ENGLISH HIGH COURT CONFIRMS RIGHTS TO A CLAIM IN ARBITRATION CAN BE TRANSFERRED TO ANOTHER WHILE AN ARBITRATION IS ON-GOING

by Tom Pritchard

In November 2016, the English High Court was asked to rule on an arbitral tribunal’s jurisdiction after it made an award in favour of a claimant that had undergone a corporate restructuring halfway through the arbitration (A v B [2016] EWHC 3003 (Comm)).  The restructuring occurred under Indian law, but the decision may affect any litigant that goes through a restructuring process outside of England and Wales during an arbitration.

Facts

The claimant, E, had a long-term contract for the supply of iron ore with P, an Indian company.  When a dispute regarding the performance of the contract arose, the dispute was referred to arbitration in England.  After the commencement of the arbitration, P merged with F, another Indian company, under Indian company law using an Indian court-sanctioned Scheme of Amalgamation.  The Scheme of Amalgamation provided that all the rights and liabilities of P passed to F while simultaneously causing the dissolution of P.  At the conclusion of the arbitration, F (now substituted for P) was awarded over US$ 39 million plus interest.

E then applied to the English court to have the arbitral award set aside under section 67 of the Arbitration Act 1996, arguing that the tribunal lacked jurisdiction as the arbitration should have lapsed upon the dissolution of P by the Indian courts.

Claimant’s arguments

In order to advance its claim that the arbitration should have lapsed, E relied on the fact that the Scheme of Amalgamation (the mechanism by which P’s rights and liabilities passed to F) was a “universal succession” under Indian law.  E argued that English law does not recognise that concept of universal succession and that the transfer should therefore be viewed as an equitable assignment.

For F to rely on the equitable assignment in order to bring a claim against E, E maintained that notice needed to be given to E by P after the assignment completed.  As a matter of fact, P could not provide notice to E prior to its dissolution as P ceased to exist as soon as the “assignment” occurred.  Therefore, E argued that no effective assignment had occurred under English law and that the arbitration must have lapsed when P was dissolved (as the arbitration could not proceed with only one party).

In support of its position, E relied on the case of Baytur SA v Finagro Holdings SA [1992] 1 Lloyd’s Rep 134, in which the transfer of rights to a pending dispute was characterised as an equitable assignment.

Defendant’s arguments

In response, F argued that the Scheme of Amalgamation dictated that P had ceased to exist at the moment it transferred its rights and liabilities to F.  This was a legal and natural result of the Indian company law system.  Therefore, P could not give notice to E.

Furthermore, all the requirements under Indian company law had been met in order to transfer P’s claim to F.  Consequently, F advanced the argument that it was not right to consider the transfer as an equitable assignment.  Instead, comity compelled the English courts to recognise the effect of Indian company law.

Lastly, F asserted that Baytur could be distinguished on the basis that it involved only the transfer of benefits, whereas the merger of P and F involved both rights and liabilities being transferred from one entity to another.  Additionally, in Baytur the dispute had not commenced, whereas in the present case the arbitration was already underway.

Decision

Sir Jeremy Cooke found in favour of F.  He upheld the tribunal’s jurisdiction and refused to set aside the award.

The judge appeared to be largely persuaded by the equity of the situation, stating that a ruling in favour of E would have resulted in a “black hole” in which original claimants, who had followed their governing law, could never transfer claims before ceasing to exist.  Further, he found it to be “self-evident that a notice of assignment cannot be served before the assignment has occurred“.

Consequently, the case is authority for the concept that rights to a claim in arbitration can be transferred to another while an arbitration is on-going.  It is another example of an English court taking a pragmatic “pro-arbitration” stance.  However, the result may be more accurately said to have been determined by the nature of the Indian company law regime, which prevented the ability to serve proper notice.  Perhaps the case should then be understood as a caveat to the rule that notice must always be served when transferring rights from one party to another, where equity demands.

However, this caveat appears to be particularly narrow.  It would certainly appear more advisable to avoid corporate restructuring in the middle of an arbitration (or at least fully to consider the effect of the restructuring on the arbitration process while the restructuring is happening, rather than after the event).

*This article was authored by Tom Pritchard, a trainee solicitor at Olswang LLP, and originally published on Olswang LLP’s Legal and Regulatory News.

About Wei Ming Tan

International Dispute Resolution and Arbitration Lawyer
This entry was posted in Arbitration, India, UK. Bookmark the permalink.

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