ARBITRATION AGREEMENTS NOT ALWAYS RELIABLE

There are reasons why a party to an arbitration contract may find itself before a court of law rather  than an arbitral tribunal...

Introduction

Arbitration clauses are found in a wide variety of contracts and Singapore judges frown on any attempt by a party to such a clause to avoid going to arbitration by rushing to the court instead. Therefore, when a party to a contract agrees that any disputes thereunder would be resolved through arbitration, it should be very surprised to find itself before a court of law rather than an arbitral tribunal.

It should be doubly surprised if that court were to allow the proceedings to continue rather than being stayed in favor of arbitration.

Yet this can happen for a number of reasons. One instance is where an arbitration agreement is not well drafted so that, for example, the dispute falls outside the scope of the arbitration agreement. Another is where the claim involves matters that are not arbitrable, for example, where certain insolvency issues arise.

Generally, however, the courts will try to uphold an arbitration agreement. There are numerous cases that demonstrate a clear preference by judges to enforce the obligation to arbitrate. One such case is the subject of this article. Yet this case also at the same time demonstrates the limits of an arbitration agreement. This case is Rals International Pte Ltd v Cassa di Risparmio di Parmae Piacenza SpA [2016] SGCA 53.

The salient facts

Rals International Pte Ltd (hereinafter, "Rals") was a Singapore company which carried on the business of processing raw cashew nuts and exporting processed cashew nuts. Rals had entered into an agreement with Oltremare SRL ("Oltremare"), an Italian company, to purchase from Oltremare equipment to shell and process raw cashew nuts. This agreement shall be referred to as "the Supply Agreement".

Under the Supply Agreement, Oltremare was to manufacture the equipment and deliver the same to Rals' factory in Vietnam commencing in December 2010 and completing by March 2011. Under the Supply Agreement, Rals agreed to pay Oltremare €1,952,185 in ten installments of 10% each. The first two installments were to be paid in cash in October and November 2010. The last eight installments were to be paid by eight promissory notes. The Supply Agreement went so far as to stipulate in an annexure the precise form of the notes.

The Supply Agreement was expressly governed by Singapore law and stipulated that disputes "arising in connection with this Agreement" will be settled by arbitration in Singapore.

Each of the notes was expressly issued in Singapore and payable "to the order of Oltremare". Oltremare then discounted the notes with Cassa di Risparmio di Parma ("Cariparma"). Oltremare also assigned its rights to receive payment from Rals to Cariparma.

Eventually, four notes were dishonored and Cariparma sued Rals in the Singapore courts. Rals relied on the arbitration agreement and managed, at first, to have the suit stayed in favor of arbitration. On appeal, the stay was lifted and the suit was allowed to proceed.

The issues – Bills of exchange and arbitration agreements

Two main issues were before the court. First, could Cariparma who was not a party to the Supply Agreement be compelled to refer its dispute with Rals to an arbitral tribunal as required by the arbitration clause therein?

Second, how is an obligation to arbitrate consistent with the requirement of commerce to have certainty that payment obligations represented by bills of exchange and promissory notes are at all times convertible into cash, quickly, simply, and effectively?

The case was really decided on the second issue; so this will be addressed here first. The judge highlighted the commercial purpose of a bill of exchange as a payment mechanism which was to function as a substitute for cash.

Bills of exchange evidence a contract separate and distinct from the original and underlying contract in pursuance of which the bill is executed. It does not depend on its enforcement on the performance of the original contract. A bill of exchange, once given, should be treated as cash. Therefore, a beneficiary is entitled to ignore any underlying contractual disputes and frame its claim as resting on the bill alone and to seek and secure summary judgment for that claim.

The interaction between these principles and an arbitration agreement was then examined. After a wide-ranging survey of the case law in various jurisdictions, the judge summarized the principles as follows:

Whether a claim on a bill of exchange falls within the scope of an arbitration agreement is to be resolved as a matter of construction of the arbitration agreement.

• 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.
• This conclusion will not be warranted, however, if: o The parties' arbitration agreement makes express provision bringing a claim on a bill of exchange

  within the scope of that agreement; or o The payee's action, although framed as being confined to the bill, is fundamentally and inextricably linked to a wider dispute between the parties which does fall within the scope of the arbitration agreement.

On the facts, the judge held that the claims of Cariparma and the possible defenses of Rals in the suit were not concerned with the Supply Agreement but the promissory notes. Rals had indicated that it would resist Cariparma's claim on the grounds that Cariparma was not the holder in due course of the promissory notes because it did not take the notes in good faith and because it took them with notice that Oltremare's title was defective. Additionally, Rals had suffered a total failure of consideration. This showed that there was little risk that the suit would involve matters that would fall within the arbitration agreement in the Supply Agreement.

The Court of Appeal agreed with the judge's analysis of this issue. The Court found that the fact that the obligations under the notes were separate and autonomous from those arising out of the Supply Agreement supported a conclusion in Oltremare's and thus Cariparma's favor. There was no term in the arbitration agreement or the Supply Agreement that expressly stated that the arbitration agreement was to encompass disputes arising out of the notes, nor was the arbitration agreement expressly incorporated into the notes.

In these circumstances, a claim under the notes, even by Oltremare, would not have been subject to the arbitration agreement.

The issues – Arbitration agreements and assignees

The Court of Appeal did not have to decide this issue as they found that the suit on the notes fell outside the scope of the arbitration agreement. However, the judge below had dealt extensively with this issue and the Court expressed some views on his conclusions.

The basic principle is that only a party to an arbitration agreement can be bound by it. Further, only rights and not burdens can be assigned. Therefore, although an assignee can enforce the benefit of an assigned contractual right to arbitrate, it is less clear if the counterparty can enforce against an assignee the burden of the contractual obligation to arbitrate.

In considering this issue, the judge cited the following propositions:

• Arbitration agreements are, as a class, capable of assignment.
• Where an assignor and an obligor have entered into an arbitration agreement, an assignee of a contractual right against the obligor is entitled to exercise all of the remedies of the assignor in respect of that right, including the right to arbitrate disputes with the obligor falling within the scope of that arbitration agreement.
• 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 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.

Of these, it is the third proposition that presents a conceptual problem. The judge had relied on the principle of conditional benefit, i.e., an assignee will be unable to take the right of an original obligor without also assuming the burden, where the burden is an intrinsic part of the right.

The Court of Appeal, however, expressed a preference for the approach adopted in The Jay Bola, where it was suggested that the reason that an assignee of a contract containing an arbitration agreement may be bound by that agreement has nothing to do with becoming a party to the agreement as a result of the assignment. It suggests instead that such an assignee would not be entitled to enforce its rights against the other party without also recognizing the obligation to arbitrate. The Court of Appeal did not find it necessary to come to any conclusion on these thorny issues and promised to revisit the issue of assignment of arbitration agreements as and when it falls to be determined in another case and is fully argued before the Court.

Analysis

The first issue dealt with here is fairly uncontroversial. Bills of exchange and cheques, which are a type of bill of exchange, as well as promissory notes, are payment mechanisms giving rise to a different set of rights and obligations between the parties. The underlying contract may require disputes between the parties to be resolved through arbitration, but as the case of Rals v Cariparma demonstrates, the arbitration agreement would not, unless sufficiently clearly drafted, cover disputes between the parties over the rights and obligations represented by the bills of exchange.

Therefore, if the payee of the cheque or the holder of the bill of exchange seeks to enforce payment in a court by relying solely on the cheque or bill, the drawer, although party to an arbitration agreement in the underlying contract which gave rise to the payment by cheque/bill, could find himself defending the claim in court and may not be able to insist that the dispute be referred to arbitration instead.

To avoid this, an arbitration clause can be drafted widely enough to bring within its scope such disputes. However, for a likely payee, this may not be satisfactory as suing on a bill of exchange in a Singapore court has the advantage of speed. Our courts are likely to order payment summarily, but not all institutional arbitration rules provide for such a procedure.

On the second issue, the question is how is a party like Rals to ensure that its agreement to arbitrate with its counterparty enforceable against an assignee. It is generally difficult to enforce rights against an assignee because one cannot assign burdens but only benefits.

The simple solution would be to simply exclude altogether the right to assign so that such a situation could never arise. However, this may not be commercially feasible. A compromise would be to allow assignments but only after consent is sought and obtained. In this way, a party would not be surprised to find itself dealing with a third-party assignee in circumstances where it may find itself being taken to court by the assignee. A condition of the party's consent would be that the assignee expressly accepts, perhaps in an acknowledgement to the notice of assignment, the obligation to refer disputes to arbitration.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.