QCR Spring 2019: Whether holder of bill of lading bound to submit to arbitration of demurrage dispute notwithstanding it had not exercised rights of suit
SEA MASTER SHIPPING INC v ARAB BANK (SWITZERLAND) LTD (THE “SEA MASTER”)  1 Lloyd's Rep. 101 – 25th July 2018
7000 metric tonnes of soyabean meal in bulk was shipped on board the vessel MV “SEA MASTER” at San Lorenzo, Argentina by an FOB buyer, and charterer of the vessel, Agribusiness United DMCC (“Agribusiness”), for onward sale on CIF terms.
Arab Bank (Switzerland) Limited (the “Bank”) financed the purchase of the cargo and took possession of the bills of lading as security. The bills of lading incorporated the terms of the charterparty, including the LMAA arbitration clause.
There were various complications in relation to the onward sale of the cargo. This led to the vessel being redirected to different ports of discharge on a number of occasions. In order to resolve the issues with the onward sale, the Bank agreed to the vessel owner (the “Owner”) issuing a “switch” bill of lading (the “Switch Bill”) to allow for delivery at a different port of discharge. As such, the Bank surrendered the original bills of lading to the Owner for cancellation and took possession of the new Switch Bill (which was made out to the order of the Bank) as security.
During the time in which the complications with onward sales were being resolved Agribusiness became liable for substantial amounts of demurrage under the charterparty, which it ultimately failed to pay.
The Bank later commenced arbitration proceedings against the Owner under other bills of lading in respect of other cargo on board the vessel. In response, the Owner counterclaimed against the Bank under the Switch Bill for demurrage and/or damages for the detention of the vessel due to the delays in delivery of the cargo.
The Bank contended that it was not subject to the arbitration agreement in relation to the Switch Bill because (i) it was not a party to the contract under the Switch Bill, and (ii) it had not made a demand in respect of the cargo, and therefore the liabilities under the underlying contract of carriage had not vested in it under section 3 of the Carriage of Goods by Sea Act 1992 (COGSA 1992).
The tribunal determined that the Bank was not a party to the bill of lading contracts and held that it did not have jurisdiction to decide Owner’s counterclaim against the Bank. The Owner challenged the arbitration award in the High Court under section 67 of the Arbitration Act 1996.
The judge decided that Owner’s section 67 application succeeded and the tribunal did have jurisdiction to determine the Owner’s counterclaim.
The judge held that an arbitration agreement had a separate and independent existence from that of the matrix contract in which it was found. One aspect of this doctrine of separability is that the agreement 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. The foundation of an arbitrator's jurisdiction to determine a dispute lay in the separate arbitration agreement.
The judge was unable to accept that the intended effect of sections 2 and 3 of COGSA 1992 was to bifurcate an arbitration clause in the bill of lading into rights and obligations, such as to confer arbitration rights under section 2 and arbitration obligations under section 3.
He was of the view 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.
The parties’ rights, obligations or options in an arbitration agreement are mutual and interdependent. Once an arbitral dispute has arisen, they apply whichever of the parties brings the dispute before an arbitrator or before some other forum for resolution.
This decision makes it clear that parties holding bills of lading as security (usually banks) may become subject to the jurisdiction of arbitral tribunals formed under arbitration clauses in or evidenced by the bills of lading. This is the position even if the said parties have not made any attempt to exercise any of their rights under the bills, and even if the parties divested themselves of their rights under those bills.
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IG Letters of Indemnity
Members are often asked to accept letters of indemnity (LOIs) from their shippers or charterers in return for the delivery of cargo without presentation of original bills of lading, the delivery of cargo at a port other than that named in the bill of lading (or both) and in various other circumstances.