Primetrade v. Ythan

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Note: I understand that this case is to go to appeal in October 2006. Editor, 30 March 2006

DMC/SandT/05/63
Primetrade AG v Ythan Limited (The "Ythan")
English Commercial Court: Justice Aikens: [2005] EWHC 2399 (Comm): 1 November 2005
Simon Bryant (instructed by Mills & Co) for the Defendant/Claimant in the Arbitration
Graham Dunning QC (instructed by Stephenson Harwood) for the Shipowner Claimant/Respondent in the Arbitration
SHIPOWNERS CLAIM AGAINST BILLS OF LADING HOLDER FOLLOWING LOSS OF VESSEL: CARRIAGE OF GOODS BY SEA ACT 1992, SECTIONS 2(1), 2(2), 3(1), 5(2) AND 5(4): MEANING OF "HOLDER", "TRANSACTION" AND "MAKING A CLAIM": LONDON ARBITRATION CLAUSE INCORPORATED INTO BILLS OF LADING: ARBITRATION ACT 1996, SECTIONS 67 AND 73: MEANING OF "ANY OBJECTION" AND "THAT OBJECTION": RIGHT TO ADDUCE ADDITIONAL EVIDENCE IN SUPPORT OF EXISTING OR NEW OBJECTION ON APPEAL
Summary
The New Objection Point
On the proper interpretation of s.73(1)¹ of the Arbitration Act 1996, an appellant under s.67 of the 1996 Act is entitled to argue any point coming within the existing "grounds of objection" to the jurisdiction that were raised before the arbitrators – these grounds of objection should be examined broadly, not closely as if it were a pleading
The Holder Point
Where the vessel and cargo have been totally lost, the question of whether a party has become the "holder" of the bills of lading ("bills") after the loss is to be dealt with according to s.5(2)(c)⁴ of the Carriage of Goods by Sea Act 1992 ("COGSA 1992"), not s.5(2)(b)⁴
The Making a Claim Point
A request for security – in the form of a Letter of Undertaking ("LOU") from a carrier’s P&I club – by a lawful holder of bills is insufficiently formal to amount to "making a claim" upon the contract of carriage for the purposes of s.3(1)(b)³ of COGSA 1992

DMC Category Rating: Confirmed and Developed

This case note was prepared by Jim Leighton, BSc (Hons) (University of Plymouth), LLM (Maritime Law) (University of Southampton) and Claims Consultant

Background
The shipowners, Ythan Limited ("Ythan"), sought to claim damages against the alleged bills of lading holder, Primetrade AG ("Primetrade"), following the total loss of the vessel. The loss of the vessel was allegedly due to the shipping of a cargo in breach of the dangerous cargo warranty. Primetrade had chartered the vessel under a contract of affreightment with the vessel’s sub-time charterers, Phoenix Bulk Carriers Ltd ("Phoenix"). The two sets of bills issued were shipowners’ bills and were subject to English law and London arbitration, via contractual incorporation from an identified charterparty.

The cargo was shipped by Orinoco Iron CA ("Orinoco") and the bills were consigned "To Order". Orinoco had agreed to sell the cargo FOB Palua Puerto Ordaz, Venezuela, to Primetrade. Primetrade had agreed to sell the cargo to Orient Prosperity ("Orient") CIF FO Jingtang, China. Primetrade had insured the cargo in Belgium through their insurance brokers, Marsh & McLennan Group ("Marsh"), and had financed the purchase and on-sale contracts through two letters of credit with their bankers, UBS AG ("UBS"), subject to a master credit agreement governed by Swiss law. Orinoco presented the shipping documents to their bank for payment. Orinoco’s bank then forwarded the documents to UBS for payment. The vessel was then lost, at which point Primetrade and Orient agreed to cancel the on-sale contract and the on-sale letters of credit. Primetrade then sought to make a claim upon its insurance policy for the loss of the cargo.

The underwriters and Primetrade agreed a settlement. The settlement required the full set of bills to be sent to the underwriters before an ex gratia payment would be made to Primetrade. To achieve this Primetrade had to order the payment of the letters of credit by UBS to Orinoco, despite discrepancies in the shipping documents, to enable the release of the bills. UBS then forwarded the bills to Marsh, who organised payment from the underwriters to Primetrade’s UBS bank account.

In the meantime, the loss adjusters, Atlantis International Services SA ("Atlantis"), who were appointed by Marsh on behalf of Primetrade and the underwriters, had secured a LOU from the shipowner’s P&I club, the North of England Protection & Indemnity Association ("NEPIA"), in favour of the cargo interests for any claims that were brought and determined or settled in their favour. Primetrade, upon the advice of Marsh, also complied with their contractual duty, owed to their underwriters, to secure rights against the elapse of the time-bar limitation, by placing the shipowners on notice for all costs/losses/consequences of the casualty.

The dispute was referred to London arbitration for determination before three arbitrators.

The arbitrators unanimously held that, as a matter of Swiss law, once UBS gave up possession of the bills, they ceased to be pledgees. The arbitrators also held that Primetrade became the holder of the bills during the short period between the time when the bills were sent by UBS to Marsh and the time when the insurance claim was paid.

The majority arbitrators also held that Primetrade had made a claim, within the meaning of s.3(1)³ of COGSA 1992, due to the implied threat of arrest (indicated by the request for an LOU) which was sufficient to be a "formal claim against the carrier asserting a legal liability of the carrier under the contract of carriage": see Borealis AB v Stargas Ltd (The "Berge Sisar") [2002] 2 AC 205, at [33], per Lord Hobhouse. The majority also held that there was nothing "tentative or equivocal" (a reference to paragraph [32] of The "Berge Sisar") in the communications from Atlantis to NEPIA in demanding an LOU and that they could not interpret Atlantis’s communications with NEPIA as other than a formal claim against the carrier under the contract of carriage.

Primetrade sought to appeal the decision of the arbitrators and additionally sought to adduce new evidence in support of existing and new objections for the appeal. There were three points to be considered by the judge:

1. When there is an appeal under s.67 of the Arbitration Act 1996 from an arbitration tribunal’s decision on substantive jurisdiction, to what extent is the appellant entitled to adduce new evidence on the appeal in support of either an existing or a "new" objection?
2. Was Primetrade the "holder" of the bills at any relevant time, and if so, did that transfer and vest in Primetrade rights of suit under s.2(1)² of COGSA 1992?

3. Did Primetrade or its agents "make a claim under the contract of carriage against the carrier in respect of" the cargo within s.3(1)(b)³ of COGSA 1992?

Judgment
Issue One: The New Objection Point
In considering s.73(1)¹ of the Arbitration Act 1996, the judge highlighted that the Report on the Arbitration Bill of the Departmental Advisory Committee on Arbitration Law (February 1996) – which briefly considered clause 73 (now s.73) at paragraphs 297-298 – shed no light upon whether the word "objection" or the phrase "that objection" meant an objection to jurisdiction generally or to a particular argument or ground for objection. Having pointed to the assistance provided in the cases relied upon by both parties, the judge went on to identify that the intention behind s.73 is to ensure that a party objecting to jurisdiction bring forward his objections before the arbitrators. In agreement with the judgment in JSC Zestafoni G Nikoladze Ferroalloy Plant v Ronly Holdings Ltd [2004] 2 Lloyd’s Rep 335 (Comm Ct), the judge considered that the words "any objection" and "that objection" in s.73 must mean "any ground of objection" and "that ground of objection". In considering what the phrases covered, the judge did not wish to be prescriptive or lay down precise limits in the abstract. The judge considered that it was usually easy to recognise whether a new ground of objection to jurisdiction was being raised. The judge held that the two grounds of objection that Primetrade had raised before the arbitrators were the same two raised now.

This left the issue of the admissibility of new evidence in support of new or different arguments. The judge indicated that there is no statutory limitation on adducing new evidence or any restrictions in the Civil Procedure Rules ("CPR"). But the judge considered that this did not stop the court from exercising control over what evidence to admit on an s.67 appeal, as the appeal is a re-hearing rather than a completely fresh start. In applying the "openness and fair dealing" principle from JSC v Ronly, the judge decided that this required that, so far as possible, a party must bring forward all its evidence at the hearing before the arbitrators. The judge also considered that the party wishing to adduce new evidence on appeal must give notice to the other side and, if the evidence is opposed, the party must then seek permission at an appropriate interlocutory hearing. The judge considered that the new evidence would not be permitted if that would result in substantial prejudice to the other side which could not fairly be dealt with either in costs or, if appropriate, an adjournment. As Ythan had not pleaded that the new evidence would prejudice its position the judge admitted the new evidence.

Issue Two: The Holder Point
The judge noted that in order for the arbitrators to have substantive jurisdiction it was necessary to answer yes to both the following questions: (1) were Primetrade the "holder" of the bills, and (2) had Primetrade "made a claim" upon the contract of carriage?

The judge noted that Primetrade could only become the "holder" of the bills if the facts fell within either s.5(2)(b)⁴ or s.5(2)(c) ⁴ of COGSA 1992. The first question to ask was whether the case came within s.5(2)(c), given the loss of the cargo. On this point there were two sub-issues: (1) the meaning of the word "transaction", and (2) the meaning 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". With reference to Carver on Bills of Lading ("Carver"), Benjamin’s Sale of Goods and the speech of Lord Hobhouse in The "Berge Sisar", at [30], the judge decided that the word "transaction" referred to the physical process by which the bill is transferred from one person to another. The judge, however, perceived the scope of the second phrase to be less straightforward.

Reference was made to the Explanatory Notes annexed to the Law Commission Report for the draft Carriage of Goods by Sea Bill (Law Com No 196). The Explanatory Notes give an example of what is intended to be covered by the clause that became s.2(2), which contains the same phrase as s.5(2)(c). The example included situations where the goods are destroyed or the vessel sinks. The judge considered that there was, therefore, no reason to confine the circumstances covered by the words in s.5(2)(c). The judge also stated that it was clear from the wording of s.5(4) ⁴ that the draftsman had well in mind the possibility that a bill could be issued and then the goods covered by it "cease to exist". The judge also pointed to the valuable assistance provided by Lord Hobhouse’s speech, at paragraph [31] of The "Berge Sisar", which indicated that the question to ask in relation to s.5(2)(c) is whether possession of the bill any longer gives a contractual right (as against the carrier) to possession of the goods to which the bill relates – as there cannot be a right to possession of goods that no longer exist. The judge therefore held that s.5(2)(c) applies to situations where the goods have been lost forever but does not stop COGSA 1992 from operating to transfer rights of suit or liabilities, which is dependent upon the conditions in s.5(2), s.2(2) and s.3(1).

For the purposes of s.5(2)(c), the judge indicated that there were two transactions to consider: (1) where UBS had the bills transferred to it upon payment to Orinoco, and (2) where UBS transferred the bills to Marsh. The judge held that at the time of the transfer under the letter of credit, it was UBS that became the "holder" of the bills, as s.5(2) did not stop a holder with limited interest in the goods, such as a pledgee, having contractual rights of suit transferred to him under s.2(1) – even though Primetrade had, under Swiss law, become the owner of the bills following payment being made to Orinoco.

Having decided that, when the bills were transferred to Marsh, they held them as agents of Primetrade, the judge next faced the issue of whether, at this stage, Primetrade became the "holder" of the bills. The judge agreed with Primetrade’s submission, that Primetrade did not become the "holder" as the "transaction" of UBS sending the bills to Marsh was not one as a result of which Primetrade would have become the "holder" under s.5(2)(b) if the transaction had occurred before the goods were lost when the vessel sank. The judge reasoned that the UBS/Marsh "transaction" was made solely to enable Primetrade to collect from the underwriters and that - without the casualty - Primetrade would never have had possession of the bills, because UBS would have remained the "holder" until the bills were transferred under the second letter of credit pursuant to the on-sale contract between Primetrade and Orient. The "transaction" also had nothing to do with the normal course of trading bearer bills, such as the two in this case. The judge concluded that Primetrade would not have become a "holder" of the bills "by virtue of" the UBS/Marsh "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.

The judge also agreed with Primetrade’s alternative submission, that, on the basis of s.2(2), Primetrade did not become the "holder" of the bills as the UBS/Marsh 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, rather than it being a transaction pursuant to a "contractual or other arrangement" made before that time. The judge also agreed with the reasoning in Carver, which indicated that the transaction must be the "reason or cause" for the transfer. The judge next pursued the question of what was the reason or cause for the transfer of the bills from UBS to Marsh.

The judge decided that the reason or cause for the transfer was Primetrade agreeing to accept an ex gratia payment from the underwriters in respect of the loss of the cargo. The transfer was therefore due to a compromise agreement between Primetrade and the underwriters, which was a contractual or other arrangement made long after the vessel and cargo were lost. Whilst accepting that it could be argued that the compromise agreement arose out of the open cargo cover that existed before the loss, the judge held that the immediate reason and proximate cause of the transfer of the bills to Marsh was the actual or proposed compromise itself. On the assumption that the conclusion was correct, the judge indicated that as a result (1) no rights of suit could be transferred to Primetrade under s.2(1) of COGSA 1992, as the requirements in s.2(2)(a) had not been fulfilled, and (2) as Primetrade never obtained any rights of suit it could not transfer any rights of suit on to the underwriters at any time.

The judge stated, for completeness’s sake, that had Primetrade become the "holder" of the bills, if s.5(2)(b) had instead applied, then the underwriters too would have become the "holder" of the bills following payment of the insurance claim.

Issue Three: The Making a Claim Point
Due to the judge’s conclusions on the holder point it was not strictly necessary to decide whether Primetrade had made a claim against the carrier.

The judge considered the speech of Lord Hobhouse in The "Berge Sisar", at [32], [33] and [42], regarding the correct interpretation of s.3(1) of COGSA 1992. On the basis of Lord Hobhouse’s remarks, the judge concluded that arresting a ship would be sufficiently formal to come within the meaning of s.3(1), as this would amount to the bill holder making a decision that had the character of an election to enforce its contractual rights against the carrier. The judge next considered whether this reasoning would also place a request for security, by agents on behalf of a group of potential claimants, within s.3(1).

The judge held that, on the facts of the case, the successful request by Atlantis for security in the form of an LOU did not amount to the making of a claim for the purposes of s.3(1)(b). The first set of reasons for this conclusion were: (1) that a request for security is different in character from the arrest of a vessel in support of a claim, (2) that arrest is a positive, formal and final action by a claimant, (3) that an LOU is, by contrast, a contractual arrangement, and (4) that, vitally, at all stages up to and after the provision of the LOU, no one was committed to making a claim against the shipowners at all. Secondly, at no stage was it expressly or impliedly stated that Primetrade was making a claim. Thirdly, the judge did not find the interpretation of the phrase "claims … made against the vessel", by the Court of Appeal in Rank Enterprises Ltd v Gerard [2000] 1 Lloyd’s Rep 403, of any assistance to the interpretation of the scope of s.3(1)(b) because Rank v Gerard dealt with different wording in a different context. Fourthly, the judge considered the practical points referred to by Lord Hobhouse, in The "Berge Sisar", as reasons why it is necessary to read s.3(1) as referring to a formal claim against the carrier.

Comment
The Holder Point
The conclusions reached indicate the difficulty of interpreting s.5(2)(c) and s.2(2)(a) and then applying those sections to unusual factual circumstances. The decision is made more complicated given that the party who would normally seek to establish a contractual cause of action (i.e. the trader) is arguing for contrary conclusions. The conclusions do not necessarily follow as the only logical ones that could have been reached.

The purpose of s.5(2) is to ensure that the widest possible variety of parties with a bona fide interest (i.e. a genuine, legitimate and lawful interest) in possessing the bills are deemed to be a "lawful holder" even after the loss of the goods: see Law Com No 196, paras 2.22, 2.42-2.44. It is then s.2(2) which is designed to answer, in more restrictive terms, the separate question of the transfer and vesting of rights of suit in a "lawful holder". The policy purpose of s.2(2) is to prevent the trafficking of causes of action to third parties with no genuine interest in the goods: Law Com No 196, paras 2.43-2.44. It follows in the spirit of COGSA 1992 that Primetrade and their underwriters, in turn, could have been considered to be a "lawful holder" of the bills and to have had rights of suit transferred and vested in them while they were a "lawful holder", as they had a bona fide interest in transferring and holding the bills and did not undertake any transactions for illegitimate purposes unrelated to the goods or interests in the goods.

The conclusions also indicate a potentially worrying outcome for marine insurers, as circumstances may arise where there will be no contractual rights for subrogation. The conclusions are contrary to one of the main policy purposes for enacting COGSA 1992, which was to defeat the unmeritorious technical limitations experienced, primarily by insurers, with the Bills of Lading Act 1855: see Law Com No 196, para 2.15. As the conclusions reached are contrary to a number of the underlying policy purposes of COGSA 1992, it is submitted that the application of strict logical or literal conclusions regarding the cause or reason for a transaction, for the purposes of s.5(2)(c) and s.2(2)(a), should not have defeated conclusions that could have been reached had a more purposive approach been taken. Alternatively, the conclusions reached indicate that the wording of COGSA 1992 may have created different unmeritorious technical limitations to those once experienced with the 1855 Act.

The Making a Claim Point
The decision reconfirms the requirement for a formal claim or action to be taken against a carrier before s.3(1)(b) of COGSA 1992 will have effect in a carrier’s favour. The decision indicates that the usual actions of potential claimants, in reserving and protecting their rights, will not usually expose them to liability for any carrier’s claims under the contract of carriage, unless the lawful bill holder pursues formal security proceedings or a formal claim against the contractual carrier is started.

Footnotes:

1 73.—(1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection- 
a) that the tribunal lacks substantive jurisdiction, 
b) ....
c) ....
d) ....
he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.

2 2.—(1) Subject to the following provisions of this section, a person who becomes—
 (a) the lawful holder of a bill of lading;
 (b) …
 (c) …
shall (by virtue of becoming the holder of the bill or, as the case may be, the person to whom delivery is to be made) have transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.

    (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; or
(b) … 

These Case Notes have been prepared with care, but neither the Editor nor the International and other Contributors can guarantee that they are free from error, nor that they contain every pertinent point. Reliance should not therefore be placed upon them without independent verification. The Editor and the International and other Contributors disclaim all liability for any loss of whatsoever nature and howsoever arising as a result of others acting or refraining from acting in reliance on the contents of this website and the information to which it gives access. The Editor claims copyright in the content of the website.