Court of Appeal decision on the separability of an arbitration agreement when subjects have not been lifted

Rebecca Maddison, Senior Claims Executive with UK Defence Club / Thomas Miller, has reported on an English Court of Appeal decision on the separability of an arbitration agreement when subjects have not been lifted.

The separability principle, as set out at section 7 of the Arbitration Act 1996, essentially provides that an arbitration agreement is, or must be treated as, a contract which is separate from the main contract of which it forms part.

In DHL Project & Chartering Ltd v Gemini Ocean Shipping Ltd (the “Newcastle Express”) [2022] EWCA Civ 1555, the Court of Appeal considered the application of the separability principle in determining whether there was a binding arbitration agreement where the proposed charterparty recap expressly contained a subject and that subject had not been ‘lifted’.

The owner (Gemini Ocean Shipping Ltd) and the charterer (DHL Project & Chartering Ltd) agreed a fixture recap which was “subject shipper/receiver’s approval”. The recap terms also provided for English law and arbitration. Following purported issues with the ship’s RightShip inspection and the shipper’s refusal to approve the ship, the charterer did not proceed with the fixture.

The owner subsequently brought a claim against the charterer in arbitration for repudiatory breach of the charterparty. The owner was awarded $283,416.21 in damages. The charterer challenged the arbitration award under section 67 of the Arbitration Act 1996, on the basis that the arbitrator lacked substantive jurisdiction because there was no binding fixture. Therefore there was no binding arbitration agreement between the parties.

The fixture was subject to shipper/receiver’s approval, and this was a precondition to any binding contract.

Therefore, as the shipper had not approved the ship, the charterer claimed that this subject was not lifted and there was no binding contract in place,

The Commercial Court found in the charterer’s favour. It held that the fixture was not binding unless and until the charterer communicated that the subject (in this case the shipper’s approval) had been lifted.  The arbitrator did not have jurisdiction as there was not a binding contract in place between the parties, and therefore no concluded arbitration agreement.

The owner was granted leave to appeal to the Court of Appeal, and duly appealed the Commercial Court’s decision on the section 67 application.

The owner submitted to the Court of Appeal that the Commercial Court had failed to give proper effect to the separability principle and that, in circumstances where the parties had “expressly” and “undoubtedly” concluded an arbitration agreement, the court ought to have applied the separability principle and held that the arbitrator had jurisdiction.

The charterer submitted that the starting point should be to consider the meaning and effect of the ‘subject’ in question. In this case, it was clear that the effect of the ‘subject’ was to create a condition to the conclusion of a binding charterparty until the subject was ‘lifted’. The charterer submitted that the arbitration clause in the contract in the recap was nothing more than a clause which the parties would have included in their contract if the relevant ‘subject’ condition had been fulfilled, which it had not.

The Court of Appeal upheld the decision of the Commercial Court and dismissed the owner’s appeal.

The Court of Appeal held that the use of ‘subjects’ in charterparty negotiations was a conventional and well-recognized means of ensuring that no binding contract had been concluded and (at least in many cases) was equivalent to the expression ‘subject to contract’;

The ‘subject’ in the present case was a pre-condition, the effect of which was to negative any intention to conclude a binding contract until such time as the subject was lifted.

As a result, either party was free to walk away from the proposed fixture at any time until the subject was lifted, which it never was.

The negativing of an intention to conclude a binding contract applied as much to the arbitration clause as to any of the other clauses set out in the recap. Commercial parties would reasonably expect a ‘subject’ to apply to the whole proposed contract and not to everything apart from the proposed arbitration clause

These conclusions were unaffected by the separability principle, the Appeal Court stated. The principle applied where the parties had reached an agreement to refer a dispute between them to arbitration which they intended to be legally binding. It meant that a dispute as the validity of the contract in which the arbitration agreement was contained did not affect the arbitration agreement unless the ground of invalidity “impeaches” the arbitration agreement, as well as the main agreement. However, it had no application, when the issue was whether agreement to a legally binding arbitration agreement had been reached in the first place.

Finally, the Court of Appeal judged that what the parties agreed in their negotiations in this case was that, if a binding contract was concluded as a result of the subject being ‘lifted’, that contract would contain an arbitration clause. However, it would be misleading to say that they entered into an arbitration agreement merely by acknowledging that any contract concluded between them would include that clause.

The Court of Appeal referred to the decision of Foxton J in The Leonidas [2021] 2 Lloyd’s Rep. 165 in concluding that the ‘subject’ was a pre-condition the purpose of which was to prevent a binding contract coming into existence.  This was for the charterer to ‘lift’ and it did not matter whether the shipper had, in fact, given its approval, but rather whether the charterer had communicated to the owner that the subject was lifted. Therefore the arbitrator had no jurisdiction because the requisite subject had not been ‘lifted’ which was a pre-condition to the formation of a binding contract, including the arbitration clause.

Maddison commented that this decision further reinforced that, generally, subjects in fixture negotiations are seen by the court as pre-conditions to the conclusion of a binding contract.  Furthermore, it is the leading judgment on the separability principle and confirms that in cases where it can be said that a party has not entered into the contract containing the arbitration clause, the principle of separability does not apply.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.

https://www.ukdefence.com/insights/february-2023-hard-to-fix-court-of-appeal-decision-on-the-separability-of-an-arbitration-agreement-when-subjects-have-not-been-lifted-158366/

A detailed summary of the facts can be found in the Club’s publication following the Commercial Court decision https://www.ukdefence.com/insights/march-2022-hard-to-fix-a-reminder-of-the-importance-of-lifting-subjects-157204/

2002-built, 91,051 gt bulk carrier Newcastle Express (IMO 9220213) sails under a Hong Kong flag. It is owned vby Gemini Ocean Shipping Ltd of Hong Kong China. It is managed by HMC Ship Management of Beijing, China. It is entered with London Club on behalf of Gemini Ocean Shipping Ltd.