Arbitration agreement governs claims under divested contract. A new take on s.2(5) of COGSA 1992.


An everyday tale of switch bills and financing banks. An fob buyer of goods who had chartered the vessel  lost its on sale during the course of the voyage, and found a new buyer at a different discharge port.  The charterer agreed with the shipowners to issue new bills of lading and the bank who held the original bills as security for the money advanced to its customer for the purchase of the cargo agreed to switch the bills at its counter. The bank brought cargo claims against the owners under the original bills and the owners counterclaimed with a substantial claim for unpaid demurrage against the bank under the second bills.

The tribunal determined that the bank was not a party to the agreement to switch the bills of lading, and rejected the argument that the bank became party to the bill of lading contracts.  It rejected an argument that the bank had made a demand for delivery of the cargo or made a claim against the vessel under the contract of carriage so as to incur liabilities under section 3 of COGSA.  For those reasons, it held that it did not have jurisdiction to determine the owners’ counterclaim for demurrage against the bank. The owners applied under s.67 of the Arbitration Act 1996 to set aside or vary the award.

Popplewell J held that the tribunal did have jurisdiction to determine owner’s counterclaim for demurrage. The bank argued that the effect of section 2 of COGSA was to vest in the holder rights of suit under the contract of carriage, and vested a right to arbitrate (with an attendant obligation to do so if the rights of suit are exercised), but no obligation to do so if it did not exercise the rights of suit vested by section 2. Popplewell J rejected this argument. An arbitration agreement contains obligations by which a party is bound irrespective of the assertion of substantive rights by that party or the commencement by that party of arbitration or other proceedings.   They arise when there is an arbitral dispute, irrespective of which party is the maker or recipient of the claim which is disputed.  Sections 2 and 3 of COGSA did not split the arbitration clause in the bill of lading  such as to confer arbitration rights under section 2 and arbitration obligations under section 3.

The bank also argued that although it had become the lawful holder of the bill of lading it had been divested of its rights thereunder by virtue of s2(5) when it transferred the bill of lading under the letter of credit opened by the new buyer of the goods. The divestment of rights under s.2(5) did not affect the agreement to arbitrate. Under the doctrine of separability an arbitration agreement has a separate and independent existence from that of the matrix contract in which it is found. Therefore once you have become a party to an agreement to arbitrate, the extinguishment of rights under the matrix contract does not affect the arbitration agreement, which remains applicable to disputes falling within its ambit.

Accordingly owners’ s.67 application succeeded on this issue. No finding was made on the other ground of owners’ application, that the bank was an original party to the contract contained in or evidenced by the switch bills. This was a substantive issue for the tribunal to determine.



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