The Commercial Court of England and Wales Outlines Limitations under English law on the Doctrine of Separability in Respect to Agreements to Arbitrate

The Commercial Court of England and Wales has outlined limitations of the doctrine of “separability,” i.e., the notion that an arbitration agreement within a commercial contract is distinct from the main contract itself, in a judgment in which it allowed an application to set aside an arbitration award for lack of jurisdiction. 

In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd [2022] EWHC 181 (Comm), the Applicant (the Charterers) applied under Section 67 of the Arbitration Act 1996 (the Act) to set aside an arbitration award that had been made following a claim by the Respondent (the Owners) for damages for what the arbitral tribunal had considered to be the Charterers’ repudiation of a charterparty. The tribunal had decided that the Charterers’ rejection of the vessel was unreasonable and amounted to a repudiation. Section 67 of the Act enables parties to challenge arbitral awards on the grounds that the arbitral tribunal lacked substantive jurisdiction. 

The Section 67 Application 

The Charterers contended that no binding contract was concluded between the parties, and that there was no binding arbitration agreement between them, on the grounds that certain conditions precedent to contract, known as “subs,” remained outstanding. The relevant “sub” or “subject” in this case concerned “shipper/receivers approval.” The Charterers contended that this condition was never satisfied and, therefore, the arbitrator had no jurisdiction to make the award.

The Owners’ Submissions on Separability

Section 7 of the Act, which enshrines in English law the well-established international concept of separability, 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.”

Counsel for the Owners relied on the doctrine of “separability” of the arbitration agreement and the width of the language of Section 7, specifically that this section refers to cases where the arbitration agreement is “intended to form part of another agreement” and argued that the parties had agreed on London arbitration even if they had not finally agreed on the terms of the main agreement (the charterparty). Accordingly, the Owners argued that the question of whether the parties had reached final agreement on the terms of the charter was a matter for the arbitrator, consistent with the presumption in Fiona Trust v Privalov [2007] UKHL 40 that “one stop” dispute resolution is to be applied in interpreting arbitration agreements.

The Owners further relied on:

• The express terms of the charterparty, including the fact that the “subs” related to the approval of the vessel by a third party.
• There being no reason to think that a third party’s approval of the vessel should impact upon the agreement to arbitrate.
• Passages in the judgment of Foxton J in Nautica Marine Ltd v Trafigura Trading LLC (The “Leonidas”) [2020] EWHC 1986 (Comm) that not all “subjects” can be easily characterized as conditions precedent to the existence of the contract.
• The “subject” in the present case involved an approval by a third party, and such approvals were more likely to fall within the category of “performance conditions” rather than the category of pre-conditions to a binding contract.

The Court’s Findings on Separability

In finding against the Owners and in favor of the Charterers, Jacobs J found that, prior to lifting the “subject,” the Charterers were free to walk away from the proposed contract since there was no contractual commitment and there was no reason to think that the parties intended any contractual commitment of any kind, including any contractual commitment to arbitration.

Significantly, on the question of separability, he found that “the arbitration agreement is not to be regarded as a mini-agreement which is in some way divorced from the “main” agreement which the parties were negotiating. It was part and parcel of the proposed agreement as a whole.”

In that context, he applied the dicta of the Supreme Court in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 (a case concerning the governing law of an arbitration agreement, on which we previously commented here): “it does not follow from the separability principle that an arbitration agreement is generally to be regarded as “a different and separate agreement” from the rest of the contract or that a choice of governing law for the contract should not generally be interpreted as applying to an arbitration clause.” 

The judge found that the arbitration agreement was part of the bundle of rights and obligations still under negotiation, a conclusion reinforced by the fact that the alleged charter and the alleged arbitration agreement were contained in the same document. The court held “the “subject” …was unqualified, and it was of a character which meant … that the parties had yet to enter into contractual relations of any kind…unless and until the condition precedent was satisfied, no binding contract came into being. There was no contract at all, including no contract to arbitrate.”

Comment

This case is a warning about the limitations of the principle of separability as viewed by the Commercial Court in London. While, for certain purposes, such as arguments about which governing law applies to agreements to arbitrate, the agreement to arbitrate may be analyzed as properly being regarded as distinct from the main contract, where conditions precedent to a binding contract have not been satisfied, under English law, the result may be that the agreement to arbitrate falls away completely, together with the main contract. 

While England is considered to be an arbitration-friendly jurisdiction, parties should be aware that if conditions precedent to a commercial agreement containing an agreement to arbitrate have not been satisfied, this might lead to any award made pursuant to that agreement to arbitrate being vulnerable to challenge for want of jurisdiction under Section 67 of the Act.