English Commercial High Court (QB): Whether the lawful holder of a bill of lading is bound by its arbitration clause?

Sally Roberts court case

In the case of Sea Master Shipping Inc. v. Arab Bank (Switzerland) Limited, [2018] EWHC 1902 (Comm), the English Commercial High Court dealt with the issue of whether the lawful holder of a bill of lading who has rights of suit under section 2 of the Carriage of Goods by Sea Act 1992 (COGSA) in respect of the contract of carriage contained in or evidenced by a bill of lading which contains an arbitration clause is bound by that arbitration clause and so bound to submit to arbitration the issue whether it has assumed liabilities under the contract. Read the case analysis below:

Factual Matrix

The cargo in question was one of a number shipped on the vessel MV SEA MASTER (the Vessel) by Oleaginosa at Argentina. Oleaginosa had sold the cargo on Free on Board (FOB) terms to Glencore Grain BV, who had in turn sold it on FOB terms to Agribusiness. Agribusiness concluded a voyage charterparty on an amended Norgrain 89 form with the owners of the Vessel (the Owners). The charter incorporated by reference a provision for London arbitration on the terms of the applicable LMAA clause, which covered “any dispute arising out of or in connection with this Contract”. The cargo was covered by the issue of seven bills of lading each bill being for a part of the total quantity. The bills provided that freight was payable as per the charterparty and expressly incorporated the terms, conditions, liberties and exceptions of the charterparty including the arbitration clause.

Agribusiness needs the existing bills of lading to be replaced with new “switch” bills providing for the new discharge port.  Its bank (the Defendant) holds the original bills as security for the money advanced to its customer for the purchase of the cargo.  The Owner of the goods agrees with the shipowners to issue new bills of lading and the bank facilitates the transaction by allowing the bills to be switched at its counters, so that the bank retains possession of effective bills at all times to protect its security interest.  The new switch bills of lading are consigned to the order of the bank.  The dispute arose between the parties to decide whether the bank become an original party to the bill of lading so as to come under liability to the shipowners on the terms of the contract of carriage contained in or evidenced by the bill of lading, including, for example, liability for shipment of dangerous cargo or demurrage?

The Defendant commenced arbitration against the Owners in respect of claims under 10 of the bills of lading relating to other cargo on board the vessel. The Bank contended that it was not a party which had undertaken any obligations under the second switch bill and was not party to the arbitration agreement; accordingly it challenged the jurisdiction of the tribunal to determine the counterclaim. The Tribunal held that that the Bank was not a party to the agreement to switch the bills of lading, either in respect of the first or second switch bills; and rejected the argument that the Bank became party to the bill of lading contracts.

Applicable Legal Principles

Section 67 of the English Arbitration Act

“67 Challenging the award: substantive jurisdiction.

(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court—

(a) challenging any award of the arbitral tribunal as to its substantive jurisdiction;

(3) On an application under this section challenging an award of the arbitral tribunal as to its substantive jurisdiction, the court may by order—

(a) confirm the award,

(b) vary the award, or

(c) set aside the award in whole or in part.”

Relevant provisions of COGSA

“1.— Shipping documents etc. to which Act applies.

(1) This Act applies to the following documents, that is to say—

(a) any bill of lading;

…..

(2) References in this Act to a bill of lading—

(a) do not include references to a document which is incapable of transfer either by indorsement or, as a bearer bill, by delivery without indorsement; but

(b) subject to that, do include references to a received for shipment bill of lading.

…..

2.— Rights under shipping documents.

(1) Subject to the following provisions of this section, a person who becomes—

(a) the lawful holder of a bill of lading;

…..

shall (by virtue of becoming the holder of the bill…) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.

…..

(5) Where rights are transferred by virtue of the operation of subsection (1) above in relation to any document, the transfer for which that subsection provides shall extinguish any entitlement to those rights which derives—

(a) where that document is a bill of lading, from a person’s having been an original party to the contract of carriage; or

…..

3.— Liabilities under shipping documents.

(1) Where subsection (1) of section 2 of this Act operates in relation to any document to which this Act applies and the person in whom rights are vested by virtue of that subsection—

(a) takes or demands delivery from the carrier of any of the goods to which the document relates;

(b) makes a claim under the contract of carriage against the carrier in respect of any of those goods; or

(c) is a person who, at a time before those rights were vested in him, took or demanded delivery from the carrier of any of those goods,

that person shall (by virtue of taking or demanding delivery or making the claim or, in a case falling within paragraph (c) above, of having the rights vested in him) become subject to the same liabilities under that contract as if he had been a party to that contract.

…..

(3) This section, so far as it imposes liabilities under any contract on any person, shall be without prejudice to the liabilities under the contract of any person as an original party to the contract.

5.— Interpretation etc.

(1) In this Act—

“bill of lading”, … shall be construed in accordance with section 1 above;

“the contract of carriage” —

(a) in relation to a bill of lading…., means the contract contained in or evidenced by that bill …;

“holder”, in relation to a bill of lading, shall be construed in accordance with subsection (2) below;

…..

(2) References in this Act to the holder of a bill of lading are references to any of the following persons, that is to say—

(a) a person with possession of the bill who, by virtue of being the person identified in the bill, is the consignee of the goods to which the bill relates;

(b) a person with possession of the bill as a result of the completion, by delivery of the bill, of any indorsement of the bill or, in the case of a bearer bill, of any other transfer of the bill;

(c) a person with possession of the bill as a result of any transaction by virtue of which he would have become a holder falling within paragraph (a) or (b) above had not the transaction been effected at a time when possession of the bill no longer gave a right (as against the carrier) to possession of the goods to which the bill relates;

and a person shall be regarded for the purposes of this Act as having become the lawful holder of a bill of lading wherever he has become the holder of the bill in good faith.”

Parties Contentions

The Owners’ contended that the Bank was the original party to the second switch bill under normal principles of contractual formation by reason of the circumstances in which it was issued and the Bank’s involvement in its issue at the Bank’s counters; and so owed the liabilities under the contract contained in it; being an original party to the bill made the Bank a party to the arbitration clause and conferred jurisdiction on the arbitrators to determine the Owners’ demurrage counterclaim against the Bank.

The Bank argued that it was not the original party to the second switch bill; Agribusiness was.  It recognised that it became the lawful holder of the second switch bill, to protect its security interest, but asserted that it did so solely by virtue the bill being consigned to its order and so bringing it within section 5(2)(a) of COGSA.  It contended that the result was that it had vested in it the rights of suit as if it were a party to the contract of carriage contained in or evidenced by the bill pursuant to section 2 of COGSA; but it had not performed any of the acts triggering liability under section 3 of COGSA (which was not in dispute in the present case); and that accordingly, the Bank was not bound by the arbitration clause and the tribunal was correct to hold that it had no jurisdiction.

Analysis

The Court referred the cases of Schiffahrtsgesellschaft detlev von Appen GmbH v Voest Alpine Intertrading GmbH  [1997] 2 Lloyd’s Rep 279 and Shipowners Mutual Protection and Indemnity Association (Luxembourg) v Containerships Denizcilik Naklyat Ve Ticaret AS  [2016] 1 Lloyd’s Rep 641 to conclude that where an assignee acquires rights under a contract which contains an arbitration clause, its entitlement to exercise those rights is qualified by the obligation to do so in arbitration; this is so whether the assignment is contractual or statutory.

The Court then discussed the doctrine of separability and commented that one cannot assume that a statute such as COGSA which addresses the substantive rights and obligations of the parties under a matrix contract intends to treat the rights and obligations under the ancillary arbitration agreement in precisely the same way.

With regard to rights and obligations of parties under an agreement to arbitrate, the Court observed that there are two aspects of the nature of an arbitration agreement.   The first is that 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.  The collateral agreement contained in the arbitration clause is an agreement between the parties as to what each of them will do if and whenever there occurs an event of a particular kind, namely the coming into existence of an arbitral dispute, i.e. one which falls within the scope of the arbitration agreement.  That may arise from either party asserting a claim.  If it is disputed, the arbitration agreement provides for what each party is to do in the event of such dispute.

The Court remarked that 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. They arise when there is an arbitral dispute, irrespective of which party is the maker or recipient of the claim which is disputed.

Another remarkable feature of an arbitration agreement pointed out by the Court in the instant case is that however one categorises the bundle of rights, obligations or options in an arbitration agreement, they are mutual and interdependent.  Once an arbitral dispute has arisen, they apply whichever party is the protagonist in seeking to bring the dispute before an arbitrator or before some other forum for resolution.

Conclusions

The Court concluded as follows:

  • that the intended effect of sections 2 and 3 of COGSA is not to bifurcate an arbitration clause in the contract of carriage contained in or evidenced by the bill of lading into rights and obligations, such as to confer arbitration rights under section 2 and arbitration obligations under section 3.
  • the operation of section 2 of COGSA involves a lawful holder becoming a party to the arbitration clause in the contract of carriage contained in or evidenced by the contract of carriage because the section treats him as if he had been a party to that contract.
  • the holder is a party to that separate arbitration agreement, with all the consequences which flow from such agreement, including the mutual obligation to have any dispute falling within the scope of the agreement determined in arbitration, irrespective of whether it owes any substantive obligations under the matrix contract contained in the bill.

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