In the recent case of Piallo GmbH v Yafriro International Pte Ltd, [2013] SGHCR 20, a stay of proceedings was sought by the defendant, Yafriro, on the basis of an arbitration clause in a Distributorship Agreement between the parties. The claimant, Piallo, sought to resist the stay by arguing that its claim against Yafriro was based on dishonoured cheques presented to it by Yafriro and that its claim and the dispute (if any) did not fall within the arbitration clause.

The Singapore High Court granted the stay and held that Piallo’s claim on the dishonoured cheques fell within the arbitration agreement on the particular facts of the case.

Facts

Piallo is the Austrian maker of luxury items under the brand “DELACOUR”. Under the Distributorship Agreement, Yafriro was Piallo’s exclusive distributor for the DELACOUR products in certain markets in Asia. In or around 2013, Piallo alleged that it had not received payment from Yafriro for the DELACOUR products it had supplied from May 2012 to December 2012 (see paragraph [5]). Piallo claimed the sum of CHF570,333.45 was outstanding.

Yafriro admitted that sums were owing to Piallo but alleged that Piallo had breached the terms of the Distributorship Agreement (see paragraph [6]). Nonetheless, Yafriro offered part payment for the DELACOUR products it had received but had not paid for by way of 15 post-dated cheques in late 2012 (see paragraph [7]).

The total sum of these cheques was approximately CHF511,210.00. However, before the first cheque was encashed, Yafriro notified Piallo and took steps to countermand payment on the cheques (see paragraph [8]). The reason given by Yafriro for the countermanded payment in its letter of 8 April 2013 was as follows:

“…Unfortunately, your unexpected and premature alteration to our existing Exclusive Distributorship Agreement signed on 17th September 2008 had resulted in significant damage to the sales of the brand in Yafriro as well as our credibility to our customers, making the payment schedule highly impossible. …”

Despite having received notice of Yafriro’s intention to countermand payment on the cheques, Piallo continued to present those cheques for payment. The cheques were subsequently dishonoured.

The arbitration clause in the Distributorship Agreement provided that:

“20.1 Any dispute arising out of or in connection with the present contract shall be finally settled under the rules of Arbitration of the ICC Paris by one arbitrator appointed in accordance with the said Rules.

20.2 The seat of the arbitration is Geneva.

20.3 This contract is governed by the laws of the Switzerland.

20.4 The language of arbitration is English.”

Arguments resisting Stay Application

Piallo’s case for resisting the stay application was predicated on two key arguments (see paragraph [19]):

1. That a claim on dishonoured cheques does not fall within the scope of the arbitration clause.
2. Even if such a claim fell within the scope of the arbitration clause, there was no dispute between the parties to refer to arbitration.

Accordingly, section 6(1) of the International Arbitration Act which mandates a stay of court proceedings where there is a dispute between parties which is the subject of a arbitration clause between those same parties, would not apply. Yafriro’s application for a stay therefore had to fail.

The Law on Bill of Exchange (cheques) and Arbitration Clauses

The Singapore High Court held that “a bill of exchange is a separate contract from the contract pursuant to which the said bill of exchange was furnished” (see paragraph [25]) citing the Singapore Court of Appeal decision of Wong Fook Heng v. Amixco Asia Pte Ltd [1992] 1 SLR(R) 654).

The High Court then considered the English House of Lords case of Nova (Jersey) Knit Ltd v. Kammgarn Spinnerei GmbH, [1977] 1 WLR 713 where the law lords held (by a majority) that a stay of the English court action should be refused because the appellant’s claim on the bills of exchange did not fall within the arbitration clause in the partnership agreement between the parties. Those bills of exchange constituted separate and independent contracts (see paragraph [31]). The arbitration clause read,

“18. Arbitration agreement

“All disputes arising from the partnership relationship or occasioned by (or ‘in connection with’) the partnership relationship between the partnership and the partners shall be decided by the arbitration tribunal provided for in a separate document.”

The Nova case was followed by the Hong Kong Court of Appeal in Pacific Forex Ltd v. Lei Kuan Leong [1999] HKCA 364 where the court held at paragraph [11] that,

“The approach to be adopted in Hong Kong law is no different from that in English law … A bill of exchange is not valid if it incorporates an arbitration clause. To hold that an arbitration clause referring to disputes arising from the underlying agreement, applies to bills of exchange would make “a very substantial inroad upon the commercial principle on which bills of exchange have always rested.” Accordingly there must be a plain manifestation in the arbitration clause that it is to apply to bills of exchange if the presumption against taking bills of exchange into arbitration is to be rebutted. As Lord Russell indicated, there is an inconsistency between the nature and function of such a bill and an arbitration clause.”

In the end, the Singapore High Court declined to follow Nova (and the cases following it). The learned Assistant Registrar distinguished those cases for the following reasons (see paragraph [39]):

1. The cheques were post-dated cheques and “had no value as it did not represent any property that a creditor could resort to in the event he wanted to realise or recover the debt” (citing the Malaysian High Court case of Lien Chung Credit & Leasing Sdn Bhd v. Chang Chin Choi [1994] 3 MLJ 488). The value of such cheques only arose at the actual date of payment.
2. Piallo had been notified that the cheques would be countermanded even before the first post-dated cheque was to have been due.
3. Unlike in Nova or Getwick Engineers Limited v. Pilecon Engineering Limited [2002] KCFI 189, none of the cheques tendered by Yafriro had been honoured. In Getwick, two of the three post-dated cheques had been honoured and that court “[saw] no reason why the third cheque should not be seen in the same light [i.e. honoured]“.
4. The learned Assistant Registrar considered that the arbitration agreement in the Distributorship Agreement was wider than that in Nova.

Furthermore, any doubts about whether the subject matter of the claim before the courts falling within the arbitration clause should be resolved in favour of the applicant for the stay proceedings (see paragraph [40] and [41] citing the Singapore High Court decision of Dalian Hualiang Enterprise Group Co Ltd & Anor v. Louis Dreyfus Asia Pte Ltd [2005] 4 SLR(R) 646). The High Court thought that “there [was] no clear-cut answer to the question of whether the [Piallo]’s claim on the [c]heques [did] indeed fall outside the scope of the arbitration clause. In these circumstances, and on the authority of Dalian Hualiang, [the High Court] would order a stay of the court proceedings in favour of arbitration“.

Was there a dispute?

The learned Assistant Registrar held that insofar as Piallo’s claim fell within the arbitration clause, there was a dispute to be referred to arbitration.

The High Court noted that the Singapore Court of Appeal had taken a very broad view of what constituted a dispute for purposes of a stay under the International Arbitration Act.

“44 In [Tjong Very Sumito & Ors v. Antig Investments Pte Ltd [2009] 4 SLR(R) 732] , the Court of Appeal held that the word “dispute” in an arbitration agreement should be interpreted broadly and the court “would readily find that a dispute existed unless the defendant had unequivocally admitted that the claim was due and payable”. Further, “the court would not assess the merits of a denial/defence or the genuineness of a ‘dispute’ since these matters should properly be left to the arbitrator to assess in accordance with the parties’ contractual bargain to arbitration” (see headnote 4 of the judgment).”

Piallo sought to argue that there was no dispute as to liability or Piallo’s “entitlement to payment” as Yafriro was merely proposing an alternative mode of instalment payment by way of the cheques (see paragraph [46(a)]). It also argued that Yafriro had not disputed the quantum of the outstanding sum but merely the “frequency of the payments” (see paragraph [46(b)].

The High Court rejected Piallo’s arguments:

1. Yafriro’s countermanding of the cheques was evidence of a dispute between the parties (see paragraph [47]).
2. The learned Assistant Registrar considered that Tjong Very Sumito “made it clear…that a dispute remains even where the defendant had originally admitted liability, but subsequently refused to make payment, and that such dispute should be referred to arbitration” (see paragraph [47]).
3. There was in fact no unequivocal admission by Yafriro as to liability or quantum (see paragraph [48]).

Comments

It is interesting that neither party had adduced evidence on Swiss law despite the fact that the arbitration clause was a Swiss arbitration clause and the underlying contract was governed by Swiss law.  The learned authors of Dicey, Morris & Collins: The Conflict of Laws (15^th ed) stated at [16-075] that:

“Once the party seeking the stay has established that the parties agreed to arbitration and that their dispute falls within the scope of that agreement, the court must grant a stay unless the other party satisfied the court that there is a good reason why a stay should be refused (for example, because the arbitration agreement is null and void). The question whether an arbitration agreement is wide enough to cover the dispute between the parties depends on the principles of interpretation of the law applicable to the arbitration agreement. Before granting a stay under s.9, the court must be satisfied that there is an arbitration agreement between the parties and that the subject of the action is within the scope of the agreement.”

In the Nova case, the House of Lords considered both English as well as German law in coming to its decision that the claim on the bills of exchange did not fall within the arbitration clause. However, both English and German law came to the same result. Likewise, the Hong Kong Court of Appeal noted in Pacific Forex,

“…

The issue fell to be considered in the light of German law as well as English law and the Court found there to be no significant difference in the approach to Bills of Exchange. One of the most authoritative German works included:

“In the case of bills given by merchants in payment of the price of goods it cannot, if there is any doubt, be assumed that a clause providing for submission of disputes to arbitration applies to claims under the bills.”

The German expert gave as his view on the authorities that

“A very plain manifestation of intention to extend an arbitration clause to claims under bills of exchange is needed to rebut the presumption that businessmen neither wish nor expect bills of exchange to be taken into arbitration.”

…”

The High Court’s comment that the arbitration clause in this case was wider than that of the Nova case also raises an interesting point of history. Prior to the case of Premium Nafta Products Ltd (20th Defendant) & Ors v. Fili Shipping Company Ltd & Ors [2007] UKHL 40, the English courts had undertaken semantic distinctions as to whether a claim fell within an arbitration clause on the basis of whether the clause referred to disputes “arising out of“, “arising under” or “in connection with” the contract. With the Premium Nafta (aka Fiona Trust) case, the English courts will start from the presumption that in the absence of clear words to the contrary, commercial parties are taken to likely have intended to have all their disputes resolved in a single forum (arbitration).

Conclusion

The Singapore court has once again demonstrated its very robust pro-arbitration approach in granting a stay of its proceedings in favour of international arbitration. However, commercial parties should note that the facts of this case differed markedly from the other cases involving bills of exchange and arbitration clauses in the underlying contract.