Arbitral jurisdiction under bills of lading – reinventing the wheel?

Published 2 agosto 2018

The Commercial Court in Sea Master Shipping Inc v. Arab Bank (Switzerland) Ltd ("The Sea Master") [2018] 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.

Facts

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.

The decision

Popplewell J has held that the section 67 application succeeded on the arbitrability issue, based on the following grounds:

1. The starting point should be reliance on the doctrine of separability in that the arbitration agreement “has a separate and independent existence from that of the matrix contract in which it is found,” and hence conferring jurisdiction on the arbitrators to determine disputes “notwithstanding the termination or even initial invalidity of the matrix agreement giving rise to the disputes”. The doctrine was applied in Harbour Assurance (UK) Ltd v. Kansa General International Insurance Co Ltd [1993] QB 701, and crystallised in section 7 Arbitration Act 1996. For that reason, one could not assume that a statute such as COGSA, in which the rights and obligations of the parties are addressed, should be treated in the same way as the substantive rights and obligations of the parties under the bill of lading.
   
   
2. The obligations under an arbitration agreement "arise not upon the exercise of rights of suit or pursuit of arbitral proceedings by either party, but upon a prior event" and hence "an arbitration agreement contains obligations by which a party is bound irrespective of the assertion of substantive rights by that party or the commencement by that party of arbitration or other proceedings".
   
   
3. The effect of the Bank becoming a lawful holder of the switch bill “was to subject the Bank to an obligation to arbitrate disputes falling within the scope of the arbitration clause it contained ”, even if the Bank had ceased to have any rights of suit under that bill of lading.

Finally, Primetrade AG v. Ythan Ltd (the Ythan) [2006] 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.

Conclusion

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.