Navigating Complexities of Arbitration: Mergers, Amalgamations, and Impacts
Shivam Agrawal
4th Year, B.Com. LL.B.(Hons.), Gujarat National Law University
Adwitiya Gupta
3rd Year, B.A. LL.B.(Hons.), Gujarat National Law University
Introduction
As arbitration has emerged as one of the preferred mechanisms for resolving corporate disputes in India, a lot of complexities have been noted since the enactment of the Arbitration and Conciliation Act 1996 (“the Act”). These issues pertaining to Arbitration agreements have raised a string of pivotal problems. One of such problem includes the uncertainties that arise when the entities undergo restructuring through mergers or amalgamations. As the entities undergo the process of mergers or amalgamations it becomes imperative to determine the effect and enforceability of arbitration agreements that were entered between the any of the amalgamated company before the process of amalgamation. Therefore, it becomes crucial to determine whether the amalgamating or merging company is bound by the arbitration agreements that were entered and executed before the amalgamation or merger. With the rising number of mergers and acquisitions every day, it is important to understand the technicalities of the liabilities that can be faced in future. Therefore, this article discusses the issue of the impact of mergers and acquisitions on arbitration agreements.
Background on Arbitration in India
The Arbitration and Conciliation Act 1996 is the statute which governs Arbitration in India. The Act provides a comprehensive legal framework for settling disputes expediently. The provisions of the Act provide great emphasis on the principle of party autonomy, thus paying great importance to the agreements between the parties to the contract. In the contemporary world, Arbitration proceedings are preferred for dispute resolution rather than conventional methods of dispute resolution owing to the several advantages that Arbitration proceedings incorporate. However, the Act does not provide for a law that specifically deals with the problem of the continuation or discontinuation of arbitration proceedings post-mergers and post amalgamations.
Impact of Mergers and Amalgamations on Arbitration
Mergers and amalgamation have always been subject to dispute. The transfer of rights and obligations from the amalgamated company to the amalgamating company involves many techincalities, increasing the chances of a potential disagreement. The root of this issue lies in the potential changes in the identities and legal statuses of the parties involved after the merger. This transition raises crucial questions about the validity and enforceability of arbitration agreements after the mergers and amalgamations.
As per the Company Laws, the general principle is that all rights and obligations of the amalgamated company are transferred to the amalgamating company. In this context, the term “assignment” becomes relevant. Assignment is defined as the transfer by a party of all its rights to another, which typically involves intangible properties such as lease rights, mortgages, sales agreements, or partnerships. Arbitration clauses grant the right to arbitrate between the parties involved, raising the issue of whether this right can be transferred through assignment. Indian courts have grappled with the interpretation while determining the continued validity of arbitration clauses during corporate restructuring. This highlights the need for clear legal guidelines on this issue. The absence of statutory provisions addressing the arbitration agreements post-merger/amalgamations has exacerbated the legal ambiguities.
Case Law Analysis
To date, none of the Indian Judicial Precedents offers an in-depth explanation of how the courts have dealt with the Arbitration agreements after Mergers or Amalgamations. The question of arbitration agreements post-merger or post-amalgamation came up in the following cases wherein the court has briefly dealt with this issue.
In the case of Flowmore (P) Ltd., New Delhi vs U.P. State Industrial the question arose whether the arbitration agreement becomes void owing to the subsequent impossibility. This question lies on the premise that since the transferor is no longer in existence, the arbitration agreement becomes impossible to be enforced. The respondents relied upon section 56 of the Indian Contract Act 1872, which provides for the doctrine of frustration of contracts wherein the courts provide relief to the parties in case of subsequent impossibility of performance of contract if the whole purpose of the contract was frustrated by intrusion or occurrence of an unexpected event. However, the court upheld that a subsequent impossibility would not impinge upon the rights and liabilities that were already incurred prior to the occurrence of the event, making the performance of any part of the contract impossible nor will it affect the arbitration clause of the agreement if it is sought to be invoked in respect of any right acquired or liability incurred prior to the effective date. Therefore, this case concluded that the arbitration agreement is valid only to the extent of the rights acquired or liability incurred before the process of amalgamation.
In the case of Patanjali vs. Rawalpindi Theatres, Delhi High Court dealt with the issue of whether the arbitration agreement is capable of implied assignment after the process of amalgamation takes place. Delhi High Court came to a conclusion that if the arbitration agreement’s subject matter is assignable, the assignee assumes the assignor’s rights and obligations. The assignee in this case becomes both bound by the agreement and entitled to enforce it as well. The court laid emphasis on the laws relating to the assignment of contractual rights and obligations while determining the assignability of contractual rights.
Furthermore, in the case of Kotak Mahindra Prime Limited vs Sanjeev S/o Sadaram Chavare, the Bombay High Court concluded that the entire agreement, including the arbitration clause, could be assigned. The court held that the question of whether an arbitration clause has been assigned or not needs to be decided in the facts and circumstances of each case, and there is no law that prohibits such assignment. In M/s. Roy’s Institute of Competitive Examination vs. M/S. R.N.B. Digitronix, the petitioner, assumed control of the firm’s business and invoked the arbitration agreement. The Calcutta High Court ruled that the petitioner is entitled to the arbitration clause benefits as per their arbitration agreement.
The aforementioned precedents showcase the complexities that arise with respect to arbitration in cases of mergers and amalgamations. The disparity between some rulings that support the continuation of arbitration clauses after the merger, whereas some limit their applicability based on the timing of rights and obligations, needs to be solved. Therefore, it becomes imperative to have a clear approach while dealing with such matters pertaining to uncertainties about arbitration agreements post the corporate restructuring.
International Perspective: A v B [2016] EWHC 3003
The English High Court case of A v B provides a comprehensive view of arbitration agreements post-corporate mergers. In this case, party P merged with party F during the ICC Arbitration proceedings. The court’s stance on this issue was that even though English law does not recognize the doctrine of universal succession, it provides a recognition of the effect of changes in corporate status under foreign law (in this case, Indian law). The court laid emphasis on “the substance of what takes place” rather than a strict application of domestic legal concepts such as equitable assignment. Adapting this approach has several advantages; one of the major advantages is that this approach can prevent the arbitration from falling into a legal “black hole” which could have arisen if strict notice requirements for assignment had been imposed when the original entity ceased to exist after the merger’s effective date.
This precedent doesn’t hold an authoritative value for the Indian courts however it provides a benchmark recommendation for the Indian courts to adopt a flexible approach while dealing with arbitration agreements. This perspective can assist Indian jurisprudence in dealing with such matters as it continues to struggle with these issues.
Enforcement Considerations
Even after understanding the interpretation of the survival of arbitration clauses post-merger or amalgamation, several issues nevertheless persist. These issues add to the already persisting issues, making it an altogether complicated process for the parties. Such problems include the enforcement of arbitral awards involving merged or amalgamated entities. Recognition of awards and compliance with International Conventions such as the New York Convention are some of the other problems. All these aforesaid issues require compliance and the process becomes terribly complicated if not defined by definite laws. In order to avoid issues pertaining to corporate mergers or amalgamation, parties need to undertake due diligence before any dispute arises. This would ensure that the mechanisms of enforcement are not hampered by legal hurdles regarding such restructuring.
Best Practices and Recommendations
In order to effectively negotiate the convolutions of arbitration within the framework of mergers and amalgamations, it is suggested and recommended that stakeholders take preemptive actions. Upfront, if arbitration clauses were drafted in a straightforward and unambiguous manner and included provisions that addressed possible corporate restructuring scenarios, the parties would have a clear understanding of the agreement’s provisions and a more coherent means of resolving their disputes.
Second, it is imperative to conduct due diligence on the merger histories of counterparties and any currently ongoing arbitration actions. By averting possible conflicts, a well-thought-out and well-defined plan for post-merger arbitration proceedings may further facilitate and ease the process. Practices such as the arbitrators’ appointment process, jurisdictional issues, and various other possible difficulties might be included in strategic and deliberated planning. Moreover, the parties’ best interests would be protected in this way.
Finally, maintaining the integrity of arbitration agreements during corporate restructuring would make the best from instituting the practice of consulting with knowledgeable and experienced attorneys in both corporate law and arbitration to comprehend the interactions between these fields.
Conclusion
The effect of mergers and amalgamations on arbitration in India is a diversly complicated matter that needs to be considered carefully. Indeed, the complexities have so far been beyond the capacity of the Indian courts to handle, which makes the case for a clear legislative framework to deal with the enforceability and continuity of arbitration agreements subsequent to mergers and amalgamations. It is in this regard that the careful drafting, strategic planning, and due diligence may prevent disputes arising out of these complications. Similarly, a flexible content-over-form approach, borrowing from other countries, may also help the cause in cases regarding dispute resolution procedures. The application of such procedures would be part of an approach aimed at strengthening legal certainty, so very much needed and required within the dynamic system of the business world.
