Singapore – Promissory Notes And Arbitration.

28 October, 2015

 

Collision of commercial principles

 

Throughout its history, Singapore has been a centre of commerce and trade. Commercial law today remains a key part of the Singapore legal system. One element of this is the promotion of international arbitration, which is recognised and supported in Singapore as a pre-eminent form of commercial dispute resolution. Sometimes, this support collides with one of the other key commercial principles that feature in Singapore law. An example was found in the recent case of Cassa di Risparmio di Parma e Piacenza SpA -v- Rals International Pte Ltd.1

 

Facts

 

Rals International Pte Ltd (Rals) bought machinery from Oltremare SRL (Oltremare) to process cashew nuts. Payment was to be partly in cash, and partly by eight promissory notes. Oltremare assigned the promissory notes to a bank, Cassa di Risparmio di Parma e Piacenza SpA (Cariparma). Cariparma presented the notes for payment in Singapore; the notes were dishonoured; Cariparma sued Rals.

 

Rals asserted that since the contract between Oltremare and Rals had an arbitration clause, the High Court must refer the dispute to arbitration. The arbitrator would then assess whether payment was due or not: Rals said the machinery was defective.

Judgment

 

At the start of his judgment, Vinodh Coomaraswamy J acknowledged that two fundamental principles of commercial law were at odds here. The first principle was that an arbitration clause should be upheld (if not null and void, inoperative or incapable of being performed). The second principle was that promissory notes and other bills of exchange are the equivalent of cash. The holder must be certain that they may be converted into cash quickly, simply and effectively.

 

The judge divided his analysis into two parts. The initial question was whether Cariparma was a party to the arbitration agreement, or at least was claiming through or under a party to the arbitration agreement (Oltremare). The next question was whether the claim fell within the scope of the arbitration agreement. If Rals could satisfy the court that it was at least arguable the answers to both questions were yes, the dispute must be referred to arbitration.2

 

Through or under a party to the agreement

 

Only Rals and Oltremare were parties to the arbitration agreement, so the first question centred on whether or not Cariparma claimed "through or under" Oltremare for the purposes of section 6(5)(a) of the International Arbitration Act. As the assignee of Oltremare, it was difficult to say that Cariparma was bound by the arbitration agreement under normal assignment principles: an assignee normally takes the benefit, not the burden, of a contract.

 

However, the judge took the view that the arbitration agreement was an "annexed burden". The entire purpose of the arbitration agreement arose from the substantive rights and obligations to which it was annexed. Thus, when the contract was assigned, both the benefit and the burden of the arbitration agreement were also transmitted. As the judge stated: "The assignor and assignee cannot break apart the right and the remedy which the assignor and the obligor have created ab initio as a single, indivisible whole in their contract, at least not without the obligor's consent." This meant that Cariparma claimed through or under Oltremare.

 

Scope of the arbitration agreement

 

Turning to the second question, the judge draw a distinction between a claim under the contract between Rals and Oltremare, and a claim under the promissory notes. The former would fall within the arbitration agreement. The latter might fall outside.

The judge reviewed the approach to the interpretation of arbitration agreements under Singapore and English law. From an initial point where arbitration agreements were construed narrowly, because of the courts' reluctance to accept that parties had ousted their jurisdiction, a more liberal approach to arbitration clauses has increasingly been adopted.  

 

The Singapore Court of Appeal in Larsen –v- Petroprod3 stated: "arbitration clauses should be generously construed such that all matter of claims, whether common law or statutory, should be regarded as falling within their scope, unless there is good reason to conclude otherwise".

 

However, the judge stressed that the particular wording of the clause must be observed. Here, the arbitration agreement stated that all disputes "arising in connection with" the sales contract must be referred to arbitration. Disputes under the promissory notes were not "in connection with" the sales contract.

 

Promissory notes are negotiable instruments. They give the assignee (here, Cariparma) better rights than the assignor (Oltermare), because the assignee acquires title to the assigned rights free of any
equities that the drawer (Rals) may be able assert against the assignor. Further, promissory notes function as a substitute for cash, and as such can be sued on without obstacle. As the judge stated: "Simply put: the drawer is obliged to pay now and argue later".

 

The judge also considered that the substantive arguments raised by Rals did not bring the dispute within the arbitration agreement. Although Rals argued that there had been a failure of consideration as a result of deficiencies in the machinery, there was no evidence filed in support of this. Also, a failure of consideration is not a defence against a holder of the promissory notes which has received them after trading with the original assignor. Such a holder of the notes has acquired an indefeasible title.

 

As a result, the judge concluded that the claim on the promissory notes did not fall within the arbitration agreement. Rals' application to refer the matter to arbitration was dismissed.

 

Comment

 

The conflict between these two important parts of commercial law is difficult to resolve. Recognising this, the judge has given Rals permission to appeal. Pending the decision of the Court of Appeal, a number of important points arise from this case concerning Singapore law:

 

• Unless the arbitration agreement states otherwise, a holder of promissory notes (if not the original party to the contract) will not be bound by the arbitration agreement, and can sue in national courts rather than going to arbitration.
• When a contract is assigned, both the benefit and burden of the arbitration agreement will transfer to the assignee, unless the arbitration agreement states otherwise.
• Although an arbitration agreement will be interpreted "generously", it remains important that the drafting is suitably wide, to ensure that all disputes come within the agreement.

 

Notes

 

1  [2015] SGHC 24.

2  Tjong Very Sumito and others –v- Antig Investments Pte Ltd [2009]

4 SLR(R) 732; Malini Ventura –v- Knight Capital Pte Ltd and others

[2015] SGHC 225.

3  Larsen Oil & Gas Ltd –v- Petroprod Ltd (in official liquidation in the

Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414.