Paul Crane Partner
Court of Appeal finds arbitration agreement ‘subject’ to charterparty being concluded
DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd (Newcastle Express)  EWHC 181 (Comm)
The Court of Appeal has held that a proposed charterparty which was expressly stated to be ‘subject shippers/receivers approval’ did not contain a binding arbitration agreement conferring jurisdiction on the Tribunal to determine whether the charterparty had been properly concluded.
In reaching its decision, the Court of Appeal has approved the recent case of the Leonidas  EWHC 1986 (Comm) relating to ‘subjects’ in charterparty negotiations. It has also considered in detail the authorities relating to the ‘separability principle’, i.e. that an arbitration agreement is, or must be treated as, a contract which is separate from the main contract of which it forms part.
The background facts
The parties had negotiated the terms of a fixture which was expressed to be subject to the shippers’/receivers’ approval (i.e. “on subjects”). With the shippers not approving the fixture until a Rightship inspection had been satisfactorily concluded, the Charterers released the Vessel: they advised the Owners that they would not be lifting subjects and that the deal had fallen through.
The LMAA arbitration
The Tribunal held that the Charterers were in repudiatory breach of charter and awarded the Owners damages. In reaching its decision, the Tribunal construed the “subjects” provision as being qualified by a separate clause of the charter, such that the shippers’/receivers’ approval was not to be unreasonably withheld. On the basis of this construction and in circumstances where the Owners were not obliged to provide the Rightship inspection results until the Vessel sailed, the Tribunal held that approval had been unreasonably withheld when the Charterers released the Vessel prior to the intended date of sailing ‘due to Rightship’.
The Commercial Court decision
The Charterers applied to the Commercial Court under s.67 of the Arbitration Act 1996 (“the Act”) to challenge the award on the grounds that the Tribunal had no jurisdiction to make the award. They also sought permission to appeal under s.69 of the Act on the alternative basis that if the Tribunal did have jurisdiction, then their decision was wrong in law.
The Court found that the subject fixture was not binding unless and until the Charterers communicated to the Owners that the subjects were lifted, which they never did. The “subjects” in the fixture recap extended to the arbitration agreement contained within it. The effect of the “subject” was to negate the Charterers’ intention to enter into any contract unless and until the subject was lifted.
The Owners were granted leave to appeal against the s.67 decision.
The Court of Appeal
The Court of Appeal upheld the Commercial Court decision and, in doing so, gave a valuable summary of the law relating to both (i) ‘subjects’ in charterparty negotiations; and (ii) the separability principle.
‘Subjects’ in charterparty negotiations
In considering the effects of ‘subjects’, the Court of Appeal approved the judgment and reasoning given in The Leonidas. In doing so, it confirmed that a distinction can be drawn between:
- ‘pre-conditions’, i.e. a condition which prevents a binding contract from coming into existence at all; and
- ‘performance conditions’, i.e. one which has the effect that performance does not have to be rendered if the subject is not satisfied for reasons other than a breach of contract by one of the parties.
A ‘subject’ in the context of charterparty negotiations is more likely to be classified as a pre-condition: it is a device to ensure that a binding contract is not yet concluded. The charterparty will only become binding once the subjects in question have been lifted and it is only at that point that the ship will become fully fixed. The Court of Appeal held that this was the effect of the ‘subject’ (i.e. to obtain shippers’/suppliers’ approval) in this case.
The separability principle
In considering the principle that an arbitration agreement is treated as a separate contract from the contract in which it appears, the Court of Appeal looked in depth at the judgment of Harbour v Kansa  1 Lloyd’s Rep. 81. In doing so, it emphasised the distinction between the two circumstances in which an arbitration can be impeached: by issues of (i) contract formation; and (ii) contract validity.
The first relates to a dispute as to whether a party ever agreed to a contract containing an arbitration clause. This applies ordinary principles of contract formation, i.e. an examination of offer, acceptance and intention to create legal relations. A lack of agreement impeaches the arbitration agreement and it will be for the Court to determine the dispute, not an arbitrator.
The second is where a contract containing an arbitration clause has been agreed, but the agreement is invalidated on a legal ground which renders the contract void or voidable, for example, due to mistake, vagueness, duress or misrepresentation etc. In these circumstances, in determining whether an arbitrator has jurisdiction, it is necessary to consider carefully the nature of the dispute to determine whether the ground on which the main contract is voided is also one which impeaches the arbitration clause. The issue of contract validity impeaching an arbitration agreement has been given statutory recognition in s.7 of the Act.
Application to the facts
Applying the above principles to the facts, the Court of Appeal held that the parties had agreed that if the shippers’/receivers’ approval was obtained and the subjects lifted such that a binding contract was concluded, that contract would include an arbitration agreement. Nothing more. As subjects were not lifted, it could not be said that the parties entered into an arbitration agreement merely by acknowledging that any contract concluded would contain such a clause.
This case provides a welcome reminder on the use of subjects in a charterparty context as a conventional and well-recognised means of ensuring that no binding contract is concluded until a specified pre-condition is ‘lifted’. Until such time, either party is free to walk away from the proposed fixture at any time.
In also highlights that ‘subjects’ will apply as much to the arbitration clause as to other clauses set out in the recap. The Court of Appeal recognised that commercial parties may not be aware of the legal principle that an arbitration agreement is separable from the main contract and so the expectation would be that a ‘subject’ should apply to the whole proposed contract and not to everything apart from the proposed arbitration clause.
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