High Court Decision on Bills of Lading to hit Trade Finance Banks

By Lisa Hillary & Daniel Jennings

The recent decision in the case of Sea Master Shipping Inc v Arab Bank (Switzerland) Ltd [2018] EWHC 1902 (Comm) looks set to challenge the very business model that trade finance banks are based upon. Following the recent ruling banks will be subject to the jurisdiction of an arbitral tribunal appointed under bills of lading previously held by them as security which could result in liability for claims even though they were not involved in the underlying contract of carriage.

The role of the trade finance bank is to finance international trade by providing what has been described as “self-liquidating” short term finance to traders. The bank holds bills of lading that cover the cargoes in order to secure repayment of the purchase price. However, the banks are generally reluctant to get involved in the underlying contract of carriage because in doing so they would be burdened by taking on the rights and obligations that such involvement entails.

The Facts

The case arises out of a claim for demurrage by shipowners. As the charterers were unable to pay the demurrage invoice, the owners claimed demurrage from a Swiss trade finance bank that had financed the purchase of the cargo of soyabeanmeal.

The shipowners argued that the trade finance bank was liable as a result of their being an original party to the contract contained in and evidenced by a replacement “switch” bill of lading issued by the bank in Zurich in exchange for the original bills of lading. The “switch” bill was issued because the charterers had lost their buyer at the named discharge port in Morocco and consequently entered into a substitute sale contract which stipulated that delivery should take place in Lebanon.

The tribunal was unpersuaded by the argument that the trade finance bank was liable and held that it did not have jurisdiction over the issue because the bank was not a party to the original switch bill of lading. Unhappy with this decision, the shipowner challenged the decision under section 67 of the Arbitration Act 1996.

The Decision

The Commercial Court took the opposite view. Popplewell J held that the tribunal did in fact have jurisdiction. This was despite the fact that the bank did not have either the rights or obligations under the switch bill at the commencement of arbitration.

Popplewell J held that because the bank had previously held rights of suit under the switch bill pursuant to section 2 of the Carriage of Goods by Sea Act 1992 (COGSA 1992) the tribunal had the required jurisdiction.

This was despite the fact that the bank had never come subject to any obligations under the switch bill in accordance with section 3 of COGSA 1992 and had even lost the rights of suit it held in accordance with section 2 of COGSA 1992 by the time arbitration was commenced as a result of the endorsement of the switch bill in favour of the Lebanese buyer.

It was the view of Popplewell LJ that the doctrine of separability applied to this case. This means that the assumption that COGSA 1992 intended to treat rights and obligations under the arbitration agreement as the same as those of the parties under the bill of lading contract is incorrect. When the bank became lawful holder of the switch bill it became subject to an obligation to arbitrate disputes that fell within the scope of the arbitration clause that the switch bill contained despite the fact that the bank no longer had rights of suit under the same bill.

Comment

This decision is likely to be a contentious one for trade finance banks. It represents a direct challenge to the existing body of case-law on the subject. The ruling directly contradicts the obiter comments made by Aikens J in Primetrade AG v Ythan Ltd (“The Ythan”) [2006] 1 Lloyd’s Rep 457. The position in “The Ythan” would certainly be preferable for trade finance banks as the obligation to arbitrate would only exist if the bank becomes subject to the liabilities under the bill of lading pursuant to section 3 of COGSA 1992 or if the bank makes a claim against the owner within the terms of the arbitration clause of the bill of lading.

It will be interesting to see whether the Sea Master will be followed by the Court of Appeal. Trade finance banks will certainly hope that it isn’t and until such time will need to be aware of potential liabilities under bills of lading held as security for trade transactions.

If you have any queries about this article, please get in touch with Lisa Hillary, whose details appear below.

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About the contributor

  • Lisa Hillary Partner

    Lisa is a Partner in the London Office and a member of the Shipping and International Trade and Commodities Group and the Energy Team.

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