UK: Financing Bank Liable For Demurrage As Intermediate Holder Of Bills Of Lading

Last Updated: 25 October 2018
Article by Carl Walker and Guy Fountaine

Sea Master Shipping Inc v. Arab Bank (Switzerland) Limited (Sea Master) [2018] EWHC 1902

In a recent decision that will be of interest to ship-owners and trade finance banks alike, the Court has held that a bank, which becomes the lawful holder of bills of lading to protect its security interest in the cargo, becomes subject to the rights and obligations contained in those bills, including the arbitration clause.

The background facts

The underlying claim was an action for demurrage brought by the Owners against the Bank that had financed the Charterers' purchase of a cargo of soyabeanmeal. During the course of the voyage, the Charterers lost their initial buyer and they, therefore, sought to re-direct the cargo to an alternative discharge port for delivery to a new buyer. The Owners agreed to issue a 'switch' bill to this effect and the Bank replaced the original bills with new bills at its counters, which were consigned to the order of the Bank.

The new switch bill incorporated the charterparty arbitration clause. The original bills were marked cancelled by the Bank at the same time and returned to the Owners' agent. The switch bill was accepted under the CIF contract and the cargo delivered.

The Bank subsequently commenced arbitration against the Owners for claims under bills of lading relating to other cargo on board the vessel. The Owners counterclaimed for demurrage and/or damages for detention under the switch bill, as the Charterers were not good for the money.

The Tribunal held that it did not have jurisdiction to determine the Owners' counterclaim against the Bank, since the Bank was not a party to the agreement to switch the bills of lading, had not become party to the bill of lading contracts and had not demanded delivery or made a claim under the contract of carriage so as to incur liabilities under section 3 of the Carriage of Goods by Sea Act 1992 ("COGSA").

The Owners appealed, arguing that the Bank was the original party to the switch bill of lading due to the circumstances in which it was issued and the Bank's involvement in issuing it at their counters. It followed, therefore, that the Bank owed liabilities under the contract contained in the switch bill and was a party to the arbitration clause that gave the Tribunal jurisdiction over the claim.

The Bank argued that it was not the original party to the switch bill, but that the Charterers were. The Bank accepted that it became the lawful holder of the switch bill to protect its security interest, but that it did so solely because the switch bill was consigned to its order.  This brought the Bank within section 5(2)(a) of COGSA, with the result that the Bank had rights of suit vested in it. However, because it had not performed any of the acts triggering liability under section 3 of COGSA (for example, it had not demanded delivery under the switch bill), it had not assumed liabilities under the switch bill and was not, therefore, subject to the arbitration clause contained in it.

The Commercial Court decision

The Court allowed the appeal and remitted the substantive dispute to the Tribunal to decide. The Court did not accept that the intended effect of sections 2 and 3 of COGSA was to bifurcate the arbitration clause incorporated into the switch bills so as to confer arbitration rights under section 2 and impose arbitration obligations under section 3. 

On its true construction, the operation of section 2 involved the lawful holder of a bill of lading becoming a party to the arbitration clause contained therein, because that party is treated as if it had been a party to the bill of lading, with all the consequences that flow from that, including the mutual obligation to have any dispute falling within the scope of the arbitration clause determined in arbitration. This is the case irrespective of whether that party owes any substantive obligations under the bill of lading.

The Court rejected the Bank's argument that it had not become subject to an obligation to arbitrate because it had not performed any of the acts that trigger the transfer of liabilities under section 3. Rather, the issue of whether the lawful holder of a bill of lading has assumed obligations under section 3 is an arbitral issue and, if the effect of section 2 of the Act is to entitle the lawful holder of the bill to arbitrate that dispute, its effect must also be to require it to do so. 

The Court emphasised that the rights and obligations in an arbitration agreement are mutual, commenting that "it would be contrary to the very nature of an agreement to refer disputes to arbitration if one party were entitled to litigate an arbitral dispute but the other entitled and bound to arbitrate it".

This conclusion was said to accord with the reasonable expectations of businessmen, which the Court considered would require that, when a contract of carriage includes a widely drafted arbitration agreement providing for disputes "arising out of or in connection with" the contract of carriage, then the position should be that all disputes in relation to the maritime venture, including all questions of who has rights of suit and liabilities under the contract of carriage, will be subject to the single defined dispute resolution mechanism. 

Comment

This decision confirms that financing banks that receive bills of lading to protect their security interest in the cargo can become subject to the rights and liabilities contained in those bills of lading. This includes the obligation to have any disputes arising in relation to the bills of lading referred to arbitration, if the bills include an arbitration clause.

This will be of interest to ship-owners who are unable to recover sums due to them from their charterers under the relevant contract of carriage. In this case, the Charterers did not have the means to satisfy the sums owed, but it was open to the Owners to pursue a claim for these sums from the bank, who assumed liability solely as a result of becoming the lawful holders of the bill of lading in order to protect their security interest in the cargo.

02.10.2018

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