Assignment of Arbitration
In the constantly changing landscape of corporate legal responsibilities, what happens when a legal entity transforms into a different legal entity, with a view to attaining some commercial benefits?
Let's take an example. "A Ltd" decides to merge with "B Ltd", for the purpose of forming a new company, "C Ltd.". The question arises, what would be the proper manner of disposing of the existing and future obligations of A Ltd and B Ltd respectively? With this merger, did all or some the obligations, especially the prior dispute resolution proceedings (i.e. arbitration) of the parent companies with third parties vanquish or survive?
To address the issue, the 'assignment of arbitration' comes onto the scene. In general terms, assignment' means the transfer of contractual rights or liability by a party to the contract to some other person who is not a party. While the current level of commercial utilization of assignment has never been found before, assignment of obligations or legally contractual benefits has been there as far back as the law of contract has existed, and has nearly been the same over the ages. Section 130 of the Transfer of Property Act, 1882 implies that every actionable claim may be transferred.
Over the years, the judicial trend in India has reiterated this position again and again evident from several Indian cases. But, the question is to what extent such concept of assignment of contract is recognized in Bangladesh?
Section 37 of the Contract Act 1872 read with section 130 of the Transfer of Property Act 1882, one can assert that such a concept does exist in Bangladesh. It is also a settled principle of law, under Arbitration Act 2001 and existing case laws that an arbitration agreement is a separate agreement and it survives even after the contract becomes inoperative or terminated by a breach.
Now, what is the effect of the arbitration clause after the contract is terminated? In 2016, a judgment by the High Court Division of Bangladesh held that an arbitration clause does not get perished nor rendered inoperative merely because the contract has come to an end; rather it survives for resolution of disputes arising out of the contract. It has been already opined that a contract can be assigned, which actually means in legal sense assignment of all existing and future obligations.
The abovementioned scenario involves an important question of law as to whether an arbitration clause is assignable to the dispute that arises out of a contract between A Ltd and a third party. In other words, whether an arbitration clause survives after the entities change their legal identities?
This is a vital question given the prevalence and ease with which corporate entities regularly merge with one another. If these clauses are not assignable, any person could easily escape liability by simply merging with another company. This would amount to complete disregard of the parties' intention. Therefore, in the scenario given above, once A Ltd and B Ltd merge to form C Ltd, the newly formed legal entity, i.e. C Ltd becomes the assignee of the formers. Then the assignee would step into the shoes of his assignors and all the companies are bound by it and entitled to enforce the existing and future obligations of the formers. Likewise, the assignee i.e. C Ltd is also bound by the arbitration agreement between A Ltd and the third party.
Nevertheless, one should be aware of any express provision in restricting the assignment of the contract or contents contained therein. If the nature of the contract does not make it incapable of assignment, an arbitration clause can be assigned and as of now, there is no legal provision or case-laws in Bangladesh which suggests otherwise.
Mahim Al Hasan is a
consultant at Vertex Chambers.