Singapore: Court of Appeal holds reassignment of contract to original party after commencement of arbitration not sufficient to confer jurisdiction on arbitrator (BXH v BXI)

Shaun Lee (Counsel) & Low Zhe Ning (Associate), in the dispute resolution group at Bird & Bird ATMD LLP explain the implications of the decision of the Singapore Court of Appeal ("SGCA") in BXH v BXI [2020] SGCA 28.

We had previously discussed the case of BXH v BXI [2019] SGHC 141 in which the applicant award debtor (BXH) had failed to set aside the arbitral award on the basis that the agreement which contained the arbitration clause had expired before novation.

On appeal, the SGCA allowed the appeal in part and partially set aside the award. The portions which were set aside related to claims which were reassigned back to the respondent award creditor (BXI) only after the arbitration proceedings had been commenced by BXI.

What are the practical implications of this case? Why is the decision of interest to arbitration, disputes and commercial lawyers?

BXH v BXI reinforces the Singapore court's pro-arbitration policy whereby the court will seek to give effect to a clear intention to arbitrate. The apex court has confirmed favouring the Paul Smith approach — where a contract contains an arbitration clause and a jurisdiction clause, the Singapore courts will prefer a generous and harmonious interpretation which gives effect to both clauses.

The assignment of a debt results in an assignment of the right to arbitrate a dispute in relation to that debt. Further, once the right to arbitrate has been assigned, the assignor cannot commence arbitration proceedings. This is because the legal assignment extinguishes the legal cause of action of the assignor against the party liable so that the assignor cannot thereafter itself seek an award against the party liable.

An arbitration claimant must have standing to sue at the time the arbitration proceedings are commenced. The SGCA held that an arbitrator would not have jurisdiction over a dispute if the claimant in the arbitration only obtained the right of suit after the commencement of the arbitration.

The SGCA has also held that a notice of assignment can be validly sent by either the assignor or the assignee. The debtor in turn has the right to request for evidence of the assignment when it receives notice from the purported assignee. Assignees may therefore take steps to protect their assigned interests by providing the relevant notice(s) without having to wait for the assignor to do so.

As a matter of practice, where the award is being challenged on the basis that one party did not have the right to commence arbitration proceedings following an assignment of the underlying agreement, the ground on which the setting aside application should be made is Article 34(2)(a)(i) of the Model Law, i.e., that no arbitration agreement existed between the parties.

What was the background?

The appellant, BXH, was the distributor and marketer of the respondent, BXI's goods in Russia. The parties were involved in an intricate web of some 8 contracts involving the assignment, novation and reassignment of rights to debts, which arose out of a Distributor Agreement involving BXH and the Parent Company of BXI. Some of the contracts were bipartite, some were tripartite and one was between four parties.

The Distributor Agreement contained both a SIAC arbitration clause for a Singapore-seated arbitration as well as a Singapore jurisdiction clause. BXI commenced arbitration proceedings against BXH and obtained an award in respect of what the court categorized as Debt 1A and Debt B. In the High Court below, BXH's application to the Singapore High Court ("SGHC") to set aside the award failed.

The issue on appeal was whether BXI had the right to bring arbitration proceedings against BXH.

What did the Singapore Court of Appeal decide?

The SGCA allowed the appeal in part and set aside the arbitration award which dealt with Debt B on the ground that there was no arbitration agreement between the parties in relation to the substantive right (the debt) in question at the time of commencement of the arbitration.

In this respect, Debt B refers to debts which had been assigned by the BXI (the claimant in the arbitration) to a third-party factoring company. These debts were then purportedly re-assigned back to BXI through a Buy Back Agreement in April 2015 and a second buy back in December 2015 (collectively the "2015 Buy Back Agreements"). However, the fact of reassignment was only confirmed by the third-party factoring company by way of a letter to BXH in 2017 (the "2017 Letter"). Upon a construction of the terms of the 2015 Buy Back Agreements, the SGCA held that they did not and/or were not intended to reassign the rights to Debt B back to BXI and that reassignment of the rights to Debt B only occurred by way of the 2017 Letter.

1. Endorsement and application of Paul Smith approach
   
   

   The Distributor Agreement contained conflicting dispute resolution clauses — cl 25.9 provided for SIAC arbitration whereas cl 25.8 was a Singapore court jurisdiction clause. The SGCA agreed with the SGHC's solution of adopting the Paul Smith approach, which though "not entirely satisfactory" was "practical" and allowed the court to give effect to the intention of the parties to have matters resolved by arbitration. Thus, the purported inconsistency was resolved by holding that the parties intended to resolve substantive disputes in arbitration under cl 25.9 and to resolve disputes arising out of any such arbitration in the Singapore courts in the exercise of their supervisory jurisdiction under cl 25.8.
   
   

   The SGCA further noted that it was "fortified in reaching this conclusion [that parties had evinced a real intention to have matters resolved by arbitration] given the amount of detail provided by the parties in cl 25.9… in contrast to cl 25.8, which simply provide[d] for the applicability of Singapore law and the jurisdiction of the courts located in Singapore".

    

2. Dispute over right to arbitrate following assignment of the underlying agreement is a dispute as to the existence of the arbitration agreement
   
   

   The SGCA disagreed with the SGHC's characterization of the right to commence arbitration following an assignment and reassignment of the underlying contract as relating to the issue of the scope of the arbitration agreement. Instead, the SGCA held that whether a party has the right to commence arbitration over a substantive right (e.g., a debt) is a dispute relating to the existence of one's right to arbitrate. As such, this issue is properly considered under the ground of Art 34(2)(a)(i) Model Law which concerns the existence and validity of any alleged arbitration agreement.

    

3. The right to arbitrate is parasitic on the substantive right in respect of which arbitration proceedings are brought— the right to arbitrate is assigned together with the debt
   
   

   One of the issues which arose concerned the BXI's right to arbitrate upon assignment of the underlying contractual debt (i.e. Debt B). In this regard, the SGCA held that once the substantive right to Debt B was assigned to the factoring company, BXI could no longer arbitrate in relation to Debt B.
   
   

   The SGCA explained that "an arbitration agreement does not have a purpose or a life independent of the substantive obligations that it attaches to". Thus, upon assignment of the substantive contract to another party, the assignor loses its right to arbitration and no longer has standing to arbitrate disputes arising over the substantive contract.

    

4. Tribunal has no jurisdiction over a dispute if the substantive right, to which the right to arbitrate attaches, is only reassigned to the claimant after the commencement of arbitration
   
   

Having examined the transactions and agreements which the parties entered into, the SGCA held that the rights to the debts (in respect of which arbitration had been commenced) were only reassigned to BXI in 2017, after arbitration had been commenced by BXI.

The SGCA also rejected BXI's argument that the right to sue in relation to the debts in question could be vested retrospectively.

The SGCA further held that, the principle of retrospective vesting for an assignment should not apply to arbitration (and left it open as to whether the retrospective vesting principle should apply in court proceedings). The SGCA reasoned that arbitration is based on the fundamental principle of parties' consent. Moreover, the issue of party consent is closely tied to the importance of ensuring that the proper parties are involved at the onset of arbitral proceedings. On the facts, at the time BXI had commenced arbitration proceedings, Debt B was still assigned to another party (i.e. the factoring company) and thus the agreement to arbitrate only covered disputes relating to Debt 1A. Thus, the tribunal had exceeded its jurisdiction when adjudicating on matters relating to Debt B and the award was partially set aside under Art 34(2)(a)(i) of the Model Law.

Comments and Conclusion

The decision by the Singapore apex court provides welcome clarity to the laws of assignment as they apply to contractual debts which are subject to arbitration clauses. Commercial parties would be well advised to scrutinize their right to commence arbitration proceedings when the debts have been factored or assigned to another party.

Similarly, the apex court's nod towards the Paul Smith approach is also helpful to give effect to an arbitration clause notwithstanding a seemingly contradictory court jurisdiction clause in the same underlying contract.

However, and as we had flagged in our previous article, the case still does not address a situation in which a contract contains both a Singapore arbitration clause but where the court jurisdiction clause is that of a foreign court. In that situation, it would be difficult to reconcile the court jurisdiction clause as providing for the foreign court to be the curial supervisory court as the Singapore courts ought to be the curial court by virtue of the arbitration being seated in Singapore.

This article was first published on LexisPSL linked here.

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please contact our lawyers if you have any specific queries.