Assignee's claim on bills of exchange not required to be arbitrated

The Singapore High Court has held that given the commercial purpose behind stipulating a bill of exchange as a payment mechanism, a claim on a bill would ordinarily fall outside the scope of an arbitration agreement in the underlying contract.

In brief

  • The Singapore High Court has refused to stay proceedings brought by a bank, as assignee, against the defaulting payer of multiple bills of exchange.
  • The bills of exchange were issued as payment under a Supply Agreement which was subject to an arbitration clause. The receivable under the Supply Agreement had also been assigned to the bank, but the bank confined its claim to its rights under the bills of exchange only.
  • While the Court held that the bank was subject to the arbitration agreement in the Supply Agreement, it also held that the dispute under the bills of exchange did not fall within the scope of the arbitration agreement. Given that a bill of exchange is the equivalent of cash and the bill itself is a separate contract, the Court concluded, in accordance with overseas authority, that a claim on a bill of exchange is outside the scope of the arbitration clause in any underlying contract.
  • The decision in Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd is now subject to appeal.
  • Financial institutions, and others, being assigned rights under commercial contracts need to be aware of the dispute resolution mechanisms to which they may become subject.  

The dispute

The defendant, Rals International Pte Ltd (Rals) is a Singapore company and was the buyer under a supply agreement (Supply Agreement). The Supply Agreement was governed by Singapore law and contained a Singapore ICC arbitration clause.

Pursuant to the supply agreement, Rals had issued 8 promissory notes to the counterparty seller, Oltremare SRL (Oltremare). Oltremare had negotiated the notes to the plaintiff bank, Cassa di Risparmio di Parma e Piacenza SpA (Cariparma) without recourse and, as part of the same transaction, assigned to Cariparma its contractual right to receive payment for the goods from Rals under the Supply Agreement (“Discount Contract”). Rals received notice of the assignment of the receivable. The Discount Contract was governed by Italian law and had an exclusive jurisdiction clause in favour of the courts of the City of Parma, Italy.

Cariparma commenced proceedings in the Singapore courts against Rals after the first 4 of the 8 promissory notes were dishonoured. Rals sought to stay the proceedings on the basis of the arbitration clause in the Supply Agreement. The High Court refused to stay the proceedings.

Bills of exchange and arbitration agreements

The Singapore High Court held that Cariparma’s claim on the promissory notes did not fall within the scope of the arbitration agreement in the underlying Supply Agreement. Key to its decision was that a promissory note as with other bills of exchange is considered a separate contract from any underlying commercial contract, brings with it various statutory rights (including limiting the payer’s defences) and commercially is intended to function as the equivalent of cash.

The Court reviewed case law from England, Hong Kong, Australia and Singapore and concluded that:

  1. The commercial purpose behind stipulating a bill of exchange as a payment mechanism ordinarily leads to the conclusion that a claim on a bill is outside the scope of an arbitration agreement in the underlying commercial contract.
  2. This would particularly be the case if staying an action on a bill of exchange in favour of arbitration would also fragment the resolution of the parties’ dispute eg because an essential party to the claim on the bill is not bound by the arbitration agreement. 
  3. Conversely, the dispute on the bill of exchange may fall within the scope of the arbitration agreement in the underlying contract, if the arbitration agreement expressly provides for a claim on a bill of exchange to be arbitrated or where the payee’s claim on the bill, is “fundamentally and inextricably linked to a wider dispute between the parties which does fall within the scope of the arbitration agreement”.

The Court distinguished its earlier decision in Piallo GmbH v Yafriro International Pte Ltd [2013] SGHC 260. In Piallo v Yafriro, Piallo had commenced an action in the Singapore High Court claiming on a series of cheques issued by Yafriro in its favour – those cheques had been countermanded by Yafriro and dishonoured by the bank. The cheques had been issued by Yafriro pursuant to a settlement agreement between the parties which contained an arbitration agreement. Piallo commenced action in the Singapore courts and Yafriro successfully sought for and obtained a stay of the court proceedings on the basis that the dispute should be arbitrated. The Court held that Yafiro’s cross claims for breach of the settlement agreement and Piallo’s claims on the dishonoured cheques arose from the same incident and were so closely connected that they should be resolved together.

By contrast, in this case, the bills had been negotiated to a third party: Cariparma was not the payee of the promissory notes but an indorsee. Secondly, Cariparma’s claim and Rals’ defences to that claim, did not arise from the Supply Agreement. Rals’ defences all came squarely within the defences set out in the Bills of Exchange Act.

Cariparma is a party to the arbitration agreement

One of the other important issues in the case was whether Cariparma, as assignee of the receivable under the Supply Agreement, was bound by the arbitration agreement in the Supply Agreement.

The Singapore High Court held that although Cariparma as an assignee had not become a party to the Supply Agreement, Cariparma was a “person claiming through or under [a] party” pursuant to section 6(5)(a) of the International Arbitration Act (Cap. 143A) and accordingly would be bound to arbitrate a dispute falling within the scope of the arbitration agreement in the Supply Agreement.

The Court also held that under Singapore law, where an assignor and an obligor have entered into an arbitration agreement, an assignee of a contractual right against the obligor is “obliged to submit to arbitration all disputes with the obligor falling within the scope of that arbitration agreement, notwithstanding the well-established rule that an assignment can convey to the assignee only contractual benefits and never burdens”.

Comment

As the law stands, given the contrasting decisions in this case and that of Piallo v Yafiro, a third party assignee of a bill of exchange is in a better position in Singapore than the assignor itself would have been. This is because the assignee is entitled to avail itself of the Court’s summary judgment procedures by suing on the bill of exchange regardless of the dispute resolution mechanism in the underlying commercial contract. In comparison, the original parties to the bill of exchange may be required to arbitrate a dispute on the bill of exchange if that dispute is regarded as closely connected to the underlying commercial contract.

The decision of the Singapore High Court is subject to an appeal to the Singapore Court of Appeal. It will be interesting to see how the Court of Appeal reconciles the two decisions. Piallo v Yafriro might end up representing the high water mark for a liberal and expansive interpretation of the scope of an arbitration agreement in the underlying contract to bills of exchange.

 


This article is a joint article by Simmons & Simmons and JWS Asia Law Corporation, Singapore.

JWS Asia is a boutique Singapore law practice that provides a one-stop service to the asset management and investment funds sector in Singapore, offering a full range of legal services to clients across all stages of development - from fund structuring formation and marketing, to advisory services such as licensing, corporate structuring, transactional and dispute resolution services.

JWS Asia offers clients deep local knowledge combined with access - through our "best friends" referral relationship - to the wide network and global expertise of Simmons & Simmons, a leading international law firm.

Authors:

Amanda Lees (Simmons & Simmons Asia LLP)
T +65 6831 5635
E Amanda.Lees@simmons-simmons.com

Mohammed Reza (JWS Asia Law Corporation, Singapore)
T +65 6831 5582
E mohammed.reza@jwsasialaw.com.sg

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document. Simmons & Simmons JWS Pte. Ltd. is registered and incorporated in Singapore as a Joint Law Venture under the Companies Act of Singapore. We are licensed to practise Singapore law in the permitted areas of legal practice according to section 130A(1) of the Legal Profession Act of Singapore. The permitted areas of legal practice excludes (according to Rule 3(1) of the Legal Profession (International Services) Rules 2008 of Singapore) areas such as constitutional and administrative law; conveyancing; criminal law; family law; succession law; trust law; and appearing or pleading in court.