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Subjects and separability – LexBlog


With thanks also to Counsel, Charles Holroyd at 7KBW.

In DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd 2022-000247 [EWCA], the Court of Appeal, in a judgment upholding the High Court’s judgment of Mr Justice Jacobs, clarified the scope of the separability principle in relation to arbitration clauses in contracts, including the scope of s 7 Arbitration Act 1996.

A “subject” provision in a putative fixture requiring “shipper/receivers approval” was held to be of an unqualified character such that the contract would not become binding unless and until DHL (“Charterers”) lifted the “subject”, which, on the facts, had never occurred. That meant that not only the fixture, but also the arbitration agreement contained therein, was never concluded.

Background – Tribunal and High Court

As discussed in our blog earlier this year, Charterers and Owners negotiated the main terms of a putative fixture for a proposed voyage of the “Newcastle Express” (the “Vessel”) from Australia to China in late September 2020, containing the said ‘subject’ provision, until Charterers informed the broker that the shippers had requested a new vessel and they were releasing the Vessel, without having ever lifted the “subject”.

Owners treated this as a repudiatory breach of the contemplated fixture and commenced arbitration. The Tribunal accepted Owners’ submission that there was a binding charterparty and that the “subject” provision in the recap was to be read together with Clause 20.1.1 of the pro forma charterparty, meaning that “shipper/receivers approval” was “not to be unreasonabl[y] withheld”.

However, in DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd [2022] EWHC 181 (Comm), Charterers succeeded in their application against the Owners to set aside the arbitration award pursuant to section 67 of the Arbitration Act 1996. Mr Justice Jacobs held, in summary, that the effect of the “subject” was that no binding contract was concluded until the subject was lifted, which never happened. Just as when agreement is reached “subject to contract”, the common practice in the chartering market of a vessel being “fixed on subjects” has the effect of negativing any intention to enter into contractual relations until the subjects are “lifted”, leaving both parties free to withdraw in the meanwhile. That subject covered the entire agreement including the arbitration clause.

The Commercial Court granted leave to appeal with the Court’s reasoning being that “a decision of the Court of Appeal would provide guidance and certainty” on issues of general public importance, although the first instance judge was not persuaded that the proposed appeal had any real prospects of success.

Court of Appeal

The Court accepted that the “subject” in this case was a pre-condition to the contemplated fixture, the effect was “to negative any intention to conclude a binding contract until such time as the subject was lifted”, and, as a result, “either party was free to walk away from the proposed fixture at any time, and for any reason, until the subject was lifted”.

It was notably mentioned that any commercial parties would reasonably expect that such a “subject” should be applicable to the proposed contract in its entirety rather than with the exclusion of any arbitration clause. In particular, the Court held that negativing of an intention to conclude a binding contract (by not lifting such “subject”) applied as much to the arbitration clause as to all of the other clauses set out in the contemplated charterparty.

The Court clarified that an arbitration agreement is “a contract like any other” and, as such, it calls for no different treatment with the result that the question whether such an agreement has been concluded is subject to the usual contract formation rules.

It therefore held that the separability principle (upon which Owners sought to rely) is not relevant in circumstances where “the issue is whether agreement to a legally binding arbitration agreement has been reached in the first place”. The Court determined that the respective parties had agreed in their negotiations merely that if a binding contract was concluded (by way of the Charterers’ lifting the “subject”), that contract would contain an arbitration clause. This did not amount to the agreement of an arbitration clause. The Court agreed with the Charterers’ submission that “if there is no binding arbitration agreement in the first place, there is nothing to which the separability principle can apply”.

The Court emphasised the difference between contract validity and contract formation. In cases of contract formation “the argument that no contract was ever agreed necessarily affects the arbitration clause because it means that the arbitration clause was not agreed either”.  In cases of contract validity, such as Fiona Trust (Fiona Trust & Holding Corporation v Privalov [2007] UKHL 40, [2007] 4 All ER 951), however, “it is necessary to consider whether the ground of invalidity in question is one which amounts to “an attack on” or “impeaches” the arbitration clause.  It will not necessarily do so and, indeed, will be presumed not to do so unless the points relates directly to the arbitration agreement”.

In response to the Owners’ submissions that as a matter of policy, parties should be encouraged to resolve any disputes in arbitration and in line with the modern “one-stop” dispute resolution presumption in contractual interpretation, the Court said in clear terms: “One-stop shopping is all very well, but if the parties have not entered into an arbitration agreement, the shop is not open for business in the first place”.

Significance

Mr Justice Jacobs referred this matter to the Court of Appeal precisely for the purpose of resolving any ambiguity created by previous judgments delivered by lower Courts.

This judgment will be welcomed both by the shipping market, given the usual commercial practice of fixing a vessel “on subs”, and also more widely by all parties who are negotiating contracts including arbitration clauses.

The Court was at pains to explain that its conclusion would not necessarily lead to the need for multiple proceedings, as it would be open to the parties to agree to an ad hoc arbitration to determine whether a binding contract had been concluded, without prejudice to any issue as to whether such an ad hoc agreement is necessary.



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