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Published 2 August 2018
The Commercial Court in Sea Master Shipping Inc v. Arab Bank (Switzerland) Ltd ("The Sea Master")  EWHC 1902 (Comm), has recently handed down a judgment, in which Popplewell J has ruled that banks are subject to the jurisdiction of an arbitral tribunal appointed under bills of lading previously held by them as security. On that basis, banks will potentially face arbitral disputes, even if they were not involved in the underlying contract of carriage or had divested themselves of the obligation to arbitrate at the time the arbitration was commenced, thus not acquiring any rights or obligations under those bills of lading.
In the underlying arbitration, Arab Bank (Switzerland) Ltd (the "Bank") commenced arbitration against the Owners of the MV Sea Master (the "Shipowners") in respect of claims under 10 bills of lading relating to the cargo on board the vessel. The Shipowners in turn brought a counterclaim against the Bank for demurrage and or damages for detention under the second switch bill of lading.
The Shipowners argued that the Bank was liable as a result of them being the original party to the contract contained in and / or evidenced by a 'switch' bill of lading issued at the Bank’s counters in Zurich, which were issued in exchange for the original bills of lading.
In international transactions regarding large commodity trading, funds are normally advanced to the buyer by the trade finance banks through financial agreements, in which the banks would normally hold the bills of lading as security for the purchase of the cargo. In the present matter, the original contract of sale fell through, which resulted in the buyer named in the original bills not taking delivery of the cargo in Morocco. A string of sales were negotiated thereafter, until the Charterers entered into a contract of sale with a Lebanese buyer, and hence required the Shipowners to issue “switch” bills of lading providing for discharge in Lebanon.
The arbitral tribunal held that the Bank was not a party to the agreement to switch the bills of lading, and thus rejected that the Bank had made a demand for delivery of the cargo or 'made a claim' against the vessel under the contract of carriage, and hence incurring liabilities under section 3 of the Carriage of Goods by Sea Act 1992 ("COGSA"). The Shipowners challenged that decision under section 67 of the Arbitration Act 1996.
Popplewell J has held that the section 67 application succeeded on the arbitrability issue, based on the following grounds:
Finally, Primetrade AG v. Ythan Ltd (the Ythan)  1 Lloyd's Rep 457, was cited by the Bank's counsel, in which a claim was brought against a party to a contract of affreightment, Primetrade. The Shipowners alleged that Primetrade had become the lawful holders of the bills of lading under section 2 of COGSA and, having sought a letter of undertaking from the Shipowners P&I Club, they had assumed liabilities under section 3 of COGSA. Aikens J held that Primetrade had never become lawful holders of the bill of ladings, but went on to decide (obiter) that had they 'made a claim', he would have concluded that Primetrade had not done so. Nonetheless, in Popplewell J's view Aikens J was wrong to have done so, as the section 3 issue was within the jurisdiction of the tribunal and a matter for them to decide upon.
Popplewell J’s analysis provides an interesting ruling on the effects of COGSA 1992 on arbitral jurisdiction and the doctrine of separability, by which the principles that an arbitration agreement has a separate and independent existence from that of the matrix contract in which it is found are underpinned. This judgment potentially opens the door to protected litigation against trade finance banks, even where those banks are no longer the holders of the bills of lading, which were vested rights upon securing repayment of the purchase price.
It is understood that Popplewell J's judgment will be appealed, so this matter will be closely followed until the Court of Appeal is given an opportunity to rule on this matter.
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