failing to provide for the selection of arbitrators at all will inevitably result in Court intervention, increased costs and delay for the parties. In Sherwin-Williams v Walls Alive , 2000 ABQB 811, the arbitration agreement was silent on the appointment of the tribunal and, in the absence of any guidance in the agreement itself, the Court appointed a retired judge, preferring legal experience over the accounting expert put forward by one of the parties.

In Broken Hill City Council v Unique Urban Built Pty Ltd [ 2018] NSWSC 825 the arbitration agreement provided that the “President of the Australasian Dispute Centre” was to nominate the arbitrator. It transpired that the Australasian Dispute Centre did not exist, but the Court salvaged the agreement, though at the expense of increased costs and delay, by finding that since parties did intend for disputes to be arbitrated, the agreement was operative despite the oversight of the appointing authority and the Court would appoint the arbitrator instead.

While every effort should be taken by parties to avoid litigating disputes, creating prerequisites to arbitration through multi-tiered dispute resolution procedures should be articulated clearly to avoid uncertainty as to the compulsory nature of the steps.

In Emirates Trading Agency v Prime Mineral Exports Private [2014] EWHC 2104 (Comm), the agreement provided that “the parties shall first seek to resolve the dispute by friendly discussion” , and that if no solution could be reached for a continuous period of four weeks, the dispute could be referred to arbitration. The Court found that the use of the word “ shall ” indicated that the obligation was mandatory, thus making four-week long “friendly discussions” a condition precedent to arbitration. Findings like this can have a significant impact on a party’s rights, particularly where the limitation period for a claim is nearing expiry.

To quote Justice Feasby in Singh v Modgill, 2022 ABQB 369, arbitration “is not some lesser form of litigation than that being conducted in the courts” … unless that is what the parties bargained for.” To avoid unintended bargains, parties are advised to consider the drafting of arbitration agreements carefully, with a view to mitigating uncertainty and providing clear answers to foreseeable issues.

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Article Contents

Table of contents.

I. Effects of Assignments of Contractual Rights on Arbitration Agreements – A Jurisdictional Overview

II. Factors to be Considered in Resolving the Issue of Transfer of the Arbitration Agreement

III. The Question of Applicable Law

  • IV. Competency to Resolve the Issue of Transfer: Court or Arbitral Tribunal?
  • V. Conclusion: Proposal For Uniform Rules in the Context of International Commercial Arbitration
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Assignment of Rights and Agreement to Arbitrate

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Daniel Girsberger, Christian Hausmaninger, Assignment of Rights and Agreement to Arbitrate, Arbitration International , Volume 8, Issue 2, 1 June 1992, Pages 121–166, https://doi.org/10.1093/arbitration/8.2.121

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IV. Competency To Resolve the Issue of Transfer: Court or Arbitral Tribunal?

V. Conclusion: Proposal for Uniform Rules in the Context of International Commercial Arbitration

in the context of domestic and international business transactions, parties routinely assign to third parties legal rights arising from their contractual relationships. While the assignment of such contractual rights and their eventual enforcement by third parties usually pose no specific procedural problems, several issues are likely to emerge in case the contract concluded between the original parties (the ‘main contract’) contains an arbitration clause. Questions arising in this instance are not only whether the arbitration clause travels automatically with the assigned contractual right to the assignee, but also what law is applicable to this issue, and who – arbitrator or domestic court – is competent to rule on the matter.

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The law applicable to the assignment of claims subject to an arbitration agreement - chapter 3 - conflict of laws in international commercial arbitration.

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Originially from  Conflict of Laws in International Commercial Arbitration

I.INTRODUCTION: ISSUE DEFINED 

Suppose an arbitration agreement or clause between the initial parties to the main contract (the creditor/assignor and the debtor/debitor cessus): Does the arbitration agreement apply merely to disputes between these two initial parties, or may the arbitration clause also apply to disputes between the assignee (who is not a party to the initial contract) and the debtor? 

When Christian Hausmaninger and I undertook to analyse the issue of assignment and arbitration more than 25 years ago,2 we realized that we could not base our thoughts on much specific literature: While the question of whether an assignee is bound to, or may invoke, an arbitration agreement concluded between the assignor and the debtor, had arisen as a practical problem quite often in many jurisdictions, no specific and even less comprehensive analyses had been published at the time. That has changed radically in the meantime: The articles and case notes are now legion, and various detailed articles and books have appeared in many languages analysing and comparing a multitude of legal systems.3 It would thus constitute a redundant task to add yet another analysis to these careful, and largely comprehensive, publications, and it would be impossible to summarize all relevant court and arbitral decisions and/or theories in a short article such as the one I was asked to produce. I will therefore endeavour to structure my observations in the form of a dozen or so preliminary theses, in which, and from which I will try to draw a few conclusions on how legislators, courts, and arbitral tribunals may approach the problem of the applicable law in the future when confronted with it.  

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Arbitration Agreement

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An Arbitration Agreement is a document through which two parties decide to handle any disputes that may arise between them through binding arbitration. Binding arbitration is a dispute resolution mechanism that is out of the court system and run by either a single individual or three individuals. The individuals running the arbitration are called arbitrators. The arbitrators, whether one or three are generally either chosen by the parties or chosen by the American Arbitration Association , the main non-profit organization in the United States that assists with private arbitrations.

The parties entering into an Arbitration Agreement can have any relationship with each other. Often, Arbitration Agreements are used alongside other full, written contracts . Some examples of situations where Arbitration Agreements may be used include in employment (if the employment agreement does not already contain an arbitration provision) or in cases of joint ventures, through a Joint Venture Agreement or a Partnership Agreement , or with new LLC formation, alongside Articles of Organization .

In an Arbitration Agreement, the parties explicitly agree that no disputes between them will go through the traditional court system and instead will all be handled through binding arbitration. In other words, if, after signing an Arbitration Agreement, any party tries to bring a case in court, the court will not allow it and will instead kick out the case so it can go through arbitration. When parties sign an Arbitration Agreement, they entirely give up their rights to take their case to court.

How to use this document

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After that, the document will self-populate with the needed information to create a binding Arbitration Agreement. When this document is filled out, each party should sign it and keep a copy .

Applicable law

Arbitration Agreements are subject to the United States Arbitration Act, 9 U.S.C. ch. 1, more commonly referred to as the Federal Arbitration Act.

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Assignment and Separability: Can an Assignor Compel Arbitration? The South Carolina Supreme Court Says the Arbitrators Get to Decide

Introduction: assignment and the separability doctrine .

Separability and Assignment

Suppose A and B enter a contract imposing mutual obligations on them. The contract contains an arbitration agreement requiring arbitration of all disputes arising out of or related to the contract. The contract does not purport to prohibit assignment, and the parties’ rights under the contract are otherwise capable of assignment.

A assigns to assignee C its rights to receive performance under the contract. B commences an action against A under the contract and A demands arbitration. B resists arbitration, arguing that A has assigned to C its right to enforce the contract (we’ll call it a “container contract” because it contains an arbitration agreement) and thus there is no longer any arbitration agreement that A can enforce against B. Judgment for whom?

In Sanders v. Svannah Highway Auto Co. , No. 28168, slip op. (July 26, 2023),  the Supreme Court of North Carolina said that, under the Federal Arbitration Act’s “separability” doctrine, the claim that the contract—including the arbitration agreement— could no longer be enforced was an issue that concerned the enforceability of the container contract as a whole, not the enforceability of the arbitration agreement specifically. And because the assignment concerned only the continued existence of the container contract, and not a claim that the container contract was never formed, the exception to the separability doctrine under which courts get to decide whether a contract has been concluded did not apply.

Accordingly, explained the South Carolina Supreme Court, it was for the arbitrator to decide what effect, if any, the assignment had on A’s right to enforce the container contract, including the arbitration agreement.

Sanders: Background

The contract in Sanders was an installment sales contract for the purchase of a vehicle by buyer. The dealership assigned the contract to a bank. The installment sales contract contained an arbitration clause, which stated:

Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Clause, and the arbitrability of the claim or dispute), between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract, or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract) shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action.

Slip op. at 2-3.

The buyer made various claims against the dealership and its representatives, including an assertion that those persons had misrepresented the buyer’s income to the bank, which resulted in the bank accepting a contract that imposed a monthly payment on the buyer that was 37% of buyer’s actual pre-tax income.

The dealership moved to compel arbitration and the buyer opposed the motion, claiming that the assignment extinguished the dealership’s right to enforce the arbitration agreement in the container contract. The trial court and the intermediate court of appeals determined that the question whether the matter was arbitrable was for the court, and the matter was not arbitrable because the dealership had assigned the contract to the bank and therefore could no longer enforce the arbitration agreement. The South Carolina Supreme Court reversed. Slip op. at 2, 13.

The Court’s Decision: Separability Doctrine Governs

Separability doctrine.

Rather than rule on whether the contract clearly and ambiguously delegated arbitrability questions to the arbitrators, the Court premised its decision on the separability doctrine of Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U.S. 395, 404-06 (1967);  Buckeye Check Cashing, Inc. v. Cardegna , 546 U.S. 440, 444-46, 448-49 (2006); and Rent-A-Ctr., W., Inc. v. Jackson , 561 U.S. 63 (2010). We have discussed the separability doctrine in prior posts. (See, e.g., here and here .)

The so-called doctrine of “separability” (sometimes referred to as the doctrine of “severability”) was first articulated by the U.S. Supreme Court in  Prima Paint , and reaffirmed in  Buckeye Check Cashing . Grounded in Federal Arbitration Act Section 2, the separability doctrine permits courts to compel arbitration of fraudulent inducement claims and defenses—and other contract-validity or contract-enforceability claims and defenses—that fall within the scope of a broad arbitration clause, provided that they relate to the contract as a whole, and do not specifically and independently relate to the arbitration agreement itself (and thus give rise to a bona fide question of arbitrability within the meaning of FAA Section 2).

The doctrine of separability helps implement the Federal Arbitration Act’s enforcement command by preventing courts from being inundated with non-arbitration-agreement-specific contract enforceability and validity claims and defenses. That is important not only to preserve arbitration as a viable alternative to litigation, but also, and relatedly, to discourage parties from asserting contract-enforceability or contract-validity defenses as a pretext to delay or avoid arbitration of disputes for purposes of obtaining an unwarranted strategic advantage in the dispute resolution process.

There is an important exception to the separability doctrine: if the defense is that the container contract never existed (and thus was never concluded) then the question whether the parties agreed to arbitrate the dispute is for the Court. See, e.g., Buckeye , 546 U.S. at 444 n.1 (“The issue of the contract’s validity is different from the issue whether any agreement between the alleged obligor and obligee was ever concluded.”); Henry Schein, Inc. v. Archer & White Sales, Inc. , 139 S. Ct. 524, 530 (2019) (“To be sure, before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists.”) (citation omitted).

Separability: Arguments on Appeal

The dealer did not request the Court to reverse the lower appellate court’s finding that the assignment extinguished the buyer’s right to compel arbitration. While it argued that the assignment of a container contract does not always divest the assignor’s right to compel arbitration under the Federal Arbitration Act, the seller requested the Court to hold only that the question of whether the assignment had such an effect was a “gateway question” to be decided by the arbitrators.

The seller’s appeal made two principal arguments: (1) the gateway question was for the arbitrator because the buyer did not argue that the arbitration agreement itself was invalid or unenforceable (a separability argument); and, alternatively, (2) the arbitration agreement contained a delegation provision under which the parties clearly and unmistakably agreed to arbitrate arbitrability issues.

The Court explained that when one challenges another’s right to invoke arbitration, “the gateway question sometimes becomes: Does the court or arbitrator decide whether the dispute is arbitrable.” Slip op. at 6 (citations omitted).  That was true, said the Court, whether: (1) under the separability doctrine—according to which “challenges to the. . . ‘container contract’[] are for arbitrator to decide, while challenges to the arbitration provision itself are for the court to decide,” slip op. at 6 (citations omitted); or (2) the parties have “delegated threshold arbitrability issues to the arbitrator” by “clear and unmistakable evidence.” Slip op. at 6 (citations and quotation omitted).

The Court discussed the separability doctrine in some detail in the opinion, and noted that “[t]he Prima Paint doctrine has been roundly criticized, and applying the doctrine is unnecessarily muddled.” Slip op. at 6; see slip op. at 6-10.)  Applying it to the “set of facts” before it, was “not so simple.” Slip op. at 8.

Separability: Application of the Law to the Sanders Facts

Was the assignment challenge directed at the container contract as a whole or to the arbitration agreement itself? The Court agreed with the seller that the assignment challenge was not “directed” “specifically” to the arbitration agreement. Slip op. at 8. But the buyer argued that because of the assignment, the agreement between the buyer and the dealer “ceased to exist[,]” and that, accordingly, the “court must decide the challenge—even though it is directed to the contract as a whole.” Slip op. at 8.

That required the Court to determine whether the assignment raised a question of whether the arbitration agreement was concluded, a contract formation question that the Court had to decide before it could legitimately compel arbitration.

The Court concluded that the assignment challenge was not a claim that the contract never existed; it was a claim that the contract, indisputably formed, ceased to exist. Slip op. at 11-12. Reviewing pertinent case law, the Court concluded there were two reasons why the buyer’s “‘contract existence’” argument had no merit. Slip op. at 11-12. First, the contract formation cases lent “no support for the conclusion that a challenge to he continued existence of a container contract is for the court to decide under the Prima Paint doctrine.” Slip op. at 11.

Second, there are good grounds for distinguishing between contract formation challenges and “continued existence” challenges. Slip op. at 11. In contract formation challenges the question of whether an agreement was ever concluded necessarily arises. Slip op. at 11. Given arbitration is a matter of consent, “it would be illogical for an arbitrator to resolve such a challenge.” Slip op. at 11. But by allowing arbitrators to resolve “continued existence” challenges courts never “risk. . . sending a party to arbitration when that party never agreed to arbitration.” Slip op. at 11 (emphasis in original).

The Court summed up by saying the separability “doctrine is not the model of clarity[,]” but nevertheless “requires us to hold that the arbitrator must decide the gateway question of whether [the seller] retained the right to compel arbitration after assignment of [the retail instalment sales contract].” Slip op. at 13.

The Dissent: Contract Existence Exception Applies

Associate Justice George C. James, Jr. wrote the majority opinion in which two other members of the Court joined. Acting Justice Kaye Gorenflo Hearn wrote a thoughtful  dissenting opinion in which Acting Justice James E. Lockemy joined.

The dissent thought the “majority place[d] too fine a point on the slight distinction between whether an agreement to arbitrate ever existed versus if one continues to exist.” Slip op. at 16. It also disputed the majority’s characterization of certain cases from other jurisdictions that had concluded that an assignment precluded the assignor from enforcing an arbitration agreement. Slip op. at 14-15.  The dissent “would [have] follow[ed] the general rule that an assignment extinguishes the rights under a contract. . . .” Slip op. at 16. “Without an agreement to enforce,” said the dissent, it follows that the [Court] must generally resolve this threshold question.” Slip op. at 16 (citing and quoting Schein , 139 S. Ct. at 530).

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that  The Loree Law Firm  offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or  [email protected] .

Philip J. Loree Jr.  has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.

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This entry was posted on Wednesday, August 2nd, 2023 at 2:08 pm and is filed under Application to Compel Arbitration , Arbitrability | Clear and Unmistakable Rule , Arbitrability | Existence of Arbitration Agreement , Arbitration Agreements , Arbitration as a Matter of Consent , Arbitration Law , Arbitration Practice and Procedure , Clear and Unmistakable Rule , Contract Defenses , Existence of Arbitration Agreement , FAA Chapter 1 , Federal Arbitration Act Section 1 , Federal Arbitration Act Section 2 , Federal Arbitration Act Section 3 , Federal Arbitration Act Section 4 , Federal Policy in Favor of Arbitration , Gateway Disputes , Gateway Questions , Practice and Procedure , Questions of Arbitrability , Section 4 , Separability , Severability , South Carolina Supreme Court , United States Supreme Court . You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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Assignment Of Contractual Rights And Its Impact On Arbitration Agreements

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Mertcan İPEK

ABSTRACT The assignability of contractual rights has long been discussed in terms of the privity of contract. In modern legal systems, it is widely accepted that contractual rights can freely be assigned. However, there are also exceptions to this rule, such as non-assignability clauses in the contracts and personal nature of contractual rights. One of the most important issues as regards the assignment of contractual rights is the fate of arbitration agreements, which are directly related to the right to sue and therefore constitute an accessory of the assigned contractual right. The discussion is focused on the question whether arbitration agreements are automatically transferred through the assignment of contractual rights. The arguments raised by the advocates and opponents of the automatic transfer rule are further analyzed in this article.

Keywords: Assignment, contractual right, privity, arbitration agreement, automatic transfer.

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India: Can An Arbitration Agreement Be Assigned?

Section 16 of the Indian Arbitration & Conciliation Act, 1996 ('the Act') provides for the principle of separability, as per which an arbitration clause enshrined in a contract is considered a separate agreement in itself. India is gearing up to showcase its arbitration-friendly character which is evident from amendments brought in the arbitration act as well as from the catena of judgments propounded by the national courts. This article would be focusing on a very important and practical issue which lurches in the mind of every party to arbitration and thus requires clarity i.e. the fate of an arbitration clause enshrined in an agreement that has been assigned via a Deed of Assignment.

Practice of assignment of contract is very common. It is when there is a transfer of rights & obligations (with the consent of counterparty to the contract) from a party to a contract to another entity which is not a party to that contract. 1 Businesses usually assign their rights under a contract to another party vide a registered Deed of Assignment. Rights under a contract can be assigned unless the said contract is personal in nature or the said rights are unassignable under law or under an agreement between the parties. A benefit under a contract can always be assigned. 2 It is always open for the parties to enter into an agreement prohibiting assignment.

However, issue arises when such a contract has an arbitration clause. What is the fate of such an arbitration clause when the underlying contract itself is assigned to a third party? This leads to a usual jurisdictional objection if an arbitration is invoked, as the third party was originally not a party to the arbitration agreement. The party challenging the jurisdiction of the Tribunal can argue that as arbitration agreement is in itself a separate agreement, separable from the main agreement that has been assigned, the third party was not the one with which the arbitration agreement was entered into i.e. there was no agreement to resolve any disputes with the third party through arbitration.

The Bombay High Court in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors. 3 , gave a finding that in case of assignment of a contract, the arbitration agreement enshrined within the agreement is also assigned. The relevant excerpt of the judgment is reproduced herein below -

"77. In my view, there is no substance in the submission of the learned senior counsel for the respondent that even if the two contracts were assigned in favour of the petitioner, the arbitration agreement forming part of such contracts was not assigned. The judgments relied upon by the learned senior counsel for the respondent interpreting section 16 of the Arbitration & Conciliation Act, 1996 are not relevant to decide whether arbitration agreement can be assigned or not. Under section 16 of the Arbitration & Conciliation Act, 1996, it is provided that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It is provided that the arbitral tribunal has power to rule on its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement and for that purpose, the arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. Merely because a party has appointed an arbitrator or has participated in the appointment of an arbitrator, he is not precluded from raising a plea of jurisdiction in the arbitral proceedings. The scheme of section 16 permitting a party to raise such an objection of jurisdiction though he had participated in the appointment of an arbitrator in an arbitration, without intervention of the Court is totally different and is limited only for that purpose. In my view, the judgments interpreting section 16 of the Arbitration Act would not apply in case of an assignment of a contract including arbitration agreement.

80. In view of the assignment of the said two contracts in favour of the petitioner, the arbitration agreement contained therein also stood assigned in favour of the petitioner. The petitioner had thus locus standi and had rightly invoked the said arbitration agreement. The impugned order holding that arbitration agreement was not assigned in favour of the petitioner shows patent illegality."

Calcutta High Court discussed in great detail the issue of assignment of arbitration agreement in Hindustan Steel Works Construction Ltd. v. Bharat Spun Pipe Co. 4 , has held, while relying on Russel on Arbitration, that the arbitration clause was not personal in nature thus there was nothing to prevent the assignment of such a contract as the restriction only applies if the contract is in the nature of a personal covenant. The relevant excerpt is reproduced herein below-

"5. Therefore, from the observations of the courts both of England and in this country, it appears to me, that the correct position in law seems to be that whether the contract is assignable or not depends upon the nature of the contract. A contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assignability would depend upon the terms and the language used in a contract. Fourthly, and this is important for our purpose, existence of an arbitration clause per se does make neither the contract non-assignable or assignable. But in a particular case the arbitration clause may be so worded as to afford an indication about the contract being personal or not. But apart from that the existence of arbitration clause does not, in my opinion, affect either the rights or the assignability of the contract if it is otherwise assignable. This is the position as a result of the principles of the different judicial authorities before the Appeal Court in England and the Supreme Court in India. This again, in my opinion is corroborated by Section 34 of the Arbitration Act, 1940 which is in pari materia with Section 4 of the Arbitration Act, 1950 of England so far as relevant from this aspect of the matter and which re-enacts part of Section 4 of the Act of 1889 upon which Master of the Rolls Lord Creene M.R. relied in the case of (1946) 2 All ER 54 (supra).

6. On this aspect it may be appropriate to refer to the statement of law as stated by the learned editor of Russel on Arbitration, 18th Edition at page 143.

"3. Person claiming through or under a party.

Assignee of contract.

An arbitration clause will bind a valid assignee of a contract containing it; and the presence of an arbitration clause will not normally cause a court to hold that a contract is not assignable."

7. Looking at the contract containing arbitration clause in this case it appears to me that the contract was not personal. It was for performance and for supply of some materials. It was an agreement between the buyer and seller. There is nothing in the facts of the case or on the terms of the contract or in the arbitration clause, which make it necessary to hold that it was upon personal qualification or quality of Shrigopal Modi that the Hindustan Steel Works Construction Ltd. was induced to enter into this transaction. Furthermore, the arbitration clause in its nature also does not in my opinion contain any special clause which indicated any personal nature of the covenant. In the aforesaid view of the matter this is not a contract which by the nature of the contract or by the terms of the contract could not be said to be one which is not assignable and the existence of the arbitration clause itself or its term also do not indicate any contrary intention. There was, therefore, nothing in law which prevented effectual assignment of this contract."

At this juncture, the discussion in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. 5 , as to whether even non signatories to the Arbitration Agreement can be referred to Arbitration is of prime importance. The Court while analyzing the circumstances wherein a third party (non-signatory) to an arbitration agreement can referred to arbitration cite assignment of underlying contract containing the arbitration agreement as one of such circumstance. The relevant portion is reproduced herein for better understanding -

"70. Normally, arbitration takes place between the persons who have, from the outset, been parties to both the arbitration agreement as well as the substantive contract underlining (sic underlying) that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy onus lies on that party to show that, in fact and in law, it is claiming "through" or "under" the signatory party as contemplated under Section 45 of the 1996 Act. Just to deal with such situations illustratively, reference can be made to the following examples in Law and Practice of Commercial Arbitration in England (2nd Edn.) by Sir Michael J. Mustill:

"1. The claimant was in reality always a party to the contract, although not named in it.

2. The claimant has succeeded by operation of law to the rights of the named party.

3. The claimant has become a party to the contract in substitution for the named party by virtue of a statutory or consensual novation.

4. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence."

Delhi High Court followed the finding given in its earlier judgment of Bestech India Private Ltd. v. MGF Developments Ltd. [6] , wherein it held that if the contract is assignable then the arbitration agreement enshrined in the contract will follow the assignment, in its recent judgment in Kotak Mahindra Bank v. S. Nagabhushan & Ors. 7 while deciding an application under Section 34 of the Act. The Court was faced with the issue of arbitration agreement enshrined in a loan agreement that was assigned to a third party and held that post the assignment of the loan agreement the rights under the arbitration agreement being in the nature of remedy for enforcement of rights under the agreement are assignable as well.

In cases of the contract being assigned after invocation of arbitration, the assignee can substitute itself in the pending proceedings in the place of the assignor based on a valid Deed of Assignment. The Bombay High Court while deciding on an enforcement proceeding in Agri Marketing Co. SARL v. Imperial Exports Ltd. 8/sup> held that in such a case, the assignee can take over the assignor's proceedings without there being a need to start afresh.

Thus, in light of the above cited court findings, it is clear that an arbitration agreement can be assigned and a non-signatory to an arbitration agreement can be referred to arbitration if the agreement which contained the arbitration agreement was assigned.

1 Refer Kapilaben and Ors. v. Ashok Kumar Jayantilal Sheth through POA Gopalbhai Madhusudan Patel and Ors. 2019 SCC OnLine SC 1512, wherein the Court has categorically held that a party to a contract cannot assign its obligations/liabilities without the consent of the other party.

2 Khardah Company Ltd v. Raymon & Co (India) Private Ltd., AIR 1962 SC 1810

3 2016 SCC Online Bom 5069

4 1974 SCC OnLine Cal 59

5 (2013) 1 SCC 641

6 (2009) 161 DLT 282

7 2018 SCC OnLine Del 6832

8 2001 SCC OnLine Bom 841

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Assignment in Arbitration: Scope and Issues in India

[ Krishan Singhania is Managing Partner and Alok Vajpeyi an Associate at Singhania & Co]            

Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It can broadly be divided into three stages, first being the pre-arbitration stage (prior to the time when the dispute arises), second is during the course of arbitration proceeding and last is following the passing of arbitral award.

The term ‘assignment’ is defined as the transfer by a party of all its rights to some kind of property, usually intangible property such as rights in a lease, mortgage, agreement of sale or partnership. The arbitration clause/agreement provides the right to arbitrate to the concerned parties of that agreement. Therefore, the question arises as to whether such right can be transferred through assignment to some other party. The authors in this post have discussed the scope of assignment in arbitration and the issues that arise in making such assignment.

Assignment in Arbitration: An Overview

Arbitration is a separate contract by the separability principle as envisaged under section 16(1)(b) of the Arbitration and Conciliation Act, 1996. An assignment of a contract might result from a transfer either of the rights or of the obligations thereunder. As a result, obligations under a contract cannot be assigned except with the consent of the promisee and then it is a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless a contract is personal in nature or the rights are incapable of being assigned. This view has been upheld in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors. , 2016 SCC Online Bom 5069. The Bombay High Court in its judgment stated that the arbitration clause does not take away the right of assignment of a party to a contract if it is otherwise assignable. The Court noted that there is a clear distinction between assignment of rights under a contract by a party who has performed its obligations thereunder and the assignment of a claim. The latter is a mere claim which cannot be assigned in law. It was further held in this case that once the other party has accepted the assignment and had insisted for compliance of rights, duties and obligations, the assignee steps into the shoes of the assignor and will be entitled to all rights, obligations and benefits including the arbitration agreement forming part of the said agreement.

Alternatively, parties may expressly prohibit assignment. The benefits of the contract are not then assignable. In such a case, a purported assignment by one party of the contract is invalid as against the other party, but it is valid and enforceable between the assignor and the assignee. The terms of a contract could be expressed, or may be implied as it is legitimate to take the surrounding circumstances into account. 

Taking into consideration the general principles relating to the concept of assignment in arbitration, it is to be considered whether the situation for assignment remains same throughout different stages of arbitration (pre-arbitration, during the course of the arbitral proceedings and following the passing of arbitral award).

Pre-Arbitration

The Calcutta High Court in Hindustan Steel Works Construction Ltd. v. Bharat Spun Pipe Co. , AIR 1975 Cal 8, while deciding the application for setting aside an arbitral award, discussed the scope of assignment and held that the correct position in law seems to be that whether the contract is assignable or not depends upon the nature of the contract. A contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assignability would depend upon the terms and the language used in a contract. Lastly, existence of an arbitration clause per se does make neither the contract non-assignable or assignable.

The Delhi High Court in Kotak Mahindra Bank v. S. Nagabhushan & Ors. , 2018 SCC OnLine Del 6832, while deciding the application under section 34 was faced with the question whether there was valid assignment of arbitration agreement or not. The arbitrator decided that since the claimant is not signatory to the arbitration agreement the matter cannot be decided through arbitration. However, the Court held that the loan agreement by its very nature was assignable. The Court viewed that once the rights under the loan agreement are assigned in favour of the petitioner, the rights under the arbitration agreement, being only in the nature of a remedy for enforcement of such rights, are equally assignable and have been duly assigned in favour of the petitioner in the present case by way of the assignment agreement. The Court followed Bestech India Private Ltd. v. MGF Developments Ltd. (2009) 161 DLT 282 and held that if a contract is assignable, an arbitration clause will follow the assignment of the contract.         

During the Course of the Arbitral Proceedings

The Bombay High Court in Agri Marketing Co. SARL v. Imperial Exports Ltd. , (2002) 2 Bom CR 646, while deciding the enforcement application of an arbitral award, stated that the right under an arbitration clause is assignable even after arbitration proceedings have commenced and that the assignee may simply take over the assignor’s proceedings without the need to start afresh. However, the right was subject to two important qualifications:

(i) the notice to the arbitrator must be given within a reasonable time;

(ii) absolute assignment of clause:

(a)  in writing.

(b) with notice to the other party (and the arbitrators).

Following the Passing of Arbitral Award

By virtue of section 36 of the Arbitration and Conciliation Act, 1996, on expiry of the period for an application of setting aside, an arbitral award shall be enforceable in accordance with the provisions of Civil Procedure Code, 1908 in the same manner as a decree of a court. Therefore, the award is assignable according to the provisions of the Civil Procedure Code, 1908 dealing with assignment of decree.

Champerty & Assignment

A claim for damages for breach of contract, after breach, is not an ‘actionable claim’, within the meaning of section 3 of the Transfer of Property Act, 1882, but a mere right to sue within the meaning of section 6(e) of that Act, and it cannot therefore be assigned. Rights of action arising out of or incidental to rights of property can be assigned with the property transferred. An assignment of a bare right of action may also be upheld if the assignee has a genuine commercial or financial interest in taking the assignment; but a step towards the sale of bare cause of action to a third party who had no genuine commercial interest in the claims will be void as champertous since it involves trafficking in litigation.

The Privy Council has generally held that champertous agreements are void in England as it violates the statute of champerty. However, it also recognized that this principle is inapplicable in India. The courts have looked the champertous agreements with caution as they may violate the public policy of the country. But the Indian courts have not faced any situation where the issue involved the funding arrangement with any party to the arbitration proceedings.

The concept of assignment in arbitration is based on the principles of transfer of contractual rights. Assignment can be undertaken during any of the stages and this is beneficial to the parties involved in arbitration. Assignment may be beneficial in various ways. Prior to the dispute if there is some acquisition which occurs or the party does not want to further invest in the project then it can assign the contractual rights (including right to arbitrate to the other parties). During the proceedings, the stressed companies with no real assets but pending arbitration claims can assign their claim to the party whom the debt is own. However, all of this will depend on the agreement of the concerned parties.

It is to be noted that Indian courts have held that assignment of claim is not allowed. However, assignment has been allowed during the arbitral proceedings. This is contradictory, since the pending arbitration proceeding will be considered as a claim only. The courts or the legislature should address this issue.

Therefore, Indian courts may have taken the view that assignment in arbitration is permissible. However, its scope is not clarified and therefore it should be included in the Arbitration and Conciliation Act, 1996 as well, so that the unaddressed issues can be settled and assignment becomes a right in the hand of a party having a legitimate claim. Such a statutory recognition will introduce certainty in the arbitral regime of the country and will help India in its stride to become a hub for international arbitration.

– Krishan Singhania & Alok Vajpeyi

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Assignment without privity: disposal of investment claims.

This post examines the admissibility of investment claim assignments based on the notion of Investor-State arbitration where there is no contractual relationship between the disputing parties. To do so, it draws on Jan Paulsson’s famous article titled Arbitration Without Privity .

Contract Assignments, Assignment of Claim and Arbitration Agreements

The assignment of international contracts is a widespread business practice. By virtue of an assignment, the “assignor” transfers the international contract’s legal and beneficial rights to the “assignee”, who steps into the assignor’s shoes. Whenever such international contracts contain an arbitration agreement, the widespread view is that the arbitration agreement automatically travels together with the assigned contractual receivables. Such view is upheld in many different jurisdictions, such Switzerland, Spain, France, the UK, and Germany. The assignment allows for a substitution of the old creditor (assignor) with a new creditor (assignee) vis-à-vis the original debtor with respect to the same credit, whose underlying binding relationship remains unchanged ( e.g . Spanish Supreme Court, 26 September 2002, STS 6222/2002 ). Accordingly, the new creditor enjoys the same rights as the old one, including ancillary rights, which may consist of the right to arbitrate in case of default by the debtor of its obligations under the contract. Conversely, the debtor may raise the same objections against the assignee as it could have done against the assignor.

It is generally possible to assign an international contract unless the contract expressly states otherwise or was entered into because of the unique characteristics of either of the contracting parties ( intuitu personae ). Other than these two limitations, a debtor cannot oppose the assignment of the contract.

Furthermore, a party to a contract may assign a claim in a more straightforward manner by voluntarily transferring to the assignee the cause of action for breach of contract and the legal remedies to enforce a right against the other party to the contract, where there has already allegedly been a default on that party’s contractual obligations. In this instance, as well, the assignee may avail itself of the same dispute resolution mechanism that was available to the assignor, including arbitration, if that was the case.

In most jurisdictions, it is also valid to assign a damages claim concerning prospective receivables originating from a future cause of action. The likelihood that the future claim materialises is not a factor in ascertaining the validity of the assignment, provided that the cause of action is or can be determined (by way of illustration, see Italian Supreme Court ruling No. 31896/2018 ). Besides being possible to assign a future cause of action, a fortiori, it is also possible to assign an existing cause of action intended to take place in the future, or the proceeds of a cause of action ( Re Oasis Merchandising Services Ltd (In liquidation); Ward v Aitken and others [1995] 2 BCLC 493 ).

Timing and Forms of Assignments

A claim may be assigned either before or after proceedings have been commenced. If an arbitral award has been rendered, the award may also be assigned and the assignee may seek to enforce it. The assignment of international arbitral awards, including awards issued against States, is not unusual. Energoinvest, for example, assigned to FG Hemisphere its interests in two Awards against the Democratic Republic of Congo.

Assignments may be structured in different ways. For example, an assignment may consist in a complete sale of the claim or in a mere assignment for purposes of collection (where the assignor holds an equitable interest in the claim assigned and the assignee is entitled to collect from the debtor, who discharges itself by making payment to the assignee). An assignment might otherwise be made through a third-party-funding agreement, where a full transfer of the risk of the proceedings to the assignee/funder takes place and the assignor and the assignee split the damages collected according to an agreed percentage. Third-party funding agreements are often regarded as a form of claim assignment. The Spanish construction company Abengoa, for example, agreed to partially monetize an arbitration to fund it by assigning a participation in the credit rights that could arise from the arbitration in exchange for a price of € 75 million ( see , further Anna Schmallegger ’s thesis on the “Commodification of claims”). The selection of one assignment structure over another is a question of claim management and expediency rather than a legal issue and may be influenced by the models commonly adopted in a given jurisdiction/s.

Investment Claim Based on International Treaties

International treaties also may create compulsory arbitration without privity . An aggrieved foreign national does not need to point to any contract to which it is a party to have the possibility of a direct action against the host State by means of an international arbitration. In these cases, the cause of action arises out of a given breach of a treaty-based obligation by the host State. Such a breach constitutes the violation of the primary obligation (stipulated in the provisions of the international instrument) and effectively gives rise to a secondary obligation (the obligation of reparation). The aggrieved party is entitled to dispose of such right to claim since the moment the claim arises, which is when the alleged breach of the primary obligation occurred. The aggrieved party can dispose of such right simply by deciding either to file an arbitration or not. The way the arbitration is filed – either directly or through a form of assignment – falls within the discretion of the aggrieved party, who may assign such arbitral claim to another party. Indeed, investment treaties make it possible for the aggrieved party to file an arbitration against a host State without any underlying contract. This is because the international treaty effectively serves as an instrument binding the host State to arbitration. The aggrieved party may equally seek to transfer a claim arising under such an instrument, much like an assignor may transfer a contract containing an arbitration clause or an arbitral claim to an assignee.

This is in practice what happens with political risk insurers (such as Overseas Private Investment Corporation, OPIC, now renamed U.S. International Development Finance Corporation, DFC) who subrogate to the right to claim of the foreign investors upon the payment of the insurance policy. Most bilateral investment treaties (BITs) expressly allow for such assignments, and no BIT expressly forbids them. A foreign investor may therefore freely dispose of investment claims originating from a breach of a BIT. To forbid these assignments would be to read into these BITs a prohibition that is simply not there. The procedural rules usually applicable to investment arbitrations – such the ICSID Convention and ICSID Arbitration Rules, the UNCITRAL Arbitration Rules 1976, 2010, and 2013 – similarly do not prohibit the assignment of arbitral claims. To treat the silence of these procedural frameworks as a prohibition on arbitral claims assignment would be contrary to the purpose of BITs and the ethos of ICSID and UNCITRAL (which are aimed at promoting international investment and trade). The UNCITRAL has even drafted a Convention on the Assignment of Receivables in International Trade , confirming the admissibility of such transactions in order to promote the availability of capital and credit on the basis of receivables at more affordable rates, and in turn to facilitate the development of trade finance and international trade. In the context of an investment arbitration, where a foreign investor may have had all of its assets expropriated by the host State, and as a consequence entered into bankruptcy proceedings, the assignment of its investment claim may be the only way the claim can be actually pursued. As a result of the unlawful expropriation, the investor may lack the required financial resources to pursue its claim (similarly, to what happens in insolvency procedures, where the insolvency office-holder decides to assign a claim because it has insufficient funds to pursue it on behalf of the estate).

Investors may encounter difficulties if they assign their arbitral claims to assignees incorporated in a third country that has a BIT in force with the host State with the purpose of gaining an otherwise nonexistent jurisdiction ( e.g. Mihaly International Corporation v Sri Lanka , ICSID Case No ARB/00/2, Award, 15 March 2002). The country where the assignee is incorporated is of no relevance for the purpose of establishing (or losing) jurisdiction under an investment arbitration, as the claim originates and crystallizes at the time of the host State’s violation.

Few cases have considered the assignment of investment claims. So far, no investment tribunal has ruled that an assignment is invalid per se . The most vocal case on this topic is Daimler Financial Services AG v The Argentine Republic , ICSID Case No ARB/05/1, Award, 22 August 2012). In that case, the tribunal found that the assignment of claims is compatible with investment arbitration, based on the separability between ICSID claims and their underlying investments. The tribunal went on to note that assignments share the same goals as the ISDS system, as they encourage cross-border foreign investments and reduce their political risk, and greatly facilitate and speed up the productive re-employment of assets in other ventures ( see , further Nelson Goh The Assignment of Investment Treaty Claims: Mapping the Principles ; Markus Burgstaller, Agnieszka  Zarowna, “Effects of Disposal of Investments on Claims in Investment Arbitration” ).

In summary, the permissibility of assigning arbitral claims under investment treaties can be analysed using a three-step analysis: (1) arbitral claims can be assigned (either by virtue of assigning a contract containing an arbitration agreement or through direct assignment of the claim itself); (2) a foreign investor has a direct arbitral claim against a host-State based upon the host-State’s alleged breach of one of its international obligations (an investment claim, regardless of any prior legal relationship with the host-State); (3) therefore, the investor may freely assign its investment claim without privity.

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Angelini ASSIGNMENT FOR WEEK 1

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