Court of Appeal (Civil Division): A bench of Lord Males*, Lord Birss andLord Snowden, JJ, while deciding that whether a proposed charterparty which was expressly stated to be “subject shipper/receivers approval” contained a binding arbitration agreement, conferring jurisdiction on an arbitrator to determine whether the charterparty contract had been concluded, upheld the decision of the High Court that the application for the Principle of Separability applies where the parties have reached an agreement to refer a dispute between them to arbitration, which they intend (applying an objective test of intention) to be legally binding
Background and Legal Trajectory: The parties, in August 2020, were negotiating the terms of proposed voyage charter for a voyage from Newcastle in Australia to Zhoushan in China with a cargo of 1,30,000 metric tons of coal. The vessel was recently purchased by the Owner and the manager of the vessel was changed. The negotiations were carried out through a broker who circulated “M'Term recap” (Main Terms). The provisions set out in clause 20.1.4 stated that the approval for the vessel by the charter “shall not unreasonably withheld”.
The Owner had intended the vessel to be inspected by ‘Rightship', a widely used vetting system which aims to identify vessels which are suitable for the carriage of iron ore and coal cargoes. The inspection was due to take place on 03-09-2020 before the vessel sailed from Zhoushan where it was discharging; however, ‘Rightship' approval had not been obtained. therefore, the Charterer released the vessel. The Owner stated that a binding charterparty containing an arbitration clause had been concluded, and that by releasing the vessel in this way the Charterer had repudiated the contract. The Owner argued that the Charterer had not “lifted” the “subject” of “shipper/receivers approval”.
The Owner then initiated the arbitration proceedings claiming damages for repudiatory breach of the charterparty citing afore-stated clause 20 of the proforma charterparty. A sole arbitrator was appointed, and the arbitration proceeded without participation by the Charterer.
The Arbitral Tribunal held that the rejection of vessel by the charterer was not reasonable, because the Owner was under no obligation to provide the result of the Rightship inspection until the vessel sailed from Zhoushan.
The arbitral award was challenged by the Charterer in the High Court of Justice [Business and Property Courts], wherein the Judge held that the arbitrator had no jurisdiction but granted leave to appeal. In addition, Justice Jacobs of the High Court also granted leave to appeal to the Commercial Court and indicated that, if it had been necessary, he would have allowed the appeal.
Submissions: The Owner argued that the High Court Judge failed to give proper effect to the separability principle, and that his judgment had created an unprincipled and regrettable precedent which is antithetical to the modern “one-stop” dispute resolution presumption in contractual interpretation. It was argued that in circumstances where the parties had “expressly” and “undoubtedly” concluded an arbitration agreement, the Judge ought to have applied the separability principle and to have held that the arbitrator did have jurisdiction to determine the dispute.
Meanwhile, counsel for the Charterer contended that the starting point should be to consider the meaning and effect of the “subject” in question, which was to create a pre-condition to the conclusion of a binding charterparty which persisted until the subject was “lifted” by the Charterer. It was submitted that separability principle does not mean that a main agreement and an arbitration agreement can never stand or fall together and there is no presumption as to whether they do or not.
Court of Appeal's Analysis and Conclusions:
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Regarding ‘subjects' charterparty negotiations, The use of “subjects” in charterparty negotiations is a conventional and well recognised means of ensuring that no binding contract is concluded, and (at least in many cases) is equivalent to the expression “subject to contract”.
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It was noted that “subject” in the present case was a pre-condition whose effect was to negate any intention to conclude a binding contract until such time as the subject was lifted. Either party was free to walk away from the proposed fixture at any time, and for any reason, until the subject was lifted. 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.
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The Court thus concluded that subject in this case was a pre-condition the purpose of which was to prevent a binding contract coming into existence.
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Concerning the Principle of Separability, the Court of Appeal observed that holding that an arbitration agreement is, or must be treated as, a contract which is separate from the main contract of which it forms part, is widely accepted internationally.
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It was observed that Section 7 of the Arbitration Act, 1996, gives statutory recognition to the separability principle. The provision is concerned with issues of contract validity, not contract formation. It applies where the main contract is invalid, non-existent or ineffective, but there must still be “an arbitration agreement”.
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It was further observed that this Court's findings vis-à-vis “subject” are unaffected by the separability principle. This principle. “means that a dispute as to the validity of the main contract in which the arbitration agreement is contained does not affect the arbitration agreement unless the ground of invalidity relied on is one which “impeaches” the arbitration agreement itself as well as the main agreement. But it has no application when, as in the present case, the issue is whether agreement to a legally binding arbitration agreement has been reached in the first place”.
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The Court concluded that what the parties agreed in their negotiations in the present case was that, if a binding contract was concluded as a result of the subject being lifted, that contract would contain an arbitration clause. It is misleading to say that they entered into an arbitration agreement merely by acknowledging that any contract concluded between them would contain such a clause.
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The Court further held that clause 20 of the proforma, which is concerned with the nomination of a vessel under a charterparty for a vessel to be nominated, has no application to a charterparty for a named vessel.
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On the contentions raised by the Respondent the Court observed that for ‘one-stop' dispute resolution, the parties needto enter into an arbitration agreement first in order to take advantage of the presumption.
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Therefore, the Court of Appeal upheld the decision of the High Court in setting aside the arbitral award as the arbitrator had no substantive jurisdiction.
[DLH Project & Chartering v. Gemini Ocean Shipping Co Limited, [2022] EWCA Civ 1555, decided on 24-11-2022]
*The Judgment was authored by Lord Males
Advocates who appeared in this case :
Timothy Young KC, Advocate, for the Appellant;
Charles Holroyd, Advocate, for the Respondents.