The following article is taken from the Lexology. Click here to go to the original article.

In the recent decision of Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53, the Singapore Court of Appeal considered whether an arbitration agreement contained within a contract should extend to bills of exchange issued in respect of that contract and their indorsees. Affirming the decision of the High Court, the Court of Appeal held that a negotiable instrument such as a promissory note is not governed by an arbitration agreement in an underlying contract unless that agreement has been expressly incorporated in that instrument. The decision provides useful clarification of the extent to which arbitration agreements in underlying contracts may be extended to apply to related bills of exchange.

Background

Rals International Pte Ltd. bought equipment to process cashew nuts under a supply agreement with Oltremare SRL (the “Contract“). The Contract, which contained an arbitration clause, provides for payment to be made under the Contract in two cash instalments and by eight promissory notes which were issued to Oltremare in late 2010 (the “Notes“).

Oltremare subsequently assigned the Notes to a bank at a discount to their face value. However, when the bank presented the first four Notes for payment, each of them was dishonoured by Rals. The bank sued Rals in the Singapore High Court claiming €902,000 under the Notes. In response Rals sought to stay the bank’s claim, relying on s6 of the International Arbitration Act (“IAA“), which provides (amongst others) that a court must order a stay of proceedings where:

  1. the claimant in the proceedings is a party to an arbitration agreement either directly or because he is claiming “through or under” such party (the “Party Issue“); and
  2. the subject matter of the proceedings (i.e. Rals’ obligation to pay under the Notes) is the subject of the arbitration agreement (the “Subject Matter Issue“).

On the Party Issue, the High Court found that as an assignee of the contractual right against Rals, the bank received not only the right to receive the purchase price under the Contract but also the burden of the arbitration agreement. Accordingly, the High Court found that the bank was a party claiming “through or under” Oltremare, and therefore came within s6(1) of the IAA.

On the Subject Matter Issue, the High Court found that s6(5) did not apply to the action as it was not a dispute arising in connection with the Contract. The court considered that since Oltremare and Rals expressly provided for payment by way of promissory notes, they must have contemplated that the Notes would be negotiated and that the holder of the Notes could claim outside of arbitration. Moreover, the bank was a mere indorsee of the Notes, and its claim was wholly distinct from the Contract.

As Rals could not satisfy both limbs of s6, the High Court declined to stay the action.

Appeal

Rals’ primary ground of appeal related solely to the Subject Matter Issue, arguing that the inclusion of a widely-drafted arbitration clause in the Contract meant that Oltremare and Rals must have intended for the Notes, which were an “inextricabl[e] part of the [Contract]”, to fall within its scope.

The bank argued that (a) as between Oltremare and Rals, a claim on the Notes should not fall within the scope of the arbitration agreement; and (b) even if the Notes did fall within the scope of the arbitration agreement as between Oltremare and Rals, the bank’s status as an indorsee of the Notes rendered its claim outside the scope of the arbitration agreement.

The Court of Appeal found that the obligations under the Notes were separate and autonomous from those arising out of the Contract. There was no term in the arbitration agreement or the Contract 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. Further, the Court noted that incorporating an arbitration agreement in the way submitted by Rals introduced an element of uncertainty that is at odds with the unconditional nature of the obligation to pay under a bill of exchange.

The Court was satisfied that a claim under the Notes, even by Oltremare (which was party to the Contract and therefore the arbitration agreement), would not have been subject to the arbitration agreement, and therefore found in favour of the bank and dismissed the appeal.

General principles

The Court of Appeal stated that the position in Singapore, as established by Larsen Oil and Gas Pte Ltd v Petroprod Ltd. [2011] 3 SLR 414, is that arbitration clauses ought to be construed generously – such that all claims as between the contracting parties would generally fall within their ambit.

While Larsen is the correct approach in Singapore, the Court was clear that there are limits to its application. Essentially, the rule of construction (as formulated in the English case of Fiona Trust) is that all disputes between parties to an arbitration agreement are assumed to fall within the scope of that agreement unless shown otherwise. However, this is not to be applied irrespective of the context in which the underlying agreement was entered into or the plain meaning of the words. Where there are compelling reasons, commercial or otherwise, that may displace any assumed intention of the parties that claims of a particular kind are to fall within the scope of an arbitration agreement, the court should be slow to conduct the exercise of contractual construction from that starting point.

The Court of Appeal was also keen to caution that the bank’s second argument – that the arbitration agreement did not apply because it was relying entirely on the contract within the Notes – was overly simplistic. It is not sufficient to simply point to the fact that there are two separate contracts. Once the bank had been determined to be claiming under or through a party who is subject to the arbitration agreement, the inquiry had to move on and consider the Subject Matter Issue. i.e whether the arbitration agreement on its true construction applied to the subject matter of the dispute, which was the Notes. The bank could not escape the Subject Matter Issue simply because its claim, which is based on the Notes, did not invoke the Contract.

Conclusion

Following the decision in Rals, it is clear that disputes concerning cash-equivalent negotiable instruments are unlikely to be caught by arbitration agreements in underlying contracts absent express terms, or clear intention, to that effect. Parties to a contract involving payment by negotiable instruments should therefore carefully consider whether they wish the arbitration clause in the contract to extend to the negotiable instruments and, if so, ensure that both the contract and the instruments make this clear.

 

Herbert Smith Freehills LLP – Alastair Henderson, Daniel Waldek and Daniel Mills