31 October, 2016
Singapore Court of Appeal held that, in the absence of express incorporation, an arbitration clause in an underlying contract will not cover disputes arising under an accompanying bill of exchange Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53 (Singapore, Court of Appeal, 5 September 2016)
In Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA, the Court of Appeal was asked to determine whether an assignee of bills of exchange (in this case a number of promissory notes) was required to arbitrate any disputes arising in respect of the bills of exchange pursuant to an arbitration agreement contained in the underlying contract that had led to the issue of those bills of exchange. The Court of Appeal upheld the decision of the High Court, finding that a negotiable instrument such as a promissory note was not governed by an arbitration agreement in an underlying contract unless the agreement had been expressly incorporated into that instrument.
Our Comments/Analysis
The decision provides welcome certainty as to the forum for resolution of disputes arising from negotiable instruments, preserving the commercial advantages of using promissory notes for their transferability and for ensuring payments are made quickly.
The Court of Appeal adopted a more discerning approach to the Fiona Trust “one stop shop” principle, which is appropriate in light of the fact that widespread use of negotiable instruments may sometimes entail transferees of such instruments, having little knowledge of the contents of the underlying contract, including an arbitration agreement therein.
Holders of negotiable instruments, having an immediate right of recourse, are entitled to sue upon the instrument in the event of non-payment, and such proceedings are usually dealt with by summary judgment. The Court of Appeal’s decision thus also has a practical aspect, since as the Court noted, the availability of summary judgment procedures in arbitration is less extensive, although the SIAC for instance now has a new procedure akin to a summary
judgment process in Rule 29 of the latest SIAC Rules (6th edition, 1 August 2016) on the early dismissal of a defence.
This Update looks at the Court of Appeal’s decision.
Background
Supply Agreement between Rals and Oltremare contained arbitration agreement
Oltremare transferred promissory notes to Cariparma
The appellant, Rals International Pte Ltd (“Rals”) entered into two agreements with Oltremare SRL (“Oltremare”), an Italian supplier, to purchase equipment to shell and process raw cashew nuts and for the assembly and commissioning of the equipment at Rals’ factory. One of these agreements (the “Supply Agreement”) contained an arbitration agreement which provided that all disputes arising from the Supply Agreement would be settled by arbitration.
Under the Supply Agreement, Rals agreed to pay Oltremare by way of ten instalments, the first two instalments in cash and the remaining eight by way of promissory notes (the “Notes”). Oltremare subsequently entered into an agreement with the Respondent bank (“Cariparma”), whereby Cariparma would purchase the Notes from Oltremare at a discounted value. However, when Cariparma presented the Notes for payment, the first four Notes were dishonoured by Rals. Cariparma commenced proceedings in the High Court against Rals for the face value of the four Notes presented and for certain declarations in respect of the remaining Notes.
Rals applied for a stay of proceedings pursuant to section 6 of the International Arbitration Act (“IAA”) on the basis that the Notes fell within the scope of the Supply Agreement and accordingly any disputes in respect of the same should be determined pursuant to the arbitration clause in that agreement.
The High Court held that Cariparma, as an assignee of the contractual rights against Rals, was contractually bound to arbitrate all disputes falling within the scope of the arbitration clause in the Supply Agreement. However, the Court held that section 6 of the IAA did not apply to the proceedings in respect of the Notes. This was because the rights and obligations arising from the Supply Agreement were separate and independent from the statutory contract represented by the Notes.
The High Court determined that the commercial purpose of a bill of exchange was to function as a payment mechanism that could be used as a substitute for cash – the cash equivalence principle. Thus, a payee of a bill of exchange was entitled to independently frame its claim on the bill itself without any reference to the underlying contract. Unless the parties’ arbitration agreement made an express provision bringing a claim on a bill of exchange within the scope of that arbitration agreement, a bill of exchange was ordinarily outside the scope of the arbitration agreement even though it was issued pursuant to the contract containing the arbitration agreement.
In upholding the decision of the High Court, the Court of Appeal found that an arbitration clause in an underlying contract generally would not be treated as covering disputes arising under an accompanying bill of exchange in the absence of express language or express incorporation. The Court noted that, as a matter of commercial common sense, it was difficult to see why any right-thinking merchant would choose to give up his rights in respect of bills of exchange.
Rals relied on the decision of the Court of Appeal in International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and another [2014] 1 SLR 130 (“Lufthansa”) in support of its argument that express incorporation was not necessary. In Lufthansa, the Court of Appeal had departed from the “strict rule” that clear and express reference to an arbitration clause contained in one contract was required before a court would find that the clause had been incorporated in a separate contract. However, the Court of Appeal in the present case held that Lufthansa did not assist Rals, as it did not concern a bill of exchange or a negotiable instrument.
The Court of Appeal held that, because the obligations under the Notes were separate and autonomous from those arising from the Supply Agreement, this supported a conclusion in Cariparma’s favour. The arbitration agreement was not expressly incorporated into the Notes, nor was there a term in the arbitration agreement or the Supply Agreement that expressly stated that the arbitration agreement was to include disputes arising from the Notes. Any disputes arising from the Notes were accordingly not within the ambit of the arbitration agreement.
For further information, please contact:
Andre Maniam, WongPartnership
andre.maniam@wongpartnership.com
