A judgment handed down by the English Commercial Court in 2018 illustrates how trade finance banks can find themselves facing unexpected risks when things go wrong in their customers’ trading relationships. We spoke to Nicholas Walser, Partner at Gateley Plc about the unexpected consequences of holding Bills of Lading as security
We spoke to Nicholas Walser, Partner at Gateley Plc to find out more.
The case (Sea Master Shipping v Arab Bank) concerned a cargo of soyabean meal loaded in Argentina under a number of bills of lading (B/Ls) for discharge at ports in Morocco. The cargo was purchased by the bank’s customer (A) and the bank paid for it against presentation of the original bills of lading, which were pledged to the bank as security for the funds advanced on A’s behalf. In the normal course the bank would have expected to present the bills under A’s resale contract and discharge the loan out of the proceeds of the sale. However, the original sale of part of the cargo to Moroccan buyers fell through and A re-sold it to an Algerian buyer. The change of destination required the shipowners to issue a new B/L, which was issued to the bank and then presented to the Algerian buyer’s bank for payment. However the B/L was not compliant with the new buyer’s letter of credit, so it was rejected and returned to A’s bank. Eventually A found another new buyer for the cargo in Lebanon and a second “switch bill” was issued for the new destination. The bank presented this to the ultimate receiver and finally received payment.
The problem for the bank was that the ship chartered by A to carry the goods had to be kept waiting whilst these issues were being resolved, and the shipowners presented a substantial bill for demurrage, which A failed to pay. When the bank subsequently commenced arbitration proceedings against the owners for unrelated claims under bills of lading for different cargo shipped on the same vessel, the owners responded with a counterclaim against the bank for demurrage or damages for detention under the second “switch bill” amounting to more than US$1.6 million. The bank said it was not a party to the B/L and challenged the arbitrators’ jurisdiction to consider the owners’ claims. The arbitrators agreed that they had no jurisdiction, but this decision was challenged in the High Court.
The bank maintained that the original party to the B/L was A, and the bank had simply become the holder of the B/L to protect its security interest. The bank said that it had acquired rights under the B/L but it was not subject to liabilities under it. It followed that it was not bound by the arbitration clause in the B/L. The judge rejected this argument, pointing out that an arbitration agreement involves mutual and interdependent rights and obligations. Once the bank became the holder of the B/L it was a party to the contract of carriage and became subject to the arbitration agreement contained within it. The arbitration clause could not be split into rights and obligations, giving the bank the right to arbitrate its own claims without having the obligation to submit to arbitration for the owners’ claims. The judge therefore ruled that the arbitrators did have jurisdiction to decide on the bank’s liability for the demurrage or damages claimed by the owners.