Sea Master Shipping Inc v Arab Bank (Switzerland) Ltd

Under Carriage of Goods by Sea Act 1992, a lawful holder who acquires rights of suit under a bill of lading becomes party to an arbitration agreement contained in the contract of carriage. The arbitration agreement confers mutual rights and obligations. The holder is therefore bound to arbitrate disputes within its scope, whether or not it has assumed substantive liabilities under section 3 of the Act.

A subsequent transfer or extinguishment of the holder’s substantive rights does not remove the obligation to arbitrate, because the arbitration agreement is separable from the underlying contract. A section 67 challenge involves a full rehearing of jurisdiction, but the court must leave substantive issues within the tribunal’s jurisdiction to the tribunal.

The claimant, as assignee of the shipowners’ rights, challenged under section 67 of the Arbitration Act 1996 an award concerning the defendant bank’s alleged liability for demurrage and detention under a switch bill of lading.

The bank had become lawful holder of the bill under section 2 of the Carriage of Goods by Sea Act 1992, but later transferred the bill and denied that it was an original party to the bill or bound by its arbitration clause. The tribunal had declined jurisdiction. The issues were whether the bank’s acquisition of rights under section 2 made it party to the arbitration agreement and, if so, whether the court should decide the separate question of substantive liability.

1. The section 67 application succeeded on the arbitrability issue. A challenge under section 67 is a full rehearing of the question of substantive jurisdiction. It is not limited to reviewing whether the tribunal’s decision was reasonably available: LG Caltex v China National Petroleum [2001] 1 WLR 1892; Azov Shipping Co v Baltic Shipping Co (No 1) [1999] 1 Lloyd’s Rep 68; Peterson Farms Inc v C&M Farming Ltd [2004] 1 Lloyd’s Rep 603.
2. The arbitration clause is a separate and independent agreement from the matrix contract. Its purpose is to govern disputes, including disputes about the validity, continuation or effect of the matrix contract: Bremer Vulkan Schiffbau Und Machinenfabrik v South India Shipping [1981] AC; Harbour Assurance (UK) Ltd v Kansa General International Insurance Co Ltd [1992] 1 Lloyd’s Rep 81.
3. The rights and obligations under an arbitration agreement are mutual and interdependent. The agreement does not merely confer a procedural right on a person who exercises substantive rights. It also imposes a prospective obligation to arbitrate when an arbitral dispute arises, regardless of which party asserts the dispute.
4. Section 2 of Carriage of Goods by Sea Act 1992 treats the lawful holder as if it had been a party to the contract of carriage. That treatment makes the holder party to the separate arbitration agreement, with the mutual obligation to arbitrate disputes within its scope. The question whether the holder has committed an act attracting liability under section 3 is therefore itself an arbitral issue.
5. The bank’s later divestment of its substantive rights under the bill did not extinguish the arbitration agreement. The tribunal therefore had jurisdiction to determine whether the bank owed substantive liabilities under the bill. The court declined to decide that substantive issue, which remained for the tribunal.

First-instance judgment on an application under section 67 of the Arbitration Act 1996 challenging an arbitral award on substantive jurisdiction.