The issue of the effect of contract transfer or assignment of rights on the arbitration clause is one of the most important practical matters concerning investors and companies when restructuring commercial contracts, completing sales, or assigning debts.

The practical and legal challenge lies in determining the extent to which the arbitration clause, as a standalone procedural provision independent from the underlying contract, applies to the assignee or specific successor.

This article examines how Egyptian law and courts deal with such transfers and the extent to which these transactions affect arbitral jurisdiction and the risks arising for parties to cross-border transactions.

Legal Concept: Contract Transfer and Assignment of Rights

An assignment of rights differs from a full transfer of contract in terms of scope and legal effects, although both result in a change in the parties to the legal relationship.

• Assignment of Rights (Assignment of Rights): A transaction whereby a creditor, being the assignor, transfers a right forming part of its financial estate to a new creditor, being the assignee, without transferring the corresponding obligations unless this is agreed separately.
• Transfer or Assignment of Contract (Assignment of Contract): A transaction whereby one party transfers its entire legal position, including rights and obligations, to a third party, subject to obtaining the consent of the other party to the underlying contract in accordance with the general rules.

The importance of this distinction becomes apparent when determining whether the arbitration clause automatically transfers with the right or contract, or whether a new express agreement reflecting the assignee’s intention is required.

Egyptian Legal Framework and the Principle of Autonomy of the Arbitration Clause

The Egyptian Civil Code (Law No. 131 of 1948) governs the provisions relating to assignment of rights and transfer of contracts, while the Egyptian Arbitration Law (Law No. 27 of 1994) sets out the rules governing arbitration agreements.

Egyptian law is based on a fundamental principle, namely the autonomy of the arbitration clause (Autonomy of the Arbitration Clause), pursuant to Article (25) of the Arbitration Law. This principle means that the arbitration clause constitutes an agreement independent from the other terms of the contract, and therefore the invalidity, rescission, or termination of the contract does not affect the arbitration clause unless the ground of invalidity relates to the clause itself.

Application of the Principle to Assignment of Rights and Contract Transfer

1. In the Assignment of Rights: Egyptian courts, in accordance with the principles established by the Court of Cassation and arbitral practice, recognize that the right transfers to the assignee together with all guarantees and accessories attached to it. Since the arbitration clause is regarded as one of the procedural accessories associated with the means of enforcing the right, the transfer of the right generally includes the transfer of the arbitration clause, unless there is an express agreement between the assignor and the assignee excluding arbitration.
2. In the Assignment of Contract: Where a new party replaces the original party in all rights and obligations, the effects of the contract, including all of its provisions and the arbitration clause, extend to the specific successor, provided that the assignee’s acceptance and the consent of the other contracting party are established.

Conditions and Practical Circumstances for the Arbitration Clause to Apply to a Successor

For the arbitration clause to transfer clearly and without judicial disputes over jurisdiction, a number of practical and legal conditions should be observed.

• Establishing the Assignee’s Knowledge of the Arbitration Clause: The assignee must have clear and unequivocal knowledge of the arbitration clause contained in the underlying contract and must accept it either expressly or implicitly.
• Absence of a Prohibition on Assignment in the Underlying Contract: If the underlying contract contains an express prohibition on the assignment of rights or transfer of the contract without prior written consent, any transfer made in breach of such prohibition may be challenged as ineffective, and consequently the arbitration clause may not apply against the original party invoking that prohibition.
• Formal Requirements of the Assignment Agreement: The assignment or transfer must be concluded in accordance with the applicable legal rules and become effective against the debtor either through acceptance or formal notification pursuant to Article (305) of the Egyptian Civil Code.

Legal Risks and Commercial Consequences for Companies

Failure to consider the legal implications associated with the effect of contract transfer or assignment of rights on the arbitration clause may expose companies to significant procedural and financial risks, particularly where the assignment or transfer documents do not clearly identify the applicable dispute resolution mechanism.

• Objection to the Jurisdiction of the Arbitral Tribunal: The assignee may commence arbitration proceedings only to face an objection from the other party asserting that no arbitration agreement exists between them, thereby prolonging the dispute and increasing costs.
• Resorting to the Ordinary Courts Despite the Existence of an Arbitration Clause: A dispute may be brought before the ordinary courts on the assumption that the arbitration clause did not transfer, only for the opposing party to invoke its existence, which may result in dismissal of the court proceedings.
• Disruption of the Enforcement of Payment Instruments and Facilities: In financing and factoring transactions (Factoring), the new creditor relies on the terms of the underlying contract; if the procedural transfer of the arbitration clause is defective, the process of recovering the amounts due may become more complicated.

Special Considerations for International Clients and Foreign Institutions

This issue becomes particularly important in international and cross-border commercial contracts, such as shipping, import and export, and foreign direct investment agreements, where more than one legal system may intersect within a single relationship.

• Applicable Law: A conflict may arise between the law governing the underlying contract, the law governing the assignment agreement, and the procedural law of arbitration (Lex Arbitri). This requires precise drafting to avoid conflicting legal rules.
• 1958 New York Convention: To ensure enforcement in a foreign state of an arbitral award rendered in favor of or against the assignee, it is necessary to verify compliance with the Convention’s “writing” requirement and whether the assignment is regarded as transferring the written arbitration clause.
• Financial Institutions and Multinational Companies: International contracts often contain arbitration clauses administered by international institutions such as CRCICA in Cairo, ICC, or LCIA. When such contracts are transferred, it is necessary to ensure that the assignee’s institutional structure enables compliance with the rules of those institutions and the associated costs.

Common Mistakes in Drafting and Implementing Assignments

1. Failure to Expressly Refer to the Arbitration Clause in the Assignment Agreement: Relying entirely on general wording such as “transfer of all rights” without referring to the dispute resolution mechanism.
2. Failure to Notify the Debtor of the Assignment in Accordance with Legal Procedures: Failure to provide notification may allow the debtor to rely on payment to the assignor or argue that the arbitration clause is ineffective against it.
3. Ignoring Assignment Restrictions in the Underlying Contract: Entering into an assignment of rights without reviewing the preconditions contained in the original contract.

Practical Best Practices for Companies

The more clearly the assignment documents address the status of the arbitration clause, the less room there will be for later disputes over jurisdiction. Key practical measures include:

• Express Provision: Include a clear provision in the assignment agreement under which the assignee acknowledges its acceptance of the arbitration clause contained in the underlying contract and its full commitment to its effects.
• Tripartite Agreement (Tripartite Agreement): When transferring high-value contracts, it is preferable to enter into a tripartite agreement involving the assignor, the assignee, and the other contracting party in order to confirm the transfer and acceptance of the continued application of the arbitration clause.
• Legal Due Diligence (Legal Due Diligence): Review assignment restrictions and jurisdictional rules before executing any commercial assignment.

When Is the Involvement of a Specialized Lawyer or Local Counsel in Egypt Necessary?

The need for specialized local legal counsel arises where the transfer of a contract or assignment of rights involves multiple legal positions or international elements, particularly where a dispute or enforcement is expected to take place in Egypt.

• When Restructuring Assets and Transferring Major Contracts: To ensure procedural validity and the effectiveness of the arbitration clause against the relevant parties.
• When an International Commercial Dispute Involving an Assignee Arises: To assess the validity of arbitral jurisdiction and prepare the appropriate procedural arguments before arbitral tribunals and Egyptian courts.
• Before Taking Actual Enforcement Measures: To review whether the contract transfer complies with mandatory rules and established Egyptian jurisprudence, and to pursue rights without procedural obstacles.

How Can Specialized Legal Support Help?

El Rouby Law Firm provides comprehensive legal support to domestic and international institutions to protect their legal and commercial positions when contracts or rights are transferred.

• Regulatory Compliance and Risk Management: Analyzing existing contracts and assessing the impact of transfers of rights and assignments on court and arbitral jurisdiction.
• Drafting Contracts and Assignments: Preparing agreements for the assignment of rights and transfer of contracts with precise provisions that ensure the transfer of the arbitration clause and reduce future disputes.
• Dispute Prevention and Negotiation: Managing negotiations among the parties to the assignment to reach supplemental agreements that correct procedural issues before a dispute arises.
• Representation, Litigation, and Arbitration: Advocacy and legal representation before domestic and international arbitration centers, such as CRCICA, and Egyptian courts, as well as obtaining and effectively enforcing judgments and awards while acting as Local Counsel for companies and foreign law firms.

Contact El Rouby Law Firm

Complex commercial transactions and contract transfers require a precise legal approach combining an understanding of local law with the requirements of international trade. If your organization is restructuring its contracts, assigning commercial rights, or resolving a dispute concerning jurisdiction under a transferred arbitration clause, you may engage the team at El Rouby Law Firm for specialized legal advice and representation.

Contact us to arrange a consultation with our specialized team:

• Website: El Rouby Law Firm
• Email: info@elroubylaw.com
• Services: International commercial arbitration advice, contract drafting, and local representation (Local Counsel) in Egypt.

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Frequently Asked Questions About the Effect of Contract Transfer or Assignment of Rights on the Arbitration Clause

Does an arbitration clause automatically transfer upon an assignment of rights under Egyptian law?

Yes. As a general rule, the arbitration clause is regarded as one of the procedural accessories of the right and transfers with the assigned right to the assignee, unless the parties expressly agree otherwise or the underlying contract prohibits the assignment.

What happens if the underlying contract prohibits assignment without written consent?

If the assignment is made in breach of the written prohibition, the original party invoking that prohibition may argue that the assignment and the transferred arbitration clause are ineffective against it.

Can the assignee pursue the right before the ordinary courts and disregard the arbitration clause?

No. If the right is transferred together with the arbitration clause, the assignee is bound by it, and the opposing party invoking arbitration may object to the jurisdiction of the court on the basis of the arbitration clause.

What is the difference between the effect of an assignment of rights and the effect of a contract assignment on the arbitration clause?

An assignment of rights transfers the right and the arbitration clause associated with it, whereas an assignment of contract transfers the entire legal position, including rights and obligations, subject to the consent of the other party, and the arbitration clause applies to the new party.

How can foreign companies ensure that the arbitration clause remains effective after an assignment?

This may be achieved by signing a tripartite contractual addendum (Tripartite Agreement) in which the assignee expressly acknowledges its obligation to comply with the arbitration clause contained in the underlying contract in accordance with international and domestic rules.

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References

• Egyptian Civil Code (Law No. 131 of 1948): provisions governing assignment of rights and transfer of contracts (Articles 303 to 314).
• Egyptian Arbitration Law (Law No. 27 of 1994): particularly Article (25) concerning the principle of autonomy of the arbitration clause.
• Judgments of the Egyptian Court of Cassation: Commercial and Civil Circuits concerning the effects of assignment of rights and the autonomy of the arbitration agreement.
• Cairo Regional Centre for International Commercial Arbitration (CRCICA): procedural rules and common arbitral precedents concerning the jurisdiction of arbitral tribunals in assignment agreements.