Court of Appeal rules on the “separability principle” and comments on “subject” in charterparty fixture recaps

The “separability principle” is widely recognised in arbitration and it means that (for certain purposes) an arbitration clause is treated as an agreement that stands separately from the contract containing it. Thus, an agreement to resolve the parties’ dispute in arbitration is not necessarily nullified by the lack of validity of the main contract.

In the "Newcastle Express"[1], the Court of Appeal clarified the scope of the “separability principle” and, in the process, provided useful commentary on the legal effect of the term “sub” or “subject” in a fixture recap issued during charterparty negotiations.

The facts

The prospective charterers, DHL Project & Chartering (DHL), negotiated a fixture recap with Gemini Ocean Shipping Co (the Owners) for a voyage charter regarding the shipment of coal in bulk on board the vessel “Newcastle Express”. 

The recap was expressed to be “SUB SHIPPER/RECEIVERS APPROVAL WITHIN ONE WORKING DAY [AFTER FIXING MAIN TERMS]” (in caps and bold in the original text) and included a clause providing for arbitration in London (the Arbitration Clause):

"CONTRACT LAW AND ARBITRATION FORUM:

GA/ARBITRATION TO BE IN LONDON, ENGLISH [sc. LAW] TO BE APPLIED

Attached to the recap was a separate charterparty proforma stating that a vessel acceptable to the charterers should be nominated, but that acceptance should “not be unreasonably withheld”. 

Clause 2 of the fixture recap provided that the vessel should be "RIGHTSHIP APPROVED" and that this was to be maintained for the duration of the voyage.

However, the shippers refused to approve the “Newcastle Express” after the Owners did not obtain RightShip approval identifying the ship as suitable for the carriage of coal cargoes. 

DHL advised:

“Shippers is (sic) not accepting Newcastle Express due to RightShip not rectified, kindly consider this vessel free.”

DHL released the vessel and the negotiations ceased.
 
The Owners commenced arbitration in London contending that, by releasing the vessel as they had, DHL were in repudiatory breach for walking away from a binding charterparty containing an arbitration clause. 

The Tribunal agreed with the Owners and held that the “subject” of the “shipper/receivers approval” was qualified by, and should be read together with the separate charterparty proforma provision, which required approval not to be unreasonably withheld. It found that the shipper’s lack of approval was unreasonable because the Owner was under no obligation to provide the result of the RightShip inspection until the vessel was due to sail from Zhoushan two days later and awarded damages to the Owners.

High Court

DHL challenged the Tribunal’s award under section 67 of the Arbitration Act 1996 on the basis that the Tribunal had no substantive jurisdiction to determine the dispute. Their main argument was that the terms of the fixture were “subject” to the shipper/receivers’ approval and since this was never lifted, neither the charterparty nor the Arbitration Clause was concluded or binding on the parties. 

In addition, in the event that the section 67 challenge should fail, they sought permission to appeal under section 69 on the grounds that the Tribunal’s decision was wrong in law. 

The High Court ruled in DHL’s favour. It agreed that the Tribunal lacked jurisdiction and granted leave to appeal under section 69.

Court of Appeal

The Owners challenged the High Court’s decision, alleging that even if DHL never lifted the “subject”, the “separability principle” meant that the parties’ agreement to the Arbitration Clause would stand. 

They maintained that the starting point, where business parties negotiate an agreement containing an arbitration clause, would be to presume that they intended to rely on a “one-stop” arbitration to resolve all their disputes including those related to the existence or validity of the main agreement. 

They also referred to the Tribunal’s reasoning that the “subject” should be read together with the charterparty proforma provision stating that approval of the nominated vessel should not be unreasonably withheld.

The Court of Appeal disagreed with the Owners’ reasoning. It distinguished between the issues of contract formation and contract validity. The former is concerned with a situation where the parties intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary “subject to contract” case and a tribunal has no jurisdiction in these cases. 

Conversely, where the issue is that the contract, which the parties apparently agreed to, is void or voidable, the matter will be that of contractual validity. Here, a tribunal would have jurisdiction provided it was the intention of the parties to refer their dispute to arbitration.

In the present circumstances, the dispute between DHL and the Owners was found to be an issue of contract formation, where the lack of intention to conclude a binding charterparty extended to the Arbitration Clause as much as it did to other contractual provisions. 

For the “separability principle” to apply, the parties must first objectively intend the arbitration clause to be legally binding. However, on the facts, the parties’ agreement to the Arbitration Clause was conditional on reaching a binding charterparty, which itself was on “subject”. 

The Court pointed out that the word “sub” or “subject” was a pre-condition that prevented a binding contract from being concluded and since this was never lifted, there was no agreement in relation to the Arbitration Clause either, and the parties were at liberty to leave the proposed agreement at any time. 

The Court further concluded that as it was a pre-condition rather than a performance provision, the “subject” could not be read together with the charterparty proforma provision.

The Owners’ appeal was therefore dismissed, and the Tribunal’s award was set aside under section 67 of the Arbitration Act 1996. The appeal under section 69 did not arise. 

Comment

The "Newcastle Express” Court of Appeal decision is an important one as it clarifies the scope of the “principle of separability” of arbitration agreements from the main contracts in which they feature. It is crucial for contractual parties to be aware of this principle, particularly if one of them later seeks to argue that an agreement, together with its arbitration provision, is invalid.   

The decision also serves as a reminder that, just as “subject to contract” is used in general commercial negotiations, the expression “subject” in the chartering market is commonly used to negate the parties’ intention to reach a binding agreement until further conditions are satisfied. As such, when conducting negotiations to conclude a charterparty where the fixture recap is said to be on “subject”, parties should pay particular attention to the precise pre-conditions which need to be fulfilled for the “subject” to be removed (i.e., “lifted") and the charterparty to become binding. The more aligned the parties’ understanding of the pre-conditions are, the lower the risk of misinterpretation. 

[1]DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd – The “Newcastle Express” WC2A 2LL