Supreme Court Appoints Arbitrator in Dispute Over Assigned Contracts: Lifeforce Cryobank vs. Cryoviva Biotech (2024)

Date of the Judgment: 8 November 2024
Citation: 2024 INSC 860
Judges: Dr. D.Y. Chandrachud, CJI., and Manoj Misra, J.
Can a company that buys the assets of another company in an auction also inherit the right to arbitrate disputes under contracts held by the original company? The Supreme Court of India recently addressed this question in a case involving Lifeforce Cryobank Sciences Inc. and Cryoviva Biotech Pvt. Ltd. The core issue was whether an arbitration clause in a contract could be assigned to a third party without the explicit consent of all original parties to the contract. The bench comprised Chief Justice of India Dr. D.Y. Chandrachud and Justice Manoj Misra, with the opinion authored by Justice Manoj Misra.

Case Background

Lifeforce Cryobank Sciences Inc., a company incorporated in the USA, purchased the assets of Cryobank International, Inc. at a public auction on June 8, 2010, following a decree by the Circuit Court of Florida on May 5, 2010. This purchase included all tangible and intangible assets of Cryobank USA. Lifeforce Cryobank claimed that it stepped into the shoes of Cryobank USA. The dispute arose from two agreements: an Exclusive and Perpetual License Agreement and a Share Subscription and Shareholders Agreement. The License Agreement was between Cryobank USA and Cryobanks India International Pvt. Ltd. (now Cryoviva Biotech Pvt. Ltd.), while the Share Subscription Agreement involved RJ Corp, Devyani Enterprises Pvt. Ltd., Devyani Overseas Private Ltd., RK Jaipuria & Sons (HUF), Dhara Jaipuria, Cryobank USA, and Cryobanks India International Pvt Ltd. Both agreements contained arbitration clauses stipulating that disputes would be referred to a sole arbitrator with jurisdiction in Delhi.

Lifeforce Cryobank contended that under the License Agreement, the respondents were to use Cryobank’s intellectual property rights in exchange for consideration, including shares in the respondent company. Lifeforce Cryobank asserted that it had stepped into the shoes of Cryobank USA, a fact allegedly acknowledged by the respondent company in various correspondences. When their demands were not met, Lifeforce Cryobank invoked the arbitration clause through a notice dated September 29, 2017.

Timeline:

Course of Proceedings

The Supreme Court was approached by the petitioner, Lifeforce Cryobank, under Section 11(6) and 11(12) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator. The respondents contested the maintainability of the petition, arguing that the arbitration agreement was between Cryobank USA and the respondents, and not between the petitioner and the respondents. The respondents contended that the petitioner had only purchased the assets of Cryobank USA and had not been accepted as an assignee of the contract by the respondents. The Supreme Court, at this stage, had to decide if an arbitration agreement existed between the parties to refer the matter to arbitration.

Legal Framework

The Supreme Court considered Section 11 of the Arbitration and Conciliation Act, 1996, specifically sub-sections (6) and (12), which deal with the appointment of arbitrators by the court. Sub-section (6-A) of Section 11 states that the court, when considering an application for the appointment of an arbitrator, should confine itself to the examination of the existence of an arbitration agreement. The court also discussed the concept of assignment of contracts, noting the distinction between the assignment of rights and the assignment of obligations. The court referred to the principle that while rights under a contract are generally assignable, obligations require the consent of the promisee, which may result in a novation.

Arguments

Petitioner’s Arguments:

• The petitioner, Lifeforce Cryobank, argued that it had purchased all assets, including contractual rights, of Cryobank USA, and thus stepped into the shoes of Cryobank USA.
• Lifeforce Cryobank submitted that the respondent company acknowledged this fact through various correspondences.
• The petitioner contended that the rights under the contracts, including the arbitration agreement, were assigned to it through the auction sale.

Respondents’ Arguments:

• The respondents argued that the License Agreement was non-assignable.
• They contended that they had not accepted Lifeforce Cryobank as the assignee of the contract.
• The respondents asserted that there was no privity of contract between them and Lifeforce Cryobank, and therefore, the arbitration clause could not be invoked by the petitioner.

The innovativeness of the argument lies in the respondent’s argument that the petitioner, despite purchasing the assets, did not have the right to invoke the arbitration clause without the consent of the respondents, highlighting the distinction between the assignment of rights and obligations.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but the main issue was:

1. Whether an arbitration agreement exists between the petitioner and the respondents.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• Khardah Company Ltd. v. Raymon & Co (India) Pvt. Ltd., AIR 1962 SC 1810: The Supreme Court relied on this case to reiterate the distinction between assignment of rights and obligations under a contract. It was used to highlight that while rights are generally assignable, obligations require the consent of the promisee.
• DLF Power Ltd. v. Mangalore Refinery & Petrochemicals Ltd., 2016 SCC OnLine Bom 5069: The Court took note of the Bombay High Court’s view that an arbitration agreement can be assigned along with the main contract. However, the Supreme Court did not fully endorse this view but stated that the issue of assignment of the arbitration agreement can be decided by the arbitrator.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that at the stage of appointing an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, the court’s role is limited to examining the existence of an arbitration agreement. The court refrained from delving into the merits of the case, specifically whether the petitioner had validly stepped into the shoes of the original party to the contract. The court emphasized that this issue, along with the question of arbitrability, should be decided by the arbitrator based on the evidence presented by the parties. The court’s approach was to ensure that the arbitration process is not unduly delayed by preliminary inquiries that are best left to the arbitral tribunal.

Judgment

The Supreme Court, without expressing any opinion on the merits of the claims, deemed it appropriate to refer the matter to the Delhi International Arbitration Centre for the appointment of a sole arbitrator. The Court clarified that all contentions and pleas of both parties, including the arbitrability of the dispute, were left open for the arbitrator to decide. The Court explicitly stated that it had not expressed any opinion on the merits of the case, including the question of whether the petitioner had validly stepped into the shoes of Cryobank USA.

The Court stated:

“…at the stage of consideration of a prayer under Section 11(6) of the 1996 Act the Court has to confine itself to the examination of the existence of an arbitration agreement…”

“More so, when existence of arbitration agreement in the license agreement and share subscription agreement is not in dispute.”

“All contentions and pleas are kept open for the parties to raise before the arbitral tribunal.”

Key Takeaways

• The Supreme Court has clarified that at the stage of appointing an arbitrator, the court’s role is limited to examining the existence of an arbitration agreement.
• The issue of whether a party has validly stepped into the shoes of another party to a contract, including the assignment of an arbitration clause, is to be decided by the arbitrator.
• The court will not delve into the merits of the dispute or the arbitrability of the dispute at the stage of appointing an arbitrator, leaving it to the arbitral tribunal.

Directions

The Supreme Court directed the matter to be referred to the Delhi International Arbitration Centre for the appointment of a sole arbitrator.

Development of Law

The ratio decidendi of the case is that the court’s role under Section 11(6) of the Arbitration and Conciliation Act, 1996, is limited to examining the existence of an arbitration agreement, and issues regarding the validity of assignment of the contract and the arbitrability of the dispute are to be decided by the arbitrator. This judgment reinforces the principle of minimal judicial intervention at the stage of appointment of an arbitrator.

Conclusion

In conclusion, the Supreme Court’s decision in Lifeforce Cryobank Sciences Inc. vs. Cryoviva Biotech Pvt. Ltd. & Ors. emphasizes the limited role of the court at the stage of appointing an arbitrator. The Court refrained from deciding the issue of whether the petitioner had validly stepped into the shoes of the original party to the contract, leaving it to the arbitrator to decide. This approach ensures that the arbitration process is not unduly delayed by preliminary inquiries, and that the arbitral tribunal has the primary jurisdiction to decide on the merits of the dispute.