Taking it to the bank - Sea Master v Arab Bank
Posted on 29th November 2018 at 09:19
Demurrage can be extensive and is usually unsecured, and if charterers default owners will look elsewhere. Rights of lien often mean trouble, and it is sometimes better to target a solvent alternative. The recent decision in Sea Master Shipping v Arab Bank (Switzerland) Limited  EWHC 1902 (Comm) (the “SEA MASTER”) brings trade financing banks into focus.
A B/L will frequently incorporate a CP, including what will often be its arbitration provisions, provided suitable clausing is used.
Sometimes a charterer FOB buyer will lose his CFR or CIF sale, and will therefore need to find a new on-buyer, perhaps at a different disport. That might mean CP renegotiation, and will ordinarily require a fresh B/L. A bank providing funding will frequently have the B/L, and any new one (a switch Bill, as it is generally known) will be issued under the bank’s control, so its security is safeguarded. The first B/L is cancelled and the bank holds the switch Bill instead.
That is what happened here. The switch Bill showed the new buyer as the notify party and was made out to the bank’s order. As before it validly incorporated the CP and its arbitration clause.
Major delay caused substantial demurrage. Charterers could not pay, and when the bank later claimed (under some different Bs/L) in respect of other cargo shipped on the same vessel, owners counterclaimed for their demurrage under the switch Bill.
The 1992 Carriage of Goods by Sea Act concerns the transfer of rights and also liabilities under Bs/L. Key triggers are the notions of “lawful holder” of a B/L, and “making [a] claim” (or seeking delivery) under one.
Banks are often the first of these but are wary of the second, as it can bring about responsibility for unpaid freight, for shipment of what may later be ruled to be dangerous goods and also perhaps, as here, demurrage. Understandably, banks seek to preserve the rights of a lawful holder of a B/L and to avoid the liabilities that might accompany claiming under it.
Here the bank said that owners could not claim against them in arbitration - on the evidence they were not a party to the switch Bill and (though they had been its lawful holder) they had not made any claim under it, so there was no means by which the Tribunal had jurisdiction.
The Tribunal agreed, but the Court overturned that. It said that, while just being a lawful holder of a B/L did not activate its various obligations, it nevertheless made the bank subject to the arbitration clause. That remained so even where, as here, the bank no longer held the B/L.
The incorporated agreement to arbitrate was separate from the B/L contract. It stood alone. So, even a bank that has made no claim under a B/L is nevertheless - and always - subject to its arbitration clause if it has once been its lawful holder.
The “SEA MASTER” considers many issues, some of which are far outside the scope of this article.
On this one it has caused concern among trade financing banks and has received much commentary from those who advise them. However, it simply means that owners will often be able to invoke a B/L arbitration clause against a bank. It does not mean they are bound to succeed. Indeed, in this very case the bank is going to address the matter through the resulting arbitration process - the ruling itself is not going to appeal.
Nevertheless, the decision highlights that, when faced with defaulting and perhaps insolvent charterers, owners might have at least the possibility of remedy against a bank that has held the B/L, whether or not the bank has itself made any claim.
For unpaid demurrage, owners will want to consider all possible recovery routes. However, just as for lien clauses, this one gives rise to difficult issues and it will be important to seek advice at an early stage.
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