Dispute Resolution Singapore Client Alert November 2015 Getting more than you bargained for: When is an assignee bound by an arbitration agreement in an assigned contract? It is not uncommon for a customer of a bank, by way of security, to assign to its bank, payment rights the customer has under a contract with another party, or for the customer to indorse in favour of the bank a promissory note or bill of exchange under which the customer is a beneficiary. But what if the underlying contract contains an arbitration clause? Will the bank be bound by that clause if it seeks to enforce the assigned rights or the promissory note, notwithstanding that the bank itself did not consent to arbitration? The Singapore High Court, in the decision of Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd  SGHC 26, has recently considered these questions, holding that a bank may be bound to arbitrate in these circumstances. The value a bank or financial institution attributes to any rights assigned or granted as security may depend on many factors, including how these rights will be enforced. Accordingly, banks and financial institutions will need to carefully consider what dispute resolution and enforcement processes they may be subject to where they are assigned rights or granted the benefit of any promissory notes or similar documents. Background Rals International Pte Ltd (the Buyer) entered into a supply agreement (the Supply Agreement) with Oltremare SRL (the Seller). The Supply Agreement contained an arbitration agreement. Pursuant to the Supply Agreement, the Buyer was to make certain instalment payments by way of promissory notes. The Buyer duly drew the promissory notes in favour of the Seller. Around 2011, the Seller entered into a discount contract (the Discount Contract) with Cassa di Risparmio di Parma e Piacenza SpA (the Bank). Under the Discount Contract, the Seller assigned the promissory notes to the Bank, together with the contractual right to receive the sum of €1,804,000.00 due under the Supply Agreement, being the combined face value of the promissory notes. The Bank subsequently demanded payment under the promissory notes, but the Buyer failed to pay. The Bank commenced proceedings in the Singapore courts against the Buyer, seeking payment of the promissory notes. The Buyer applied to stay the court proceedings pursuant to s. 6 of the International Arbitration Act (IAA). This provides for mandatory arbitration of disputes which fall within the scope of a valid agreement to arbitrate if the applicant can first establish that both the applicant and the defendant are "parties" to the arbitration agreement either directly, or indirectly under s. 6(5)(a) by claiming “through or under” a party to the arbitration agreement. The Buyer succeeded before the Assistant Registrar and the stay was granted. The Bank appealed to the High Court. For further information please contact Celeste Ang +65 6434 2753 Celeste.email@example.com Rian Matthews +65 6434 2643 Rian.firstname.lastname@example.org Lucas Lim +65 6434 2518 Lucas.email@example.com Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 www.bakermckenzie.com 2 Client Alert November 2015 Decision Judge Vinodh Coomaraswamy of the High Court granted the Bank’s appeal, overturning the Assistant Registrar’s decision, and allowing the Bank to continue with its claims in the Singapore High Court. In short, Coomaraswamy J held that the Bank’s claims under the promissory note should not be subject to arbitration because those claims, upon the facts, were not strictly covered by the arbitration agreement. Coomaraswamy J took note of the commercial purpose, characterised by the principle that bills of exchange are essentially the equivalent of cash (the cash equivalence principle), and considered that a right-thinking merchant would not intend to limit its indorsee's options in bringing claims on a bill of exchange to arbitration. In reaching its decision, the Judge considered a number of other issues. What law governs whether an assignee of contractual rights will be subject to an arbitration agreement in the assigned contract? Coomaraswamy J considered that this should be determined by reference either to the governing law of the overriding agreement (in this case, the Supply Agreement) or the governing law of the arbitration agreement (the arbitration agreement contained in the Supply Agreement). The Judge was inclined to hold it was the latter (i.e. the governing law of the arbitration agreement). However, as both the Supply Agreement and the arbitration agreement were governed by Singapore law, Coomaraswamy J declined to rule finally on this point. Of note, Coomaraswamy J rejected the “validation principle”, which has been proposed by a number of academics and commentators. This is the principle that the law which governs the validity or applicability of an arbitration agreement should be determined by looking to whichever of the potentially applicable laws would, if applied, result in the agreement being valid or applicable. Coomaraswamy J was critical of this approach. The Judge commented that applying the validation principle, rather than identifying the applicable law before considering whether the arbitration agreement was valid and effective, would be to allow “the tail to wag the dog". Is an assignee bound by an arbitration agreement under the IAA? Coomaraswamy J ruled that, in general, an assignee, when seeking to enforce its rights against the obligor, will be bound by an arbitration agreement between the assignor and the obligor as a matter of Singapore law. It is a well-established rule that an assignee takes only the benefits of the contract but not the burden (unlike the case of novation). This poses a conceptual challenge to holding that an assignee is bound by the obligation to arbitrate under an arbitration agreement - is an arbitration agreement a “benefit” or a “burden”? Coomaraswamy J considered this and adopted the “conditional benefit” analysis, which says that an assignee’s rights under a contract are inseparably connected with the agreement to arbitrate: i.e. if the assignee takes any rights, he / she takes them subject to an obligation to arbitrate. ©2015. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.