International Litigation News

Transcription

1 International Litigation News Newsletter of the International Bar Association Legal Practice Division SEPTEMBER 2013

2 spain Tatiana Portillo Pérez-Llorca, Madrid Claiming unpaid promissory notes: arbitration v fast track collection proceedings for negotiable instruments Payment in contracts is implemented often through promissory notes. A promissory note is an amount receivable that meets several formalities, and it states a party s pure and simple promise to pay a determined amount of money to another party. Promissory notes bring certain benefits to the person in whose favour they are issued because they give access to privileged proceedings in order to claim payment when they are unpaid, in addition to an ease of transfer and other benefits. In this regard, the Spanish Civil Procedure Act (CPA) sets forth special fast track collection proceedings for negotiable instruments, such as promissory notes (juicio cambiario). It confers special jurisdictional protection as an instrumental tool to what is set forth by the special act on negotiable instruments for legal transactions. As stated in the CPA, the effective protection of the negotiable instrument is secured by a preliminary attachment, which becomes executive automatically if the debtor does not object or if such an objection is dismissed. In light of the above, bringing fast track collection proceedings for negotiable instruments should be a straightforward mechanism to claim unpaid promissory notes. However, we will see how the presence of an arbitral convention in a contract may frustrate the claim of unpaid promissory notes through the above mentioned juicio cambiario, although it is the proceeding legally provided for to that effect. Background The supposition of fact that we are considering is the one of a construction contract in which the parties implement the payment for the amount of several million Euros through several promissory notes. For the purposes of this article, we will assume that payment is implemented through 20 promissory notes. From a certain date, these promissory notes will be maturing successively during several months, until the sum is paid out completely. Furthermore, as it is standard practice in cross-border contracts, the parties have included an arbitral convention, according to which all disputes due to, arising from or related to the contract shall be resolved in arbitration. The problem arises when the promissory notes have matured and the party obliged to pay fails to do so. Such lack of payment leads to the other party bringing the corresponding fast track collection proceedings for negotiable instruments before the Court of First Instance of the place where the debtor s registered office is located. The surprise comes when the party in default challenges the jurisdiction of the Court, alleging that the Court has no competence to hear the case because of the existence of an arbitral convention within the contract signed by the parties. The arbitral convention, according to the debtor, prevents the Court from hearing the dispute, which has to be submitted to arbitration. The situation gets even odder when, disregarding the claimant s objection, the Court upholds the debtor s allegations and refrains from the case, as it understands that the claim for unpaid promissory notes must be brought before an arbitrator. The decision of the Court of First Instance ends up before the Court of Appeals, which confirms the decision of the former. Therefore, such a decision means that in practice, the fast track collection proceedings for negotiable instruments channel is blocked for claiming unpaid promissory notes, even though these are the proceedings especially provided for this purpose by the law. The controversy raised by the debtor s challenge of jurisdiction consists, in brief, of determining whether the unpaid promissory notes have to be claimed before ordinary INTERNATIONAL LITIGATION NEWSLETTER SEPTEMBER

3 jurisdiction or before arbitrators in those cases in which the contract signed by the parties sets an arbitral convention for dispute resolution. The section following will focus on the analysis of this controversy. Controversy The analysis of the controversy must have as its starting point the review of the promissory note entity. A promissory note is a document, by virtue of which the drawer purely and simply commits to pay a concrete amount of money to the beneficiary or bearer at a time and place determined in the document signed by the former. The promissory note entity A promissory note, as a security, is an abstract amount receivable because it is independent from the cause that has given rise to it. It means that a separation between the underlying and the negotiable relationship exists, in addition to an independence and autonomy of the obligation arising from the receivable with respect to the causal one. That is, the payment is not due to a cause different from the receivable. Furthermore, it has to be considered that the promissory note is not a simple documented promise to pay; according to the Bills of Exchange and Cheques Act (BECA), Ley Cambiaria y del Cheque, it is a real means of payment that brings very specific benefits in favour of whom it is issued, such as the access to privileged proceedings in order to claim a sum when it gets unpaid by resorting to the negotiable action, acción cambiaria. On the other hand, the negotiable action, that is, the one brought by the claimant before the Court, lies exclusively on the declaration that gives life to the receivable and not on the underlying causal relationship. For this reason, this action can only be brought through the fast track collection proceedings for negotiable instruments ruled on by the CPA. Furthermore, promissory notes should be made effective through the proceedings provided by the CPA, as otherwise, in the event they were made effective through arbitration, they would be lacking any privilege as arbitrators are not entitled to order the seizure of the debtor s assets in the way that judges are. Ultimately, it makes no sense to instrument the payment through promissory notes and simultaneously submit the claim of these to arbitration. If that were the parties will, setting in the contract that the payment would mature periodically, that is, setting short or long-term payment obligations, would have sufficed. It is precisely the confidence in the guarantee of promissory notes that leads the creditor to accept more deferments in payment. In brief, by upholding the debtor s challenge of jurisdiction, promissory notes become completely distorted as payment instruments, as their autonomy and independence from the underlying causal relationship become invalidated. The abovementioned links directly with the parties will of keeping the autonomy and independence of promissory notes at the time they agreed on the issuance of so many of them in order to make the payment. Thus, this is precisely where the analysis leads us. The will of the parties The will of the parties is another aspect that the decision of the courts has simply not considered. In effect, the fact that the parties agreed on the issuance of so many promissory notes in order to cover the cost of the contract reveals clearly that they wanted to keep the autonomy and independence of the notes, otherwise it would not have made any sense to issue 20 promissory notes amounting to several million Euros. Why would the parties agree to issue so many promissory notes if these are useless? If the will of the parties were simply to defer and break up the payment, wouldn t setting a schedule of payments have sufficed, without issuing any receivable to this effect, especially considering that the issuance of these receivables generates additional costs, such as the fiscal stamp of the promissory notes? All of the aforementioned, without taking into account that the parties were not even considering initiating an arbitration proceeding for each promissory note that got unpaid. Even if creditors wish to consolidate claims for all of the promissory notes in a sole arbitration, they will not be able to do so, as they will have to wait until all of the promissory notes have become payable. In that case, creditors will have to make sure that the negotiable action has not expired as regards those promissory notes payable first as, according to Article 88 of the BECA, the time frame for this action is three years. In any case, if the creditor waits to consolidate several promissory notes in the 28 International Bar Association Legal Practice Division

4 same arbitration in order to save on expenses, this will prejudice the debtor, as during such a delay interest will be accruing, in this case, two points above the rate of the legal interest ex Article 58.2 BECA, and that interest will have to be claimed together with the corresponding principal amount. It is obvious that by agreeing on the issuance of so many promissory notes in order to pay, the parties intention was to keep these separate from the underlying relationship between them and, accordingly, keep them away from the arbitral convention set forth in the contract. Such an intention is entirely in line with the concept of a promissory note, as it is a payment instrument autonomous and independent from the underlying causal relationship. However, neither the Court of First Instance nor the Court of Appeals have considered the parties will in this regard, which obliges the creditor to bring as many arbitrations as promissory notes issued in order to claim them from the debtor. This solution turns out to be completely illogical and disproportionate, according to the analysis below. An illogical solution In effect, the referred to solution turns out to be completely illogical and disproportionate considering the important expenses that each arbitration would imply, both for the creditor and the debtor, namely, administration expenses, arbitrators fees, expert witnesses fees, witnesses expenses and so on. Having 20 arbitrations is not the same as having 20 fast track collection proceedings for each of the negotiable instruments. Furthermore, it is entirely inoperative and contrary to the principle of procedural economy to bring an arbitration each time with the consequent and required submission to the plenary proceedings set forth by the arbitral law or ruling in order to claim some promissory notes that can be claimed before ordinary jurisdiction according to the CPA An interesting question can be raised here: in the event the debtor did not pay the 20 promissory notes issued according to the contract, was it the parties intention for the creditor to bring 20 arbitrations? Obviously, the logical answer is that it was not. It makes more sense to think that the parties were expecting that the creditor would initiate fast track collection proceedings for 20 negotiable instruments, as these are the proceedings especially set forth by the CPA to claim for unpaid promissory notes. If not, what are the 20 promissory notes useful for to the creditor, if the same is obliged to bring several arbitrations to claim them? The ineffectiveness and lack of attention to the principle of procedural economy are even more undeniable when analysing the interim relief that the CPA brings to the holder of a promissory note contrasted with the protection the same would be able to obtain by resorting to arbitral proceedings. That is, the CPA orders the immediate pre-judgement attachment of the assets of the debtor [ ] in case the payment request is not complied with, without the need for the creditor to post any security (ex Article ª CPA) or to prove that any legal requirements are met further to the formal ones referred to in the promissory note. However, in order to obtain a similar relief within arbitration proceedings, it will be necessary to request that the arbitrators order interim measures, proving that the requisites that case law sets forth for that purpose are met (fumus boni iuris, periculum in mora and posting of security). In the event those interim measures were granted, with a prior hearing of the debtor, the creditor would see him/herself obliged to resort to civil jurisdiction in order to enforce the corresponding arbitral decision. It is obvious that the effectiveness of the arbitral relief is not comparable to the relief afforded by the fast track collection proceedings for negotiable instruments. This takes on a special significance at the time of judicially enforcing the possible decision of the arbitrators granting interim measures, as it is more than likely that no attachable assets of the debtor are found. Conclusion In brief, the presence of an arbitral convention in a contract in which payment is implemented through several promissory notes may lead the courts to cause an incongruous situation, undermining any logic, as well as the parties will and the most basic rules on commercial legal traffic. In effect, by virtue of the courts decisions as outlined: INTERNATIONAL LITIGATION NEWSLETTER SEPTEMBER

5 Factors potentially compromise the independency of the letter of credit in Taiwan Promissory notes become completely distorted and invalidated as payment instruments that are autonomous and independent from the underlying causal relationship. The parties will at the time they agreed on the issuance of so many promissory notes in order to pay, that is, keeping the autonomous and independent nature of promissory notes, becomes absolutely useless. The claimants find themselves forced to bring as many arbitrations as there are promissory notes issued in order to claim these when they become unpaid. In my opinion, the tool to prevent promissory notes from becoming useless as a title to get interim relief in the frame of a contractual relationship is the arbitral convention itself. Protecting the creditor s interest against a possible lack of payment would be possible by including, by agreement of the parties, a specific mention by which claims for unpaid promissory notes will not be subject to the arbitral convention but to the fast track collection proceedings for negotiable instruments specially set forth by law. Factors potentially compromise the independency of the letter of credit in Taiwan Taiwan Shilin Huang K&L Gates, Taipei shilin.huang@ klgates.com The legal base for the application of the UCP Although the principle of freedom of contract is a commonly accepted concept in the legal community in Taiwan, judicial decisions were proved that intended to apply the Uniform Customs and Practice for Documentary Credits (UCP) under specific statutes rather than the principle of freedom of contract, in which Article 16 of the Bank Act is used most in Taiwan courts to bridge the application of UCP. Article 16 of the Bank Act in Taiwan stipulates: The term, letter of credit, under this act means a bank, appointed and authorized by a client, notifies a beneficiary will be paid a certain amount of cash by this issuing bank or other nominated bank according to an instrument subject to specific terms and conditions in the instrument. Most of the courts in Taiwan applied the UCP by serving it as part of the terms and conditions of the instrument under Article 16 of the Bank Act when it was referred in the agreements between the issuing bank and the applicant. Conflict with the UCP and Article 549 of the Civil Code The application of the UCP by serving it as the terms and conditions under the mandate agreement pursuant to Article 16 of the Bank Act would raise an issue in connection with the conflict between Article 549 of the Civil Code and Article 2 and 3 of UCP 600. Under Article 2 of UCP 600, credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. However, according to Article 549, paragraph 1 of the Civil Code, it is said that any party may terminate the mandate agreement at any time. Moreover, such a right to terminate may not be waived by parties autonomy according to the Supreme Court s previous decision in 2006 (Ref 95/1175). Thus, it allows the applicant of a letter of credit to have a non-waivable right to terminate the authorisation to the issuing bank to make the payment on behalf of the applicant, which is the major legal basis for the issuing bank seeking reimbursement from the applicant after the issuing bank honoured the letter of credit. Therefore, Article 549 of the Civil Code creates a potential issue to compromise the independency of the letter of credit, for its irrevocability might be challenged. 30 International Bar Association Legal Practice Division