All English arbitration lawyers are familiar with the long-standing principle of the separability of an arbitration agreement as enshrined in section 7 of the English Arbitration Act 1996 (AA 1996). That section provides:
“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”
This principle ensures, among other things, that even where the underlying contract falls away, the arbitration agreement can survive and govern any disputes that arise between the parties.
In the famous House of Lords case of Fiona Trust, Lord Hoffman emphasised that, pursuant to section 7, arbitration agreements should be interpreted as including disputes about the existence or validity of the matrix contract unless such disputes are expressly excluded (paragraph 13). The arbitration agreement is not invalidated along with the matrix contract because there is a defect affecting the matrix contract. This includes where the defect is that the main contract has not come into existence. However, the arbitration agreement may fall away for reasons identical to the main contract (such as where the signature of the matrix agreement, and therefore of the arbitration agreement too, was forged). In all other respects, the arbitration agreement is to be treated as a distinct agreement when determining its existence or validity.
The application of these principles arose in the recent case of DHL Project and Chartering Ltd v Gemini Ocean Shipping Co Ltd, where the Commercial Court set aside an award under section 67 of the AA 1996 on the basis that the arbitral tribunal lacked substantive jurisdiction.
What was decided in the DHL case?
A dispute arose between the charterers and owners of a vessel concerning a charterparty fixture which contained a “subjects” provision requiring the shipper and receiver of the vessel to approve the vessel name and particulars. Following various email exchanges, the owners held the charterers in repudiatory breach of the charterparty and commenced arbitration under that charterparty, seeking damages. The sole arbitrator accepted jurisdiction and proceeded to issue an award in favour of the owners. The charterers of the vessel challenged the award under section 67 of the AA 1996, claiming that the arbitrator lacked jurisdiction. The charterers argued that the parties had not concluded a binding charterparty as the “subjects” provision had never been lifted. The charterers took the argument further, arguing that the “subjects” provision also applied to the arbitration agreement, negativing any intention to arbitrate between the parties. As a consequence, no agreement had been reached for the resolution of disputes by arbitration.
The court accepted the charterers’ submissions. The “subjects” provision was positioned at the very beginning of a recap email that had been circulated to reflect the points of agreement. The court held that this recap qualified everything that followed, including the arbitration clause itself. The commercial purpose of the provision was “obvious”: the charterers did not wish to make a binding contract “unless and until both shipper and receiver have approved the vessel which the charterer is proposing to use”. This was, in fact, a “well-recognised practice in the chartering market“.
Therefore, as the receiver or shipper approval had not been obtained, and the charterers did not communicate to the owners that the “subjects” provision had been lifted, the contract remained a non-binding putative contract from which the charterers were free to withdraw.
The court also concluded that the “subjects” provision precluded the arbitration agreement from coming into existence in its own right for the following reasons:
- The effect of the “subjects” clause was to negate the charterers’ intention to enter into any contract at all, including any contractual commitment to arbitration, unless and until the “subjects” were lifted.
- While the separability doctrine under section 7 of the AA 1996 was important, an arbitration agreement was not a “mini-agreement which is in some way divorced from the ‘main’ agreement which the parties were negotiating”. Instead, an arbitration clause was part of the bundle of rights and obligations under negotiation, all of which were subject to the “subjects” provision here.
- The fact that the recap and the arbitration agreement were contained in the same document reinforced the conclusion that in this case they would stand and fall together.
- The court followed the decision in The Leonidas and held that a “subjects” clause of this nature created a pre-condition to the conclusion of the contract as a whole.
- Therefore, since the “subjects” condition precedent had not been met, that is the charterers had not “lifted their subjects”, there was no binding contract, and no operative arbitration agreement.
As the parties had not entered into contractual relations of any kind, including a contract to arbitrate, the award was set aside under section 67 for lack of substantive jurisdiction.
Permission to appeal has been granted in this case, and the Court of Appeal decision is eagerly awaited. The decision is obviously of interest to the shipping industry and provides further analysis on the role of the “subjects” provision following the decision in The Leonidas. However, this judgment may not be confined solely to a shipping context. Indeed, it may create some uncertainty for other commercial contracts and the interplay of section 7 and Fiona Trust. It therefore has the potential to lead to further jurisdictional disputes. In particular:
- Section 7 of the AA 1996 specifically states that arbitration clauses will not be held to be invalid where the matrix contract “did not come into existence”. It is difficult to reconcile that provision with this decision.
- Although the court held that the matrix contract did not come into existence, the same analysis was not conducted in respect of the arbitration clause (that is, there was no separate analysis of whether the parties intended to create a legally binding obligation to arbitrate). This is at odds with the Fiona Trust case and also the Supreme Court judgment in Enka v Chubb.
- The judgment does not set out the specific wording of the arbitration clause in question. This begs the question: did the arbitration clause specifically cover disputes concerning whether the contract had “come into existence”, and if not, would the decision have been different if had? While the necessity for such drafting was questioned in Fiona Trust, this type of language frequently appears in a number of the model form arbitration clauses produced by institutions and law firms alike. It would be interesting to understand if such wording would have changed the court’s analysis.
- Finally, and importantly, this case muddies the waters on the interaction between arbitration clauses and not only “subjects” and “subject to contract” provisions, but also any contracts which include conditions precedent. Parties may wish to consider whether they wish to state expressly that the arbitration clause will be binding even if the condition precedent is not satisfied, and that the arbitration agreement specifically covers disputes regarding whether conditions precedent have been satisfied. Without such clarifications in the contract, this case potentially paves the way for a number of jurisdictional disputes.
It will be interesting to see if and how the Court of Appeal resolves these issues.