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.
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).
Lex Fori
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.
Lex Causae
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.
