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Arbitration agreements and the separability principle – a new leading case.

28th Nov 2022

The Court of Appeal has handed down judgment in DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd (the “Newcastle Express”), a case which examines and clarifies the “separability principle” pursuant to which (for certain purposes) an arbitration agreement is treated as a separate contract from the main contract in which it appears.  The case is also significant for what it decides in relation to the meaning and effect of “subjects” in the negotiation of charterparties.  Charles Holroyd represented DHL, which was successful both at first instance and on appeal.

The facts

DHL (as potential charterers) and Gemini (as Owners) agreed a fixture recap “subject shipper/receivers approval” for a voyage of the vessel “Newcastle Express”.  The recap provided for arbitration in London and incorporated the terms of a pro-forma charterparty for a vessel to be nominated.  The pro-forma charterparty stated that approval of the nominated vessel could not be unreasonably withheld.  DHL did not proceed with the fixture after the shipper refused approval.  Gemini commenced arbitration and obtained an award for damages on the basis that approval for the purposes of the “subject” was not to be unreasonably withheld and DHL/the shipper had acted unreasonably.

The High Court

DHL, which had not participated in the arbitration, challenged the jurisdiction of the arbitrator under s. 67 of the Arbitration Act 1996 and in the alternative applied under s. 69 on the grounds that the arbitrator had erred in law in holding that approval was not to be unreasonably withheld.  In the High Court, Mr Justice Jacobs held that the s. 67 application succeeded since the effect of the “subject” (which was never lifted) was that there was never a concluded arbitration agreement.  He also granted leave to appeal under s. 69 and stated that he inclined to the view that the arbitrator was “obviously wrong” on the question of law.

The appeal

Gemini appealed the judge’s decision on the s. 67 application.  Argument in the Court of Appeal revolved primarily around the “separability principle” and the House of Lords decision in Fiona Trust v Privalov [2007] 4 All ER 951, on which Gemini sought to rely in support of its case that the arbitrator had had jurisdiction to decide whether there had been a concluded charterparty.

Males LJ, with whom the other justices agreed, upheld the decision of Jacobs J.  Drawing in particular on the first instance decision of Steyn J. in Harbour v Kansa [1992] 1 Lloyd’s Rep. 81, the substance of which had been approved by all three justices on appeal (at [1993] QB 701), Males LJ distinguished between issues of contract formation and issues of contract validity.  In the former case, the dispute is whether a party ever assented to a contract containing an arbitration clause.  A contention of this nature necessarily affects the arbitration clause.  Ordinary principles of contract formation apply and the issue is one which falls ultimately to be determined by the Court, rather than the arbitrator.  The separability principle has no significant role and nor does any presumption in favour of arbitration deriving from Fiona Trust.   As Males LJ put it, “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”.

Where, however, the parties did assent to the terms of the contract containing an arbitration clause, but the issue is whether their agreement may have been invalidated on some legal ground rendering the contract void or voidable, that is an issue of contract validity.  In that case, whether an arbitrator has jurisdiction will depend on whether the ground on which the main contract is attacked is one which also impeaches the arbitration agreement.  It will be presumed not to do so unless the point relates directly to the arbitration agreement.

The Court of Appeal held that the arbitrator had no jurisdiction because the “subject” of shipper/receivers approval created a pre-condition to the formation of a binding contract of any kind.  That was the general effect of “subjects” in the context of the negotiation of charterparties.  The pre-condition would only be satisfied if and when the (potential) charterer “lifted” the subject and thus confirmed its agreement; it was not the actual agreement of the shipper or receiver which was relevant.  In this regard, the Court of Appeal approved the decision and reasoning of Foxton J. in The “Leonidas” [2021] 2 Lloyd’s Rep. 165.

This is an important decision which is now the leading case on the separability principle since that principle was enacted in section 7 of the Arbitration Act 1996.  The decision is also of significance in relation to the effect of “subjects” in the context of charterparty negotiations.

Charles Holroyd was instructed by Reed Smith LLP (Sally-Ann Underhill, Gaby Sweidan and Dimitris Athanasopoulos).