Primetrade AG v Ythan Ltd

On 28 February 2004, off the coast of Colombia, a disastrous explosion occurred on board the bulk carrier “Ythan” (“the vessel”) . The explosion caused the death of the Master and five crew of the vessel. “Ythan” and her cargo were totally lost. The cargo (totalling some 33,760 MT) was described in the two bills of lading as being “Metallic HBI Fines” (“the cargo”). It had been shipped on board at Palua Puerto Ordaz, Venezuela, for carriage to and discharge at Jingtang Port, China. Each bill of lading stated that the shipper was Orinoco Iron CA of Venezuela and the bills were consigned “To Order”. The shippers (“Orinoco”) had agreed to sell about 35,000 MT of metallic HBI fines on FOB terms to Primetrade AG, a Swiss company (“Primetrade”). Primetrade agreed to sell approximately the same quantity of the same commodity to Orient Prosperity Pty Ltd (“Orient Prosperity”), an Australian company, at a price CIF FO Jingtang, China. This contract identified an end – user in China.

Despite the fact that none of the principal parties involved in this case have any connection with England, (Footnote: ¹) interesting and important questions that arise out of the tragic explosion and loss of the vessel now come before the Commercial Court in an appeal under section 67 of the Arbitration Act 1996 (“the 1996 Act”). The Owners wish to pursue a claim against Primetrade for losses the Owners have suffered as a result of the casualty, which they say was caused by the shipment on board of a dangerous cargo, the so – called “HBI Metallic Fines”. (Footnote: ²) The Owners say that Primetrade became the “lawful holder” of the two bills of lading within section 2(1)(a) of the Carriage of Goods by Sea Act 1992 (“COGSA”). Further, they say that Primetrade, as lawful holder of the bills of lading, “made a claim under the contract of carriage against” the Owners, as carriers of the cargo, within section 3(1)(b) of COGSA. The Owners say that this entitles them to sue Primetrade for damages for losses they have suffered as a result of the shipment of a dangerous cargo. The claim is substantial: about US$ 15 million.

This assertion gives rise to the two principal questions that I must consider: first, was Primetrade “the holder” of the bills of lading at any relevant time, and if so, did that transfer and vest in Primetrade rights of suit under section 2(1) of COGSA? Secondly, did it or its agents “make a claim under the contract of carriage against the carrier in respect of” the cargo within section 3(1)(b) of COGSA? I have dubbed these issues “the holder point” and “the making a claim point” respectively. There is no authority on the first point. On the second, although Lord Hobhouse of Woodborough has analysed section 3(1) of COGSA extensively in Borealis AB v Stargas Ltd (the “Berge Sisar”), (Footnote: ³) this is the first time the meaning of section 3(1)(b) has come up for decision in the courts.

The third question I have to consider concerns arbitration law. It arises in this way. Each of the two bills provided that “All terms and conditions of Charter Party dated Zug, January 16^th, 2004 between Phoenix Bulk Carriers Ltd, Monrovia, Liberia and Primetrade AG, Zug, inclusive of Arbitration Clause are deemed incorporated in this Bill of Lading”. The “Conditions of Carriage” on the reverse of the two Bills of Lading stated, in clause (1), that all the terms and conditions of the Charter Party “dated overleaf, including the Law and Arbitration Clause are herewith incorporated”.

Those statements did not accurately describe the contractual arrangements for the carriage of the cargo. The position was that, Primetrade, as the FOB buyer from Orinoco, had entered into a contract of affeightment with Phoenix Bulk Carriers Ltd of Liberia (“Phoenix”) by which Phoenix agreed to supply a vessel to carry a cargo of about 35,000 MT of HBI fines from Venezuela to Jingtan, China. That contract was contained in a fixture note dated 15 January 2004, which provided that the voyage should be performed on the terms of a charterparty dated 7 March 1996, with certain amendments. The owners of the vessel, Ythan Limited, a Marshall Islands registered company, had chartered “Ythan” to Americas Bulk Transport Ltd (“ABT”) by a time charterparty dated 8 October 2003. ABT sub-chartered the vessel on back – to – back terms to Phoenix.

The charterparty dated 7 March 1996 (Footnote: ⁴) contained a printed clause 28 which provided that all disputes arising out of that contract should be referred to arbitration in London. There was also a typed additional clause 44 which stated that “All disputes under this Charter Party and/or Bills of Lading are to be governed by English law”. It is accepted by both sides that the contracts contained in or evidenced by the two bills of lading are “Owners’ bills of lading” (Footnote: ⁵) and are governed by English law and, by virtue of the terms in the bills of lading, incorporate a London arbitration clause.

Primetrade was not an original party to either Bill of Lading, so it was not originally a party to the arbitration clauses in the Bill of Lading contracts. However, it is common ground that if Primetrade did become the “lawful holder” of the two bills of lading so as to transfer to it rights of suit under the bills of lading and if Primetrade had also “made a claim” under the two bills of lading against the Owners, then it, as well as the Owners, would be bound by the arbitration clause in the two bills of lading.

The precise analysis of how Primetrade would be bound by the arbitration clause was not debated before me. But if English law applies to all matters (see below), then I assume that the analysis is as follows: if Primetrade becomes the “lawful holder” of the bills of lading, then, subject to an important argument, (Footnote: ⁶) it would “have transferred to [it] all rights of suit under the contract of carriage as if [it] had been a party to that contract” within section 2(1)(a) of COGSA. Furthermore, by “making a claim” Primetrade would become “subject to the same liabilities under that contract as if [it] had been a party to that contract” within section 3(1)(b) of COGSA. Primetrade would not actually become a party to the contracts of carriage with the Owners, contained in or evidence by the bills of lading. But, as the Owners have made a claim against Primetrade based on the bill of lading, and (it is assumed) Primetrade have made a claim based on the bills of lading, then both parties would be relying on the bill of lading contracts “as if they had been a party” to those contracts. Therefore both parties would be bound by all the contract terms, including an arbitration clause. So, they would be in a similar position to others that say they can rely on contract terms, such as a legal assignee, or a person who exercises rights pursuant to a contract against an insurer under the Third Parties Rights against Insurers Act 1930. Such people will be bound by an arbitration clause in the relevant contract. (Footnote: ⁷)

The Owners started an arbitration against Primetrade, making their claim for damages caused by the shipment of an allegedly dangerous cargo. Primetrade retorted by saying that it was not bound by the arbitration clause, nor could it be sued for damages for shipment of a dangerous cargo, because it was neither the “lawful holder” of the bills of lading, nor had it “made a claim” within the terms of sections 2 and 3 of the COGSA. Therefore it had not become subject to the same liabilities under the bill of lading contracts “as if it had been a party to that contract”.

The arbitrators appointed by the parties, Mr Richard Shaw and Mr Patrick O’Donovan, (Footnote: ⁸) in turn appointed Mr Anthony Diamond QC as third arbitrator in the reference. All three arbitrators have, of course, great experience of the shipping world and shipping law. On 23 November 2004 Primetrade applied to the tribunal to make a declaratory award under section 30(1) of the 1996 Act to the effect that the tribunal was without substantive jurisdiction because there was no valid arbitration agreement between the Owners and Primetrade. The arbitrators agreed to that course.

There was a four day hearing before the arbitrators, between 17 and 21 January 2005, at which Primetrade and the Owners were represented by solicitors and counsel. Witnesses were called by both sides and many written and oral submissions made. The arbitrators published their Award and Reasons to the parties on 8 March 2005. All three arbitrators held that Primetrade had become the lawful holder of the bills of lading at the relevant time. A majority, Mr Shaw and Mr O’Donovan, also held that Primetrade had “made a claim” against the Owners. Therefore the majority held that Primetrade was bound by the arbitration clause in the bills of lading and that the arbitrators therefore had substantive jurisdiction to hear and determine the Owners’ claim against Primetrade. Mr Diamond QC concluded that Primetrade had not “made a claim” and was therefore not bound by the arbitration clause. So, on his view, the arbitrators had no jurisdiction to hear the Owners’ claim.

The point on arbitration law arises because Primetrade now appeals the majority decision on jurisdiction, exercising its right to do so under section 67(1)(a) and (b) of the 1996 Act. It is agreed on all sides that an appeal on jurisdiction under section 67(1) involves a re-hearing of the matter by the court, at which the parties can adduce evidence and reargue entirely the issue of jurisdiction. But the Owners submit that Primetrade now wishes to run new arguments on the question of whether it was ever the lawful holder of the bills of lading and, if it was, whether rights of suit were transferred to it. The Owners say that these are new “objections” to the jurisdiction of the arbitrators. The Owners say that Primetrade cannot raise new objections because of the terms of section 73(1) of the 1996 Act. (Footnote: ⁹) So this raises the third important question: when there is an appeal under section 67 of the 1996 Act from an arbitration tribunal’s decision on substantive jurisdiction, to what extent is the appellant entitled to adduce new “objections” to the arbitrators’ substantive jurisdiction and to what extent is the appellant entitled to adduce new evidence on the appeal in support of either an existing or a “new” objection? I have dubbed this issue “the new objection point”.

The hearing of the appeal took place before me on 20, 21 and 22 July 2005. The parties very sensibly agreed that there was no need to re-call the witnesses that had been heard before the arbitrators. I was supplied with the witness statements and transcripts of their oral evidence given in the arbitration hearing. There was also some written expert evidence before the arbitrators on P&I Club practice in relation to the grant of Letters of Undertaking (“LOU”), which are frequently given by shipowners and their P&I Clubs to provide security for claims by cargo owners so as to avoid a ship being arrested. I did not hear any expert evidence, but the reports were available to me. It was agreed that (without prejudice to the “new objection issue”) all documents should be evidence of the facts stated in them, subject to comments on weight. I am grateful for the interesting and helpful oral submissions of Mr Dunning QC, for the appellants, Primetrade, and of Mr Simon Bryan for the Owners, as well as their full written submissions. After the oral hearing, the parties put in further written submissions, which raised yet further points, particularly on the effect of sections 5(2)(c) and 2(2) of COGSA. I reserved judgment.

The first question that might be asked (and I put it to counsel at the hearing) is: why is English law and COGSA 1992 in particular, relevant at all? How is Primetrade, a Swiss corporation, affected by its provisions, so as potentially to be the subject of contractual obligations as a matter of English law, in relation to events which all occurred outside the jurisdiction? COGSA is not expressly stated to be extra – territorial. Nor is it mandatory in the way that the Carriage of Goods by Sea Act 1971 makes the Hague – Visby Rules mandatory as a matter of English law when applied by English Courts. (Footnote: ¹⁰) It is, perhaps, difficult to say that English law rules apply before determination of the issue of whether a person is bound by the terms of a contract whose applicable law is English law.

I think that the proper analysis is that suggested by Mr Toh Kian Sing in an article published in the LMCLQ in 1994, which is: “…to extend the notion of the putative proper law to deal with the existence of the contract between two particular parties”. (Footnote: ¹¹) Thus the English court, which must apply English law conflicts of laws rules, (Footnote: ¹²) will scrutinise the bill of lading to see what the putative proper is; if it is English law, then the COGSA 1992 will have to be considered. The parties in question will be bound by the bill of lading contract terms if the statutory requirements are satisfied. Although this point was not in issue before me, I understand that the parties were inclined to accept this analysis.

The relevant provisions of the Carriage of Goods by Sea Act 1992

The relevant provisions of the Arbitration Act 1996

Subject to the possibility of adducing new evidence under the “new objection” point, the parties were content to rely on the evidence put before the arbitrators for the purposes of the appeal. Neither party has challenged the principal findings of fact made by the arbitrators. I must therefore be entitled to use their findings to assist in reaching my own conclusions on whether the arbitrators were correct on the two principal issues. I also need to refer to the arbitrators’ findings in order to set the scene for the argument on the “new objection” issue. I will indicate if there is now any dispute as to a particular finding.

Arbitrators’ findings as to the contracts for the purchase and sale of the cargo, the letters of credit and the bills of lading.

Arbitrators’ findings as to the cargo insurance

Arbitrators’ findings concerning events soon after the casualty

Arbitrators’ findings as to the cancellation of the purchase contracts; the movement of the bills of lading after the casualty and the payment of the insurance claim money into Primetrade’s account with UBS.

Arbitrators’ findings concerning the P&I Club’s Letter of Undertaking

The wording of the LOU as finally agreed.

The conclusions of the arbitrators on the “lawful holder” issue

It is important for the “new objection issue” that I should record in full what the arbitrators say in the next paragraph in their Reasons, ie. paragraph 87:

“87.

This however is not necessarily quite the end of the matter. It may seem anomalous that if Primetrade became the lawful holder of the bills on 22^nd March 2004 solely so that the bills could be delivered to cargo underwriters in exchange for payment of the insurance claim, it should continue to be the holder of the bills once the insurance claim had been paid. This however results from the way in which the case was argued. No argument was addressed to us as to whether under section 5(2)(b) of the Act the delivery of the bills to underwriters had the effect that underwriters became lawful holders of the bills and could if they so wished enforce rights under the bills in their own name. Nor was any argument addressed to us as to whether, when underwriters acquired rights of subrogation under para. 54 of the Marine Cargo Open Policy, this resulted under Belgian law in an assignment of the rights of Primetrade to claim under the contract of carriage. Nor were we asked to consider whether payment of the insurance claim was made by underwriters to Marsh before or after 30th March 2004. We express no view on any of these matters since it would be necessary, before so doing to reopen the case for further evidence and argument. But, in view of the considerable latitude that we have already extended to Primetrade, we are finally of the view that it would be wrong to take this course.”

The conclusions of the majority on whether Primetrade “made a claim” under the contract of carriage against the Owners, for the purposes of section 3(1)(b) of COGSA 1992.

All three arbitrators made two other important findings. These are, first, that the notice sent by Primetrade to the Owners on 4 March 2004 was “clearly nothing more than a reservation of its rights and those of cargo underwriters”. This notice was sent at a time when, as everyone agrees, Primetrade was not the lawful holder of the bills of lading. The arbitrators conclude “it clearly did not amount to a claim within section 3(1)(b)”. (Footnote: ³⁷) Secondly, they held that the Club LOU was binding on both the Club and Atlantis. The arbitrators rejected the submission that the LOU was not enforceable because Atlantis had failed to sign and return the warranty. The arbitrators find: “the wording had been agreed on 23 March 2004”.

Mr Bryan submitted that the notice of 4 March 2004 had much greater weight than the arbitrators attributed to it. To that extent he challenged the first of these two findings. But the second was not challenged by either side.

The majority arbitrators’ ruling on “making a claim”.

The majority’s reasoning is as follows: (i) the demand of a letter of guarantee from a P&I Club must necessarily imply a threat of arrest; (ii) in this case the threat of arrest existed and was sufficiently formal to induce NEPIA to issue the LOU; (iii) the threat of arrest was therefore sufficiently formal to comply with Lord Hobhouse’s requirement that, to satisfy section 3(1)(b), the claim made by the lawful holder of the bill of lading must be a “formal claim against the carrier asserting a legal liability of the carrier under the contract of carriage”. (Footnote: ⁴¹) The majority go on to hold: (iv) there was nothing “tentative or equivocal” (Footnote: ⁴²) in the communications from Atlantis to NEPIA in the period 23 to 29 March 2004; (Footnote: ⁴³) (v) until the insurers agreed to settle Primetrade’s claim under the cargo insurance on 23 March 2004, the only party whose interests were at stake as regards the cargo was Primetrade; (Footnote: ⁴⁴) so (vi) “We therefore cannot interpret Atlantis’ communications with NEPIA as other than a formal claim against the carrier under the contract of carriage, backed by a threat of arrest of a sister or associated ship, by those with a legitimate right to bring such a claim, including Primetrade”. (Footnote: ⁴⁵)

Arguments for Primetrade: Mr Dunning QC, for Primetrade, made three groups of submissions. The first group concerns the “lawful holder” issue. As I understand it, Mr Dunning’s primary case now (Footnote: ⁴⁶) is that the question of whether Primetrade became the “holder” of the bills of lading is governed by section 5(2)(c) of the 1992 Act. He submitted that Primetrade was never the “holder” of the bills of lading within that paragraph or, if it was, then the facts of this case do not fall within either proviso to section 2(2), so that a right of suit was not transferred to Primetrade. Mr Dunning has alternative submissions based on section 5(2)(b). His case is that if paragraph (b) applies, then either UBS remained “holder”, or if Primetrade became “holder”, then the underwriters became the lawful holders of the bills of lading when they took possession of them so that rights of suit (and liabilities, if any) were transferred to underwriters.

I should note at this stage that Mr Dunning accepts that if Primetrade became the holder of the bills of lading, then it did so “in good faith”. (Footnote: ⁴⁷) Therefore he accepts that if Primetrade did become the “holder” at the relevant time, it became the “lawful holder” for the purposes of sections 2(1) and 3(1)(b) of COGSA 1992.

Secondly, On the “new objection issue”, Mr Dunning made two main submissions. First he submitted that if there is a challenge to a ruling on arbitrators’ substantive jurisdiction, then, on the true construction of section 73 of the 1996 Act, an appellant is entitled to put before the court any new argument and any new evidence, so long as it went to the issue of jurisdiction. Secondly, he submitted that if the section does impose restrictions, then the argument that UBS remained holder because it was assignee of the insurance proceeds had been before the arbitrators. He conceded that the arguments based on section 5(2)(c) and section 2(2) and the argument that the underwriters became the holders of the bills were new. He argued that Primetrade should be permitted to argue those points and also to introduce the small amount of new evidence to show how and when the bills were sent on to the underwriters.

Thirdly, on the “making a claim issue”, Mr Dunning submitted that the dissenting arbitrator’s reasoning is correct. Thus he submitted that Mr Diamond QC had been right to conclude that: (1) the correspondence between Atlantis and NEPIA did not constitute a clear and unequivocal claim by Primetrade as bill of lading holder to enforce rights under the contract of carriage; (2) the correspondence between the holder of the bill of lading and the carrier (or their agents) had to be examined independently of the request for security to see if it passed the test in (1) above; (3) the mere fact that a voluntary request for security had been made could not be a determining factor. (Footnote: ⁴⁸)

The Owners’ arguments: Mr Bryan submitted that, on the proper construction of section 73 of the 1996 Act, a person appealing from a decision of arbitrators on their substantive jurisdiction is not entitled to raise a new ground of objection to their jurisdiction, unless the conditions at the end of section 73 are fulfilled. (Footnote: ⁴⁹) Primetrade cannot fulfil those conditions because the arguments now being put forward by Primetrade were either known or could have been discovered at the time of the arbitration hearing. Therefore, Primetrade cannot put forward its new arguments as grounds of objection. Nor is Primetrade entitled to adduce new evidence to support these arguments.

If, contrary to that submission, Primetrade is entitled to argue those points, then Mr Bryan says that they are wrong, so that Primetrade was indeed the holder of the bills of lading in the period from 22 to 29 March 2004. Mr Bryan submits in particular that section 5(2)(c) is irrelevant to the facts of this case; but even if it applies, Primetrade became the “holder”of the bills of lading when UBS sent the bills of lading to Marsh.

On the “making a claim” issue, Mr Bryan submitted that the actions of Atlantis in insisting on the provision of an LOU in favour of Primetrade, amongst others, constituted the making of a claim on behalf of Primetrade. The demand for an LOU, with the implicit threat to arrest a vessel owned by a company associated with the Owners of the “Ythan”, was as good as arresting a vessel. It was a sufficiently formal and unequivocal act to indicate that parties interested in the cargo, including Primetrade, were intent on making a claim against the Owners under the contract of carriage. Moreover, Primetrade positively instructed Atlantis to obtain the guarantee in Primetrade’s own name and made a conscious decision to allow Primetrade’s name to be used in getting the LOU. (Footnote: ⁵⁰)

Mr Bryan submitted that, in deciding whether Primetrade had “made a claim”, the court is entitled to look at two particular areas of evidence. First, evidence of events before Primetrade became the holder of the bills of lading on 22 March. Secondly, evidence from the P&I Club, the Owners and also the expert evidence that had been before the arbitrators to show the effect of a demand for security and its provision on the Club and its Members, the Owners, even if that evidence related to matters not known at the time to Primetrade or its agents, Atlantis or Marsh. Mr Bryan also relied, by analogy, on the reasoning of the Court of Appeal in Rank Enterprise Ltd v Gerard. (Footnote: ⁵¹) In that case the court had to consider clause 9 of the Norwegian Sale Form of contract for the sale of a vessel. The relevant wording in the clause is: “…any claim which has been incurred prior to the time of delivery…be made against and in respect of any vessel”. Mr Bryan submitted that much guidance can be gained from the analysis by Mance LJ (as he then was) concerning the proper construction of the phrase “claims…made against the vessel”. (Footnote: ⁵²)

Taking all these elements together, the majority of the arbitrators were, he submitted, correct to conclude that, in the circumstances, the demand for security and the securing of the LOU on behalf of Primetrade meant it had “made a claim”within section 3(1)(b) of the COGSA 1992.

As I understand it, before the arbitrators there was no argument at all about the possible relevance of sections 5(2)(c) and 2(2) of COGSA. I put that question to both counsel in the course of the oral hearing before me. In particular, I asked whether, assuming Primetrade did become the holders of the bills of lading on 22 March 2004, it did so at a time when “possession of the bill no longer gives a right (as against the carrier) to possession of the goods to which the bill relates”. (Footnote: ⁵³) I suggested that, as the goods had been lost and the contract of carriage must have come to an end by frustration or breach by that time, then perhaps the bills of lading no longer gave the holder a right to possession of the goods as against the Owners. At first counsel were inclined to the view that those sections were not relevant. However, as I have said, in the written submissions put in after the oral argument, Mr Dunning relied on those sections in support of an argument that section 5(2)(c) governed in this case; that Primetrade was either not the holder of the bills of lading within that section, or, if it was, it did not have “rights of suit” transferred to it (under section 2(1)), because it did not fulfil the requirements of the provisos to section 2(2).

In my view it is logical to start with the“new objection issue”. This involves: (a) the question of the proper construction of section 73 of the 1996 Act, and (b) whether, on the facts, Primetrade is prevented from putting forward all or any of the arguments it wishes on the issue of whether, at the material time, it was the holder of the bills of lading, or, if it was, it had “rights of suit” transferred to it.

Having decided that issue, I will next consider the question of whether Primetrade was the “holder” of the bills of lading at the relevant time, and if it was, whether it had transferred to it “rights of suit”. Then, if need be, I will consider, assuming Primetrade became the “lawful holder”of the bills of lading, whether it “make a claim” within section 3(1)(b) of the COGSA?

As I have said, Mr Dunning accepted that two points on the “holder of the bill of lading issue” had not been argued before the arbitrators. They were: (i) the section 5(2)(c) and section 2(2) point; and (ii) the argument that once the underwriters were in possession of the bills of lading, they were the “holders”. Alternatively, if the underwriters subsequently became the holders, then any rights of suit and liability to the Owners passed from Primetrade to the underwriters. (Footnote: ⁵⁴)

In support of the second argument, Mr Dunning proposed to put in some evidence that was not before the arbitrators. This consisted of a second statement from Anja Deckers of Marsh, (Footnote: ⁵⁵) and correspondence showing that Marsh had received the bills on 23 March, had informed underwriters and that Marsh had sent the bills and other documents to underwriters on 24 March 2004.

Mr Bryan submitted that Mr Dunning had also not argued before the arbitrators that UBS remained “holder” of the bills of lading when they were sent to Marsh because UBS was the assignee of the insurance proceeds under the security documents with Primetrade. He pointed to the fact that this argument was not referred to in the Reasons of the three very experienced arbitrators, all of whom are, of course, legally trained.

In these circumstances Mr Bryan submits that, upon the proper construction of section 73 of the 1996 Act, Mr Dunning cannot raise these new “objections” to the substantive jurisdiction of the arbitrators. Mr Bryan points to the particular wording of section 73(1):

“If a party to arbitral proceedings takes part…in the proceedings without making…any objection-

(a)

that the tribunal lacks substantive jurisdiction,

……

He may not raise that (Footnote: ⁵⁶) objection later, before the tribunal or the court, unless he shows that, at the time he took part …in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds of objection”.

He submits that the wording makes it clear that a party must raise every ground of objection to jurisdiction before the arbitral tribunal and the party cannot subsequently raise a new ground before the court, unless the conditions set out at the end of the sub-section are fulfilled. It must also follow, he submitted, that a party could not attempt to introduce new evidence in support of a new objection, unless the conditions in the proviso are fulfilled.

Mr Bryan relied on two cases to support this submission. The first is: Athletic Union of Constantinople v National Basketball Association and others, (Footnote: ⁵⁷) a decision of Mr Richard Field QC (as he then was), sitting as a Deputy High Court Judge in the Commercial Court. That case concerned a dispute between two professional basketball teams and whether a particular player was bound to play for one team (Athletic Union of Constantinople – “AEK”) or another, the Phoenix Suns. The issue was put to arbitration but AEK objected to the arbitrator’s jurisdiction. It did so on the basis that there was no true agreement to arbitrate because AEK had been put under pressure to do so; therefore any apparent agreement to arbitrate was vitiated by coercion or unfairness. (Footnote: ⁵⁸) The arbitrator made an award in which he held that he had jurisdiction. AEK challenged that ruling on jurisdiction under section 67, but contended before the Deputy Judge that it had never agreed to arbitrate at all. The respondents argued that AEK could not raise this objection to jurisdiction on the section 67 appeal, by virtue of section 73(1). It was apparently accepted by counsel for AEK that by virtue of the wording at the end of section 73(1), (in particular the use of the words “that objection”), an appellant under section 67 could not argue any jurisdiction point that was not argued before the arbitrator. (Footnote: ⁵⁹) The argument before the Deputy Judge was whether AEK had submitted to the arbitrator that AEK had not even apparently agreed to arbitrate. He held that the point had not been argued before the arbitrator and so could not be argued on the appeal. (Footnote: ⁶⁰)

The second case is: JSC Zestafoni G Nikoladze Ferroalloy Plant v Ronly Holdings Ltd, (Footnote: ⁶¹) a decision of Colman J. In that case disputes arose out of a contract between Zestafoni and Ronly. The contract provided for disputes to be arbitrated before a tribunal of three arbitrators. Ronly appointed an arbitrator and invited Zestafoni to appoint its arbitrator. Zestafoni replied by consenting to Ronly’s appointee to act as the sole arbitrator. Ronly’s solicitors asked for confirmation of Zestafoni’s consent to vary the terms of the arbitration agreement and this was given. After the arbitration had proceeded some way, Zestafoni alleged that the parties could not change the terms of the arbitration agreement. The question of whether the arbitrator had jurisdiction was argued before the arbitrator. He issued an award saying he had jurisdiction because the parties had entered into an ad hoc reference and thereby granted jurisdiction to him. Zestafoni challenged that determination under section 67. One of the grounds it wished to argue was that an agreement to submit disputes to a sole arbitrator was unenforceable by reason of the law of Georgia, the place of incorporation of Zestafoni. Ronly submitted that Zestafoni could not take this point because it had not been argued before the arbitrator and it could not now do so by virtue of section 73(1).

Colman J began his discussion of this point by referring to remarks Moore – Bick J (as he then was) made in Rustal Trading v Gill & Duffus SA. (Footnote: ⁶²) Moore – Bick J had described section 73(1) as being designed to ensure that if a person believes he has grounds for objecting to the constitution of the tribunal or the conduct of the proceedings, he raises those objections as soon as he is aware of them or ought to be aware of them. It would, he said, be unfair if he took part in an arbitration yet kept an objection to jurisdiction up his sleeve and only attempted to deploy it later.

Colman J agreed with those observations. Then he said: (Footnote: ⁶³)

“I would go further. The principle of openness and fair dealing between the parties to an arbitration demands not merely that if jurisdiction is to be challenged under s.67 the issue as to jurisdiction must normally have been raised at least on some grounds before the arbitrator but that each ground of challenge to his jurisdiction must previously have been raised before the arbitrator if it is to be raised under a s.67 application challenging the award”.

He then referred to the decision of Mr Field QC in Athletic Union of Constantinople v National Basketball Association, and said that the concession of counsel was “clearly correct”. Colman J continued:

“Were it otherwise, the policy of the sub-section could be frustrated by introducing at the last minute grounds of challenge not hitherto raised and thereby potential causes of delay and disruption of the application to the prejudice of the opposite party”.

Colman J went on to hold that if a party sought to raise a new point on a section 67 appeal, it had the burden of showing good reason why the point was not raised before the arbitrator and it would usually have to do this by evidence, eg. a statement. (Footnote: ⁶⁴) The appellant, Zestafoni, had tried to introduce new documents in support of the “illegality” point. Ronly had objected to their use and Colman J refused their admission. He also held that Zestafoni had failed to discharge the burden of showing good reason why the “illegality” point was not raised before the arbitrator. Therefore he refused to entertain that ground of objection to jurisdiction. (Footnote: ⁶⁵)

Mr Dunning submits that, on the true construction of section 73(1), the relevant “objection” by Primetrade is that the arbitrators did not have jurisdiction because Primetrade was not the holder of the bills of lading at the relevant time, nor did it make a claim under the contracts of carriage against the Owners. A person is not debarred from deploying new arguments or evidence in support of a section 67 appeal simply because it did not use them before the arbitrators. He submits that if the two cases relied on by Mr Bryan hold that the phrases “any objection” and “that objection” in section 73(1) impose a stricter rule, then they are wrongly decided and should not be followed. Mr Dunning points to the fact that in two other cases of appeals under section 67, Commercial Court judges have been content both to admit new evidence that was not before the arbitrators and also to listen to new arguments: see: Aloot Kalmneft v Glencore International AG; (Footnote: ⁶⁶) and Electrosteel Castings Ltd v Scan – Trans Shipping & Chartering Sdn Bhd. (Footnote: ⁶⁷) Mr Dunning did not argue, (nor did he put in any supporting evidence), that his case came within the proviso to section 73(1).

Discussion

In the Report on the Arbitration Bill, which was produced by the Departmental Advisory Committee on Arbitration Law, (Footnote: ⁷⁰) it deals shortly (Footnote: ⁷¹) with the intention behind clause 73 of the Bill, which became section 73 in the 1996 Act. The Report said clause 73 is to deal with:

“Recalcitrant parties or those who have had an award made against them [who] often seek to delay proceedings or to avoid honouring an award by raising points on jurisdiction etc which when they have been saving up for this purpose or which they could and should have discovered and raised at an earlier stage.”

The Report says that the clause is based on Article 4 of the Model Law, although it is not in the same terms. The Report continues:

“In particular, unlike the Model Law, we have required a party to arbitration proceedings who has taken part or continues to take part without raising the objection in due time, to show that at that stage he neither know nor could with reasonable diligence have discovered the grounds for his objection….”

So the Report does not assist in deciding whether, in section 73, the word “objection” and the phrase “that objection” means simply an objection to jurisdiction generally, or a particular argument or ground for objection.

There is guidance, of course, in the decision of Colman J in the Zestafoni case (Footnote: ⁷²) to which I have referred. There is further indirect assistance in the judgment of Gross J in the Electrosteel case, where the appellant, Electrosteel, wished to introduce new evidence on an appeal under section 67. In considering whether he should admit such evidence, Gross J described the decision of an arbitrator on jurisdiction as “a provisional ruling only”, which could be challenged in an appeal, as of right, under section 67. He said it was clear, from a number of cases at first instance, that such an appeal took the form of a re-hearing of the issue and was not simply a review of the arbitrator’s decision to see whether he was entitled to make his decision. (Footnote: ⁷³) Gross J pointed out that there is no statutory restriction on new evidence being adduced on an appeal under section 67 and noted that in the Kalmneft case, Colman J had specifically held that additional evidence was admissible. (Footnote: ⁷⁴) However, Gross J permitted the new evidence, but was careful not to encourage the production of new evidence on appeals under section 67. (Footnote: ⁷⁵)

With respect to Gross J, I would not characterise a decision of an arbitrator on jurisdiction (under section 30 of the 1996 Act) as a “provisional determination”. It is a final determination, unless appealed. However, I acknowledge that the arbitrator’s determination can be appealed as of right under section 67.

It is clear that the intention behind section 73 is to ensure that a party objecting to jurisdiction, who has decided to take part in the arbitral proceedings, should bring forward his objections in those proceedings before the arbitrators. He should not hold them in reserve for a challenge to jurisdiction in the court. I agree with Colman J that this intention reflects a principle of “openness and fair dealing” (Footnote: ⁷⁶) between parties who may, or may not, be bound by an arbitration clause. I also agree with Colman J, therefore, that to fulfil this intention and to accord with that principle, the words “any objection” and “that objection” in section 73 must mean “any ground of objection” and “that ground of objection”.

But what does that phrase cover? I think that it is wrong to be prescriptive or try to lay down precise limits in the abstract. It is usually easy to recognise in particular cases whether a party is attempting to raise a new ground of objection to jurisdiction on an appeal. It was obvious in the National Basketball Association case and the Zestafoni case. Take this case: in my view Primetrade raised two “grounds of objection” to the arbitrators’ jurisdiction. They are: that Primetrade was not a holder of the bills of lading at any relevant time; and that it did not make a claim against the Owners; therefore it is not bound by the arbitration clause.

Primetrade raises the same two grounds of objection on this appeal. I accept that it raises different and broader arguments on the first ground. But in my view all those arguments are within the same “ground of objection” to the jurisdiction of the arbitrators. The argument that no right of suit is transferred to Primetrade even if it became a “holder” of the bills under section 5(2)(c) is, in my view, within that first ground.

That conclusion does leave two other points for consideration. The first is: to what extent is a party entitled to adduce new evidence in support of a new or different argument within an existing “ground of objection”. I recognise that there is no statutory limitation on adducing new evidence; nor is there any restriction in the CPR that governs this issue. But that cannot stop the court exercising control over what evidence to admit on an appeal under section 67. Appeals under that section are, after all, re-hearings, not a completely fresh start as if there had been no previous challenge to the jurisdiction of the arbitral tribunal. In my view, if the principle underlying section 73 is one of openness and fair dealing between the two parties involved, then this requires that, so far as possible, a party must bring forward all its evidence at the hearing before the arbitrators. If a party wishes to adduce new evidence on an appeal under section 67, then it must give notice to the other side. If it is opposed, it must seek permission from the court at an appropriate interlocutory hearing. The court must be able to control the procedure of the re – hearing under section 67. The court may decide not to permit new evidence to be adduced if that would result in substantial prejudice to the other side which cannot fairly be dealt with either in costs or, if appropriate, an adjournment.

In this case Mr Bryan has not asserted that the Owners are prejudiced by the new evidence that Mr Dunning wishes to introduce. I will therefore admit it.

The other point to mention is the arbitrators’ comments at paragraph 87 of their Reasons, where they say that they would not have permitted Primetrade to put in evidence or to argue any points on whether the underwriters became the holders of the bills of lading. They were entitled to take that view. But, in my opinion, their conclusion would not stop me from permitting Primetrade to argue that point now, provided it is either within the “grounds of objection” raised before the arbitrators, as I have held, or the conditions in the proviso to section 73(1) can be met.

Is section 5(2)(b) or 5(2)(c) the relevant section for the purpose of deciding whether Primetrade was “holder” of the bills of lading?

In my view the word “transaction” refers to the physical process by which the bill is transferred from one person to another. This is also the view of Carver on Bills of Lading (Footnote: ⁷⁸) and also Benjamin’s Sale of Goods. (Footnote: ⁷⁹) It appeared to be Lord Hobhouse’s understanding too, given the way he refers to a transfer of a bill of lading in paragraph 30 of his speech in the “Berge Sisar”. (Footnote: ⁸⁰)

The question of the scope of the phrase “at a time when possession of the bill no longer gave a right (as against the carrier) to possession of the goods to which the bill relates” is less easy. Mr Bryan submits that the phrase deals only with the case of “spent” bills of lading, ie. bills which cover goods that have been delivered to the person entitled to delivery under the bills. (Footnote: ⁸¹) Mr Bryan submits that the wording was not intended to deal with the situation where the goods never arrive at the destination under the contract of carriage because they have been destroyed or totally lost. But Mr Dunning points out that in the Explanatory Notes to the draft Carriage of Goods by Sea Bill which is annexed to the Law Commission Report, it gives an example of what is intended to be covered by the wording of clause 2(2) which became section 2(2). (Footnote: ⁸²) The note says: “The words “possession of the bill no longer gives a right…to possession of the goods” cover, inter alia, the case where delivery of the goods has been made and also the case where the goods are destroyed”.

Mr Dunning also refers to a passage in Carver (Footnote: ⁸³) where the authors discuss the ambit of the same wording in section 2(2). The authors deal with an example where the cargo has been destroyed in the course of the contract of carriage. They point out that the destruction could be the result of either a breach of contract by the carrier or a frustrating event or an excepted peril. With respect to the authors, the reasoning of the last part of the paragraph is a little difficult to follow. However, I agree with their view that there cannot be a right (against the carrier) to possession of the goods if the goods no longer exist.

It is clear from the wording of section 5(4) of the Act that the draftsman had well in mind the possibility that a bill of lading could be issued and then the goods covered by it “ceased to exist”. The Explanatory Notes to the Bill state that this subsection “makes it clear that rights of suit in relation to any document can exist (Footnote: ⁸⁴) in respect of goods…carried on a vessel which sinks”. Therefore there is no reason to confine the circumstances covered by the words “possession of the bill no longer gives a right (as against the carrier) to possession of the goods to which the bill relates”. How the Act operates depends on its wording. That is emphasised by the particular reference to sections 2(2) and 4 in section 5(4).

In my view, valuable assistance on the ambit of the words in section 5(2)(c) “at a time when possession of the bill no longer gave a right (as against the carrier) to possession of the goods” is gained from the analysis of Lord Hobhouse in his speech in the “Berge Sisar”. In paragraph 31 of his opinion, Lord Hobhouse notes that the 1992 Act is concerned solely with contractual obligations created in a bill of lading in relation to the carriage and delivery up of the goods. He emphasises that the Act is not dealing with proprietary rights of anyone who becomes a holder of the bill of lading. (Footnote: ⁸⁵) This distinction is important. It means that when a ship sinks and the cargo carried under a bill of lading is lost permanently, the question to ask in connection with the wording in section 5(2)(c) under consideration is: does possession of the bill of lading any longer give a contractual right (as against the carrier) to possession of the goods to which the bill relates? Like the authors of Carver, my view is that there cannot be a contractual right (as against the carrier) to possession of goods that no longer exist (for practical purposes) because they are at the bottom of the sea. If the reason for the loss is a breach of contract by the carrier, there may at that stage spring up a contractual right to damages, but whether there is and who can exercise that right are different questions which I need not discuss here.

So I conclude that the phrase in section 5(2)(c) “at a time when possession of the bill no longer gave a right (as against the carrier) to possession of the goods to which the bill relates” do apply to a situation where the goods have been lost forever, as in this case. That does not stop the Act operating to transfer rights of suit or liabilities. Whether that occurs depends on whether the conditions set out in the Act, particularly those in sections 5(2), 2(2) and 3(1) are fulfilled.

Did Primetrade become “holder” of the bills of lading within section 5(2)(c)?

Mr Bryan submitted, in his written submissions following the oral hearing, that if section 5(2)(c) is relevant, then the appropriate “transaction” to be considered is the transfer of the bills to Primetrade upon UBS paying Orinoco, pursuant to the sale contract between Orinoco and Primetrade. Primetrade would have become the “holder” of the bills within paragraph (b) of section 5(2) had not that transaction been effected (by payment to Orinoco) at a time (22 March 2004) when possession of the bills no longer gave a right (as against the carrier) to possession of the goods to which the bills relate. Therefore Primetrade became the “holder” within paragraph (c) of section 5(2).

I do not accept Mr Bryan’s analysis. There are two “transactions” to be considered. The first is when UBS had the bills “transferred” to it (upon payment to Orinoco). Assuming that section 5(2)(c) applies to the situation where the goods represented by the bills of lading have been totally lost, then upon payment to Orinoco, UBS would become the holder of the bills under section 5(2)(c). This is because UBS would have become holders of the bills under section 5(2)(b) if the “transaction” (ie. the transfer of the bearer bills to UBS upon payment to Orinoco) had taken place before the ship and cargo was lost. The “transaction” that actually took place did so pursuant to the Orinoco/Primetrade sale contract and the Primetrade/UBS MCA, all of which had been in place before the loss of the vessel.

The second relevant “transaction” is that when UBS sent on the bills to Marsh. First, at this point I will deal with Mr Dunning’s original argument, put forward at the oral hearing before me, on the assumption that section 5(2)(b) applied in this case. The argument was that Primetrade did not become the holder of the bills of lading when they were in the hands of Marsh, because UBS still retained an interest in them as assignee of Primetrade’s insurance claims, under the Pledge and Assignment document.

I would reject this argument. Once UBS had paid Orinoco on Primetrade’s instructions on 22 March 2004, Primetrade became the owner of the bills. This is the view of Av Lombardini set out in his report to the arbitrators. (Footnote: ⁸⁶) Primetrade’s Swiss law expert, Mr Ziegler, expressed the contrary opinion, ie. that UBS became the owner of the bills of lading once it had paid Orinoco, (Footnote: ⁸⁷) but I do not accept his view. It does not seem to take account of the limited capacity in which UBS had possession of the bills of lading, ie. only as pledgee. Of course the fact that Primetrade is the owner of the bills does not stop UBS being the holder of the bills for the purposes of section 5(2) of COGSA. In my opinion it is clearly intended that a person who had only a “special interest” in bills of lading, such as a pledgee, and who did not own them (or the goods which they represent), can be holder of the bills of lading for the purposes of section 5(2). In that way a person that has only a limited interest in the bills of lading can have contractual rights of suit transferred to him under section 2(1). (Footnote: ⁸⁸) At the time UBS paid Orinoco, UBS had actual possession of the bills and it had the right to possess them pursuant to the pledge it was then exercising. So at that stage UBS was the “holder” of the bills.

Mr Dunning accepts now that when UBS parted with the bills by sending them to Marsh, it lost its pledge over the bills. But he submits that UBS remained the holder of the bills, despite the fact that it no longer had physical possession of them. The only basis on which UBS could remain the holder of the bills is if Marsh received them as agent for UBS and UBS had a right to possession of the bills and so could demand them back for some reason. Mr Ziegler suggests that is the position, but I do not accept it is so. (Footnote: ⁸⁹) UBS had an assignment only of the “insurance claim” under the Pledge of Goods and Assignment document. UBS understood that to mean an assignment of the proceeds of the insurance claim. Primetrade also understood that UBS only had an assignment of the insurance claims and not a general assignment of the benefit of the bills of lading. (Footnote: ⁹⁰) UBS notified Marsh that it had an assignment of the insurance proceeds. (Footnote: ⁹¹) But it was Primetrade who had agreed the compromise with underwriters so that they would pay out on the insurance. And it was Primetrade who had agreed with underwriters that the shipping documents, including the bills of lading, would be handed over by UBS to the underwriters. Primetrade instructed UBS to pass them to Marsh and Primetrade instructed Marsh to pass the documents on to underwriters. Therefore, once UBS had lost its pledge over the bills, it is clear, on the proper construction of the security documents and both UBS’ and Primetrade’s understanding of the facts, that the only party that was entitled to possession of the bills must have been Primetrade. When Marsh got the bills from UBS, it held them on behalf of Primetrade for the purpose of enabling Primetrade to fulfil its part of the compromise agreement with underwriters.

I appreciate that the proceeds of the insurance claim were to go to Primetrade’s account at UBS. But that would be in fulfilment of the terms of the assignment of the insurance claim in favour of UBS.

Having dealt with that argument, I must now address the question of whether, when the bills of lading were transferred by UBS to Marsh (acting as agent for Primetrade), Primetrade became the “holder” of the bills of lading within section 5(2)(c). Mr Dunning submitted that the “transaction” of UBS sending the bills of lading to Marsh was not one as a result of which Primetrade would have become the “holder” under section 5(2)(b) if the transaction had occurred before the goods were lost when the vessel sank.

I have concluded that Mr Dunning’s argument is correct. If Primetrade is regarded as having possession of the bills of lading when they were sent to Marsh by UBS on 22 March 2004, then Primetrade had possession of the bills of lading “as a result of” that action – or “transaction”, to use the word in section 5(2)(c). But that transaction was performed on Primetrade’s instructions so that Marsh could pass on the bills of lading to the underwriters so that they could fulfil their obligation under the actual or proposed settlement agreement with Primetrade and pay about US$800,000 on Primetrade’s insurance claim. Such a “transaction” was not one falling within paragraph (b) of section 5(2). This is because the “transaction” of the bills from UBS to Marsh has nothing to do with the normal course of trading a bearer bill of lading, such as these two bills of lading. The transaction was made solely to enable Primetrade to collect from the underwriters once the casualty had taken place and the insurance settlement had been made. Without those events, Primetrade would never have had possession of the bills (through the insurance broker Marsh), because they would have remained in UBS’s possession (actual or constructive) until the purchasers from Primetrade had paid for them under the letters of credit that had been established in Primetrade’s favour.

Therefore, in my view, Primetrade would not have become a “holder” of the bills of lading “by virtue of” such a transaction had it occurred at a time when possession of the bills gave a right (as against the carrier) to possession of the goods to which the bills relate.

If I am wrong about that, Mr Dunning has a further argument, based on section 2(2). For convenience I will set out the relevant provisions again:

“Section 2.

(2)

Where, when a person becomes the lawful holder of a bill of lading, possession of the bill no longer gives a right (as against the carrier) to possession of the goods to which the bill relates, that person shall not have any rights transferred to him by virtue of subsection (1) above unless he becomes the holder of the bill –

(a)

by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a right to possession ceased to attach to possession of the bill;”

Mr Dunning’s argument proceeds on the basis that: (i) Primetrade became the lawful holder of the bills of lading upon UBS passing them to Marsh; and (ii) when Primetrade became the lawful holder of the bills, possession of the bills no longer gave Primetrade a contractual right (as against the carrier) to possession of the cargo to which the bills relate. In that situation, Mr Dunning says that Primetrade did not become the holder of the bills “by virtue of a transaction effected in pursuance of any contractual or other arrangements made before the time when such a [contractual] right to possession ceased to attach to possession of the bills”: (section 2(2)(a)). This is because, he submits, Primetrade only became “holder”of the bills of lading by virtue of the transaction when UBS sent them to Marsh. And that transaction was effected in pursuance of a “contractual or other arrangement” that was made after the time when a right to possession of the cargo (as against the carrier) ceased to attach to possession of the bills. Once again, the relevant “contractual or other arrangement” was the agreement between Primetrade and the underwriters that they would make a compromise payment on the insurance.

Mr Dunning points out that in Carver, the authors say (Footnote: ⁹²) that “…the words “contractual or other arrangements” in section 2(2) refer to the reason or cause for the transfer”. I agree with that interpretation of those words. So, I have to ask: what was the “reason or cause” for the transfer of the bills of lading from UBS to Marsh, as agents for Primetrade? The answer is, in my opinion, because Primetrade were prepared to agree with the underwriters that they should make an “ex gratia” payment in respect of the loss of the cargo. Ms Deckers of Marsh had written to Mr Hertzig of Primetrade on 19 March informing him that the underwriters were prepared to settle on an “ex gratia” basis. It was following that letter that Mr Roger, of Primetrade, instructed UBS to pay Orinoco and to send the bills of lading to Marsh. Although there was some wrangling between Primetrade and underwriters on the freight issue on 22 March, in my view it is clear from the terms of Primetrade’s instructions to UBS that the reason for the bills going to Marsh was because it was contemplated underwriters would pay under a compromise agreement with Primetrade. This “contractual or other arrangement” was made long after the vessel and cargo were lost.

Whilst I accept that it could be argued that the compromise agreement between Primetrade and underwriters and the transfer of the bills to Marsh arose out of the open cargo cover that existed before the cargo was lost, in my view the immediate reason and proximate cause of the transfer of the bills to Marsh was the actual or proposed compromise agreement itself. I note that Mr Bryan is prepared to accept that if section 5(2)(c) and section 2(2)(a) apply at all, then the cargo insurers received the bills as a result of the settlement agreement between Primetrade and underwriters. And he accepts also (if my analysis of the scope of the wording of these sections is correct), that the settlement agreement is not a “contractual or other arrangement made before the time when such a right to possession ceased to attach to possession of the bill”. If that is so, then it seems to me that the same reasoning must apply when Marsh got the bills, because they were sent to Marsh for onward transmission to the underwriters in furtherance of the same agreement.

If this conclusion is correct, then two things follow. First, no rights of suit can be transferred to Primetrade under section 2(1) of COGSA. That is because the requirements set out in section 2(2)(a) have not been fulfilled. Secondly, because Primetrade never obtained any right of suit, it could not transfer it on to the underwriters at any time.

If I am wrong that section 5(2)(c) is the relevant paragraph, then for completeness’ sake, I should comment briefly on Mr Dunning’s further argument, (advanced on the assumption that section 5(2)(b) is the relevant paragraph), ie. that the underwriters became the “holders” of the bills of lading once they got possession of them on about 23 March 2004. This must assume that Primetrade had been the “holder” pursuant to section 5(2)(b) from the time the bills reached Marsh.

Assuming section 5(2)(b) applies, it seems to me that the underwriters must be in an analogous position to a bank that receives bills of lading as part of shipping documents for which payment is to be made pursuant to sale contract (say FOB or CIF). So long as payment is not made, the bank will normally hold the shipping documents to the order of the seller. The underwriters were in the same position here. Until they paid the claim, they must hold the bills to the order of Primetrade. This conclusion is consistent with the timing of when underwriters will be subrogated to the rights of the assured. That occurs at the point when the underwriters have paid on the insurance; it does not occur when the assured forwards the documents in support of its claim, or even when the underwriters agree to pay on the claim.

That leaves just two further possible points on Issue Two. The assumptions would be that: (a) only section 5(2)(b) is the relevant section; (b) Primetrade had become the “holder” of the bills when they were sent to Marsh and (c) the underwriters did not become the “holders” when they got possession of the bills. The remaining questions are: (i) would underwriters have become “holders” upon paying the insurance claim to Marsh for transmission to Primetrade on about 1 April 2004 and if they did, (ii) what is the consequence? But I am going to note the issues without giving answers as, on my decisions so far, they are too hypothetical to need answering.

Conclusion on the “holder of the bills of lading” issue.

Mr Dunning and Mr Bryan agree that it is clear from the terms of section 3(1) of COGSA that a person can only become subject to liabilities under a bill of lading by virtue of that section if rights of suit are vested in him by virtue of section 2(1). Therefore, as I have held that no rights of suit passed to Primetrade, the question of whether or not Primetrade made a claim under the contract of carriage against the carrier in respect of the cargo does not arise. But as I might be wrong on the holder/rights of suit point, I will go on to consider the next question.

Any discussion about the proper interpretation of the scope and effect of section 3(1)(b) of COGSA must begin with Lord Hobhouse’s speech in the “Berge Sisar”. (Footnote: ⁹³) In that case the House of Lords was concerned with two issues. First, whether buyers of an oil cargo, who were endorsees of bills of lading under which the cargo had been carried, had demanded delivery of the cargo from the carrier, so that the shipowner/carrier could bring proceedings against them for corrosion damage to the vessel, pursuant to section 3(1)(a) of COGSA. Secondly, whether those buyers would remain liable to suit under the bill of lading contracts under section 3(1), despite the fact that they had, in turn, endorsed the bills of lading over to third party purchasers, thus transferring to the latter a right of suit against the carriers, pursuant to section 2(1) of COGSA. The House of Lords held, on the facts, that the buyers had not demanded delivery within the terms of section 3(1)(a). They also decided that an endorsee of a bill of lading ceased to be liable under the contract of carriage pursuant to section 3(1) when he endorsed the bill over to another and so transferred the right of suit under section 2(1).

In what I would respectfully describe as a penetrating and magisterial speech, Lord Hobhouse first analysed the genesis of the 1992 Act, in particular the problems under the Bills of Lading Act 1855, which gave rise to the need for reform. He then commented on the general structure of the 1992 Act.

At paragraph 32 of his speech, he begins his analysis of section 3(1). He points out: first, that the intention of the draftsman was to ensure the mutuality of the contractual relationship between the carrier and the shipper and then the endorsee of the bills of lading. Therefore, a “holder”of the bill of lading cannot come under liabilities imposed by section 3 unless he is a person in whom the contractual rights of suit have been vested by section 2(1). Secondly, if the person with a right of suit chooses to perform either of the actions referred to in paragraphs (a) and (b) of section 3(1), that person is choosing to exercise his contractual rights under the contract of carriage and to enforce them against the carrier. He does so, under paragraph (b) “by claiming a remedy for some breach by the carrier of the contract of carriage”. Lord Hobhouse describes these actions as involving “a choice by the indorsee to make a positive step in relation to the contract of carriage and the rights against the carrier transferred to him by section 2(1)”. Thirdly, Lord Hobhouse states that this positive step by an indorsee “has the character of an election, to avail himself of those contractual rights against the carrier”. I note here that throughout this passage in his speech, Lord Hobhouse appears to contemplate one person, the endorsee, making the claim and enforcing its rights under the contract. Fourthly, Lord Hobhouse comments, trenchantly, that there are “difficulties which neither the drafting nor the report face up to”. (Footnote: ⁹⁴) These are that making a demand or claim may be unspecific, tentative or provisional and may be made at any time during the carrier’s performance of the contract of carriage. Thus, at the start of paragraph 33 of his speech, Lord Hobhouse states:

“To “make a claim” may be anything from expressing a view in the course of a meeting or letter as to the liability of the carrier to issuing a writ or arresting a vessel”.

Lord Hobhouse then states his conclusion on the correct interpretation of section 3(1), as follows:

“33

…………. From the context in the Act and the purpose underlying section 3(1), it is clear that section 3 must be understood in a way which reflects the potentially important consequences of the choice or election which the bill of lading holder is making. The liabilities, particularly when alleged dangerous goods are involved, may be disproportionate to the value of the goods, the liabilities may not be covered by insurance, the endorsee may not be fully aware of what the liabilities are. I would therefore read the phrase “demands delivery” as referring to a formal demand made to the carrier or his agent asserting the contractual right as the endorsee of the bill of lading to have the carrier deliver the goods to him. And I would read the phrase “makes a claim under the contract of carriage” as referring to a formal claim against the carrier asserting a legal liability of the carrier under the contract of carriage to the holder of the bill of lading.

Lord Hobhouse returned to the interpretation of section 3(1) later in his speech, when he was dealing with the question of whether an endorsee remained liable under section 3(1) if the bill of lading was transferred to a subsequent “holder” , thus giving that holder a right of suit against the carrier. Lord Hobhouse said:

“The character of the conduct which attracts the liability imposed by section 3(1) is expected to have an element of relative finality; it is not conduct which is tentative or equivocal nor conduct which is equally consistent with the person leaving it to a later endorsee to exercise the rights conferred by section 2(1)”.

The starting point of Mr Bryan’s submission is the successful request by Atlantis on behalf of Primetrade and cargo underwriters that the Owners and their P&I Club provide security for the claim for the loss of the cargo. Mr Bryan submits that a request for security is a formal claim to a right to security. It is tantamount to the assertion of a right to damages for a breach of the contract of carriage (in the bill of lading) and a right to arrest the vessel in respect of the claim arising out of the contract of carriage. Mr Bryan submits that Lord Hobhouse recognised that, if a holder of a bill of lading in whom rights of suit are vested arrested a ship in support of a claim under the bill of lading, that would constitute making a claim under section 3(1)(b). Mr Bryan submits that a request for security, which is repeated and is ultimately successful, should be put in the same category as an arrest by a bill of lading holder in support of a claim; so it constitutes making a claim within section 3(1)(b).

I agree that it would appear from paragraph 33 of his speech that Lord Hobhouse did regard an arrest of a ship by a holder of a bill of lading as making a claim under the contract of carriage, so he put it on a par with “issuing a writ” (sic). I would respectfully agree that an arrest would, usually, constitute making a claim. When a vessel is arrested a particular party, the claimant and arresting party invokes the formal procedures of the court to interfere with the use of a vessel by her owner. If the arrest is made recklessly, the arrestor lays himself open to a claim for damages for wrongful arrest. The arrest will be in support of an identified claim by one or more identified claimants. An arrest is made in support of either an existing claim process or one that is imminent in either the jurisdiction of the arrest or another. So, in my view, an arrest plainly constitutes a choice by the holder of the bill of lading to enforce its contractual rights against the carrier and has the character of an election. The question is whether the same reasoning applies to continued requests for security by an agent on behalf of a group of potential claimants, with an implication of a threat of arrest, but where no express threat is uttered.

For the purposes of considering this point, I accept the following facts: (1) Primetrade had sent a letter on 4 March 2004, reserving all its rights. The letter refers to both “the charterparty” and also the bills of lading. However, that letter was sent at a time when, on any view, Primetrade was not the holder of the bills of lading. (2) On 4 March Atlantis asked the Club for security for the cargo claim. At this early stage the Club knew that Atlantis acted for subrogated cargo underwriters. (Footnote: ⁹⁵) (3) Atlantis was expressly authorised by Primetrade on 5 March to seek security from the Owners and their Club for a cargo claim. (4) As a result of the requests for security, Ms Forrest (of NEPIA) thought that there was a real risk of arrest of vessels in the same management as the “Ythan”, in various jurisdictions, in particular South Africa and China. (Footnote: ⁹⁶) (5) From at least 8 March, the Club pressed Atlantis for the identity of who had title to the cargo at the time of the incident. (Footnote: ⁹⁷) However, Atlantis said it did not know on 12 March. (Footnote: ⁹⁸) (6) On 18 March the Club suggested the idea of a warranty of authority to provide consideration from the cargo owners (for the LOU), as a way of getting round the problem of identifying the cargo owner in the proposed LOU. (Footnote: ⁹⁹) That was subsequently agreed. (7) The aim of the Club was to bind all possible cargo interests into an agreement to English law and arbitration for the prosecution of any cargo claims under the bills of lading and to prevent cargo interests from arresting “assets”. (Footnote: ¹⁰⁰) (8) UBS paid for the shipping documents on 22 March, although the Club was not informed of this. (9) The LOU wording was agreed by 23 March 2004, but Ms Gerres of Atlantis insisted that the amount should be US$4.4 million. (Footnote: ¹⁰¹) (10) Ms Gerres pressed Ms Forrest to “settle the security aspect today”on 26 March. (Footnote: ¹⁰²) A further chaser was sent on 29 March, after which Ms Forrest confirmed that the Club and the Owners agreed to provide the Club LOU in the wording previously agreed. (Footnote: ¹⁰³)

Mr Bryan placed emphasis on events that occurred before 22 March, the date on which he said Primetrade became the “holder” of the bills of lading. In my view only limited use can be made of such material. Section 3(1) of the 1992 Act opens with the words:

“Where subsection (1) of section 2 of this Act operates in relation to any document to which this Act applies and the person in whom rights of suit are vested by virtue of that subsection-

….

(b)

makes a claim….

This indicates that the claim has to be made at the time that the maker is the holder of the bill of lading and the right of suit is vested in the holder, rather than any time before then. The previous history can be examined for the background, but, in my view, the question of whether a claim is made must be decided by examining what happened after the alleged “claimant” is vested with rights of suit pursuant to section 2(1).

Secondly, Mr Bryan placed reliance on the internal reactions within the Club and the office of the Owners and managers to the continuing demands for security, as support for the conclusion that Primetrade was “making a claim”. He did so in respect of material that did not “cross the line”, ie. was not expressed to Primetrade or Atlantis, eg. how the Club increased its reserves in respect of a potential claim and how that might affect a member of the Club such as the Owners.

I regard none of this evidence as relevant and I think it cannot be taken into consideration in deciding whether or not Primetrade made a claim within section 3(1)(b). The whole tenor of Lord Hobhouse’s analysis and his commentary on section 3(1) indicates that the question to be addressed is factual and objective: did the holder of the bill of lading, by its words and/or deeds, make a claim against the carrier? What the carrier or its agents thought was being done or what the consequences might be if something was done are irrelevant, unless that thought or view was expressed to the claimant and the claimant commented on it.

In my view, on the facts of this case, the successful request by Atlantis for security in the form of the LOU does not amount to making a claim for the purposes of section 3(1)(b). My reasons are: first, that this request for security for a claim, even though successful, is different in character from the arrest of a vessel in support of a claim. The latter is a formal use of court procedures by identified claimants in the context of an existing suit or one that is started at the time of arrest. An arrest is a positive, formal, and final action by a claimant. An LOU, by contrast, is a contractual arrangement. In this case throughout discussions the precise identity of the potential claimant was not known to the Club and the Owners. Hence the wording of this LOU leaves at large the question of who is the owner of the cargo or any “other persons entitled to sue in respect of the cargo”. (Footnote: ¹⁰⁴) I accept that, in this case, the request for security carried the implied threat of arrest. But the Club and the Owners were anxious to turn that to their advantage. They did so by insisting that all potential claimants would be bound as to jurisdiction (London arbitration) and an agreement not to attempt to arrest vessels in the same management anywhere in the world. In return the Club agreed to pay an award made in respect of claims within the scope of the LOU. But, vitally, at all stages up to and after the provision of the LOU, no one is committed to making a claim against the Owners at all. Hence the LOU provides that the future claimant must give “notice of arbitration proceedings”. (Footnote: ¹⁰⁵) Therefore the provision of an LOU is not a statement, made to the Owners through the Club, of a formal choice by Primetrade to avail itself of its contractual rights against the Owners.

Secondly, I attach importance to the fact that at no stage was it stated, expressly or impliedly, that it was Primetrade that was making a claim. Primetrade was one of the possible claimants. The Club did not explore the matter further once Atlantis had agreed to provide the warranty of authority. Therefore at no point were the Owners, through the Club, made aware that it was Primetrade that had finally chosen to exercise its rights of suit under the bills of lading. It may have seemed possible or even likely to those on Atlantis’ side that it would be Primetrade that made a claim, if at all. But, as Mr Diamond states at paragraph 22 of his dissenting Reasons, it cannot have been assumed by the Owners and the Club that the only possible party to a potential arbitration was Primetrade, even after Orient Prosperity and Minmetals “cancelled” their contracts with Primetrade. Certainly no one on Atlantis’ side had said to the Club that there would be an arbitration and Primetrade would be the claimants.

Thirdly, I have considered the decision of the Court of Appeal in Rank Enterprises Ltd v Gerard. (Footnote: ¹⁰⁶) In that case the claimants bought three ships on terms included in the standard form of ship sale contract known as the Norwegian Sale Form. Clause 9 of the terms is a warranty by the Sellers that the vessel being sold is, at the time of delivery, “free from all encumbrances, mortgages and maritime liens or any other debts whatsoever”. The clause then continues:

“Should any claims which have been incurred prior to the time of delivery be made against the vessel, the Seller hereby undertakes to indemnify the Buyers against all consequences of such claims”.

The defendant, Mr Jacques – Raymond Gerrard, gave a guarantee to the Claimant buyers in respect of the purchase. Under its terms he irrevocably guaranteed that “should any claim which has been incurred prior to the time of delivery…be made against and in respect of any of the vessels”, he would pay for any loss or expenses arising out of or in connection with such claims. The claimant asserted that claims within clause 9 of the NSF had been made against the vessels and that the defendant must pay under the guarantee.

In the Court of Appeal there were two issues, both of which involved the construction of the second sentence of clause 9 of the NSF which I have set out above. Only the second issue, which was raised on a cross – appeal, is directly relevant to this case. However, that has to be put in the context of the first issue. That issue was whether the words “claims which have been incurred prior to the time of delivery” in clause 9 were limited to claims in respect of which the sellers were actually liable, or whether they embraced claims asserted against the seller, for which he might or might not be liable. The second issue before the Court of Appeal was: what is meant by claims “against” a vessel? At first instance, Toulson J had held on the first issue that “claims…incurred” embraced only actual or contingent claims incurred prior to delivery. On the second point he had held that the words meant a demand coupled with a real and present threat to arrest the vessel, without any necessity for proceedings to have been issued or an order of arrest to be obtained.

In the Court of Appeal Mance LJ (as he then was) delivered the judgment with which Kennedy and Thorpe LJJ agreed. On the first point, the Court of Appeal held that Toulson J had taken too narrow a construction of the phrase “claims…incurred”. They held that it included claims made, whether the liability asserted by such claims might prove to exist or not. (Footnote: ¹⁰⁷) On the second point, on the ambit of “claims ….made against the vessel”, the Court rejected a submission that the phrase was limited to claims in rem, where the vessel had been arrested or an order for arrest had been obtained. The Court of Appeal held that “claims” refers to a demand or an assertion of rights against the vessel, which carried with it a real and present threat to seizure of the vessel. (Footnote: ¹⁰⁸)

The Court in that case was concerned with the effect of different wording in a different context. In particular it was not concerned with an action by a person which would result in that party itself being liable on a contract on which it otherwise could not be sued. Moreover the interpretation of the words “claims…made against the vessel” had to mesh with the interpretation of “claims….incurred”, because the reference is to the same “claims”. Given the Court of Appeal’s decision to give a wider interpretation to the phrase “claims…incurred”, in NSF clause 9, it was inevitable that a broader interpretation be given to the phrase “claims…made against the vessel”, where it is the same “claims” involved.

Therefore, like Mr Diamond QC, I do not find the Rank case of any assistance in deciding on the scope of section 3(1)(b) of the COGSA. Mr Bryan also referred me the commentary in a volume entitled Contracts for the Carriage of Goods by Land, Sea and Air. (Footnote: ¹⁰⁹) That contains a discussion of the circumstances in which a claim might be made under section 3(1)(b) when no proceedings have been issued. (Footnote: ¹¹⁰) However, the passage acknowledges that the answer will depend on the facts of the case under discussion.

Fourthly, I have considered the practical points referred to by Lord Hobhouse (Footnote: ¹¹¹) as reasons why it necessary to read the phrase “makes a claim under the contract of carriage” as referring to a formal claim against the carrier. Mr Bryan submitted that from as early as 3 March 2004, Primetrade was aware from reports in Lloyd’s List that it was alleged the cargo was dangerous; (Footnote: ¹¹²) that Mr Herzig knew it was intended to pressurise Owners to give security and that Primetrade was at the time a sophisticated trader in the FOB and CIF market, with access to lawyers to protect its position. Yet, he said, Primetrade permitted Atlantis to act as it did on Primetrade’s behalf. But even if Primetrade was aware of the consequences of making a claim, that cannot, by itself, turn its or Atlantis’ actions into the making of a claim. That depends on what Primetrade said or did towards the Owners through the Club.

Conclusion on Issue Two

For convenience I summarise my conclusions: