Trade Finance Banks Beware: You are Subject to Arbitral Jurisdiction under Bills of Lading You No Longer Hold – Chirag Karia QC

Thu, 26 July, 2018

Trade finance banks facilitate international trade by providing short-term, “self-liquidating” finance to their trader customers.  Being able to hold the bills of lading covering the cargoes they have financed to secure repayment of the purchase price, without getting involved in the underlying contract of carriage unless absolutely forced to, is crucial to their business model. 

Such banks are likely to find the ruling of Popplewell J in Sea Master Shipping Inc v. Arab Bank (Switzerland) Limited (“The Sea Master”) [2018] EWHC 1902 (Comm), handed down on 25th July 2018, surprising to say the least.  That is because he held that such banks are subject to the jurisdiction of an arbitral tribunal appointed under bills of lading previously held by them as security, even if they were merely intermediate holders who had neither rights nor obligations under those bills at the time the arbitration was commenced.

In the underlying arbitration, the shipowners claimed demurrage from a Swiss trade finance bank that had financed the purchase of a cargo of soyabeanmeal by the ship’s charterers.  As the charterers were no longer good for the money, the owners claimed the demurrage from the bank, arguing inter alia that the bank was liable because it was the original party to the contract contained in and/or evidenced by a replacement/“switch” bill of lading issued at the bank’s counters in Zurich in exchange for the original bills of lading held by the bank as security for its loan to the charterers.  The charterers needed the “switch” bill because they had lost their buyer at the discharge ports in Morocco named in the original bills and their substitute sale contract required delivery in Lebanon.  They therefore paid the owners an additional sum to sail to, and issue a switch bill of lading providing for discharge in, Lebanon. 

The tribunal held that it lacked jurisdiction because, inter alia, the bank was not an original party to the switch bill of lading.  The owners challenged that decision under section 67 of the Arbitration Act 1996 on the sole ground that, contrary to the tribunal’s ruling, the bank was the original party to the switch bill; and the parties argued only that question.

However, Popplewell J approached the jurisdictional question from a different angle.  He held that the tribunal had jurisdiction over the bank even though the bank possessed neither rights nor obligations under the switch bill at the time the arbitration was commenced.  He held that the fact that the bank had, albeit as an intermediate holder of the switch bill and only temporarily, previously been vested with rights of suit under that switch bill pursuant to section 2 of the Carriage of Goods by Sea Act 1992 (“COGSA 1992”) gave the tribunal the required jurisdiction.  He ruled that to be the case even though the bank (i) never became subject to any obligations under the switch bill pursuant to section 3 of COGSA 1992 and (ii) had even lost its right of suit under section 2 by the time the arbitration was commenced as a result of its endorsement of the switch bill to the new Lebanese buyer. 

Popplewell J reached that conclusion in reliance on the doctrine that the arbitration agreement “has a separate and independent existence from that of the matrix contract in which it is found,” such that it may confer jurisdiction on the arbitrators to determine disputes “notwithstanding the termination or even initial invalidity of the matrix agreement giving rise to the disputes”.  In his view, that doctrine of separability meant that one could not assume that COGSA intended to treat rights and obligations under the arbitration agreement in the same way as the substantive rights and obligations of the parties under the bill of lading contract. 

He concluded that 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 ”; and that was so even though the bank had ceased to have any rights of suit under that bill. 

Popplewell J’s analysis certainly provides an interesting and different perspective on the effect of COGSA 1992 on arbitral jurisdiction.  However, with respect, it is difficult to understand how the operation of section 2 of COGSA 1992 could be said to impose “an obligation to arbitrate” on the bank given that it explicitly deals only with “rights of suit” (emphases added), and sections 2 and 3 draw a clear distinction between rights and obligations.  The fact that the bank did not even have those rights of suit at the time the arbitration was commenced makes the analysis even more difficult.  Furthermore, his ruling is directly inconsistent with the obiter analysis of Aikens J in Primetrade AG v Ythan Ltd (“The Ythan”) [2006] 1 Lloyd’s Rep 457, which mirrored that of the dissenting arbitrator in that case, Mr Anthony Diamond QC, a recognised expert on COGSA 1992. 

It is respectfully submitted that Aikens J’s analysis in The Ythan is to be preferred over that of Popplewell J in The Sea Master: the correct position is that an intermediate bill of lading holder is not under any obligation to arbitrate unless it has become subject to the liabilities under the bill of lading contract pursuant to section 3 of COGSA 1992 or it seeks to make a claim against the owner falling within the terms of the bill of lading’s arbitration clause.  However, since Popplewell J decided the issue as a matter of ratio whereas Aiken J’s analysis was obiter, The Sea Master will be followed until the Court of Appeal gets an opportunity to review this issue. 

Chirag Karia QC acted for the defendant bank in the Commercial Court action. A copy of the judgment is available here.

Chirag Karia QC

Chirag Karia QC has a broad commercial, shipping, insurance and international trade practice. He appears regularly in the Commercial Court, the Court of Appeal and international arbitrations. He is listed as a ‘Leading Silk’ for Shipping and Commodities disputes by both Chambers UK and The Legal 500. 

Chirag is instructed on high level and important shipping and commodities cases, usually multi-jurisdictional and vigorously fought. Over the past few years he has acted on: Unipec v BP & others, a complex series of inter-related Commercial Court actions and LCIA arbitrations claiming over US$80 million in damages from multi-national oil companies as a result of the sale of salt-contaminated crude oil;  The Ratna Suradha, a multi-party dispute, involving the sovereign states of Sudan and South Sudan as parties as to title to a US$60 million cargo of oil; Great Elephant Corp. v. Trafigura Beheer BV (“The Crudesky”), a five party “chain” dispute in which Chirag’s clients succeeded in the Commercial Court and then secured a substantially increased recovery from the Court of Appeal; and The Yusuf Cepnioglu, in which Chirag secured anti-suit injunctions against actions brought against his P&I Club client by third parties under Turkey’s right of direct action against liability insurers.

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