• 

Arbitration Claim Securitization

Arbitration Claim Securitization

1. Meaning and Concept

Arbitration Claim Securitization refers to the process by which monetary claims arising out of an arbitration (or potential arbitration) are:

Assigned,

Transferred, or

Structured into financial instruments (securities)

for financing, recovery, or investment purposes.

It commonly arises in:

Distressed asset resolution

Non-performing assets (NPAs)

Assignment of actionable claims

Third-party funding arrangements

Securitization and reconstruction transactions

2. Legal Foundations

(A) Assignability of Arbitration Claims

Under contract law principles:

A mere right to sue is not assignable.

However, a debt or actionable claim is assignable.

If the arbitration clause is embedded in the contract, the right to arbitrate may travel with assignment.

(B) Statutory Framework (India)

Arbitration and Conciliation Act, 1996

Transfer of Property Act, 1882 (Section 130) – assignment of actionable claims

SARFAESI Act, 2002 – securitization and asset reconstruction

IBC, 2016 – assignment of financial debt

3. Key Legal Questions

Can arbitration claims be assigned?

Does arbitration clause survive assignment?

Can securitization companies invoke arbitration?

Is a right to arbitrate separable from underlying debt?

What about third-party funding?

4. Important Case Laws

1. Khardah Company Ltd v Raymon & Co (India) Pvt Ltd (1962)

Principle: An arbitration clause is not an independent contract but a collateral term.

Significance: When contractual rights are assigned, arbitration rights may also pass unless prohibited.

Established early doctrine on assignability of arbitration agreements.

2. Booz Allen & Hamilton Inc. v SBI Home Finance Ltd (2011)

Principle: Rights in personam are arbitrable; rights in rem are not.

Relevance: Assigned financial claims (in personam) can be enforced through arbitration.

Clarified arbitrability of financial and contractual disputes.

3. Chloro Controls India Pvt Ltd v Severn Trent Water Purification Inc (2013)

Principle: Non-signatories may be bound by arbitration agreements in composite transactions.

Relevance: In securitization or assignment chains, assignees can enforce arbitration clauses.

4. Ameet Lalchand Shah v Rishabh Enterprises (2018)

Principle: When multiple agreements form a single commercial transaction, arbitration can be invoked across parties.

Relevance: In structured finance or securitization, arbitration rights can extend to assignees.

5. Cox and Kings Ltd v SAP India Pvt Ltd (2023)

Principle: Group of companies doctrine clarified; non-signatories can be bound based on conduct and intent.

Relevance: Important in securitized transactions where SPVs or asset reconstruction companies invoke arbitration.

6. Swiss Timing Ltd v Organising Committee, Commonwealth Games (2013)

Principle: Courts should adopt a pro-arbitration approach at referral stage.

Relevance: Facilitates assignees or securitization entities invoking arbitration without deep judicial interference.

7. ICICI Bank Ltd v APS Star Industries Ltd (2010)

Principle: Assignment of debt is legally permissible, and assignee steps into shoes of assignor.

Relevance: Crucial authority supporting securitization of arbitration-linked financial claims.

5. Core Legal Principles Emerging

(1) Debt vs Right to Sue

Debt or actionable claim → Assignable

Bare right to litigate → Not assignable

If arbitration is tied to debt recovery, it generally transfers with the debt.

(2) Doctrine of Separability

Arbitration clause survives:

Termination

Assignment

Novation (unless expressly excluded)

(3) Securitization Context

Under SARFAESI:

Banks assign NPAs to Asset Reconstruction Companies (ARCs).

ARCs can enforce arbitration agreements embedded in loan contracts.

(4) Third-Party Funding

Though not fully regulated in India:

Courts have not declared it illegal.

Funding of arbitration claims is permissible if not champertous or opposed to public policy.

6. Practical Corporate Scenarios

7. Risks and Challenges

Challenge to locus standi of assignee

Restriction in original contract prohibiting assignment

Non-arbitrability objections

Public policy challenges under Section 34

Conflict with insolvency proceedings (IBC moratorium)

8. Conclusion

Arbitration claim securitization is legally viable where:

The underlying claim is a debt or actionable claim,

The arbitration clause is sufficiently broad,

There is no contractual bar on assignment,

The dispute concerns rights in personam, not rights in rem.

Indian jurisprudence shows a strong pro-arbitration and pro-assignment trend, especially in financial and corporate disputes. However, statutory limitations and public policy considerations remain crucial.

RELATED Blog

Corporate Law at Afghanistan

Corporate Law at Albania

Corporate Law at Algeria

Corporate Law at American Samoa (US)

Corporate Law at Bangladesh

Corporate Law at Andorra

Corporate Law at Angola

Corporate Law at Antigua and Barbuda

Corporate Law at Anguilla (BOT)

Corporate Law at Argentina