Doctrine of separability in arbitration: should the arbitration agreement and the main contract "sink or swim" together or alone?
In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd1 the Court of Appeal considered the arbitration law doctrine of separability. Under this principle, an arbitration clause, or agreement, is treated as a separate agreement to the main contract (or "matrix contract") of which it forms a part. In this case, the Court of Appeal upheld the High Court's decision to set aside the arbitrator's award, on the basis that the arbitrator did not have jurisdiction to decide the dispute as no arbitration agreement had been concluded. Now the leading case on the doctrine of separability, this decision clarifies the operation of the doctrine in circumstances where the parties dispute the existence of an arbitration agreement as well as the matrix contract.
The proceedings concerned a dispute between DHL Project & Chartering Ltd (DHL) and Gemini Ocean Shipping Co Ltd (Gemini). The dispute arose out of charterparty negotiations of a proposed lease for a vessel known as the "Newcastle Express". Following the negotiations, the broker circulated a document titled "M'Term recap" which summarised the status of the negotiations. This included the condition that the vessel was to be inspected and approved by Rightship, a widely used vessel vetting system, prior to the voyage and stated, "subject shipper/receivers approval". The recap also contained an arbitration clause.
Rightship was due to inspect the vessel on 3 September 2020. When the inspection did not occur, DHL emailed the broker to say that it did not accept the vessel as the relevant approval had not been obtained. DHL released the vessel, which Gemini treated as a repudiatory breach of the charterparty. Gemini commenced arbitral proceedings against DHL. The arbitrator found in favour of Gemini and made an award for damages and costs against the DHL.
DHL challenged the jurisdiction of the arbitrator under section 67 of the Arbitration Act (AA) 1996. DHL claimed that the charterparty had not been concluded as it was subject to obtaining "shipper/receivers approval", and that there was, therefore, no binding arbitration agreement. In the alternative, DHL also sought leave to appeal under section 69 of the AA on the basis that, even if the arbitrator did have jurisdiction, his decision was an error of law.
The High Court held that there was no binding arbitration agreement as the "subject" of the "shippers/receivers approval" had not been "lifted" (ie, that the relevant conditions to the contract had not been satisfied). Therefore, the section 67 application succeeded as the High Court found that the arbitrator did not have the relevant jurisdiction.
Gemini appealed this judgment to the Court of Appeal.
Counsel for Gemini submitted that the High Court in the first instance had failed to give proper effect to the separability principle and that there was no reason why the "invalidity or even non-existence" of the matrix agreement should entail the invalidity of the arbitration agreement. The question of whether a condition or pre-condition had been satisfied had nothing to do with the arbitration agreement, which counsel argued had already been concluded between the parties during their negotiations. Gemini admitted that there may be circumstances where the arbitration agreement and the matrix contract "sink or swim" together, but that there needs to be powerful reasons for this to be the case.
Counsel for DHL supported the reasoning of the High Court and submitted that the "subject" in question was a pre-condition to the contract, which included the arbitration clause. The parties therefore did not conclude a binding arbitration agreement.
The Court of Appeal was not persuaded by Gemini's submissions and dismissed the appeal.
In its decision, the Court distinguished between cases where it is alleged that the matrix contract was never concluded and cases in which a concluded matrix contract is alleged to be void or otherwise ineffective. In the latter category the arbitration agreement can survive the underlying void contract under the doctrine of separability.
The Court found that the present case fell into the former category as the charterparty had not been concluded. The Court held that it was required to establish whether the parties had entered into an arbitration agreement under the ordinary principles of contract formation, and that the doctrine of separability had no significant role in this regard.
When considering the question of contract formation, the Court of Appeal found that the "subject to approval" provision served as a pre-condition to the entire contract, including the arbitration clause. The commercial purpose of this clause was to allow either party to walk away from the contract until the relevant conditions were met. While the parties had agreed that the contract would include an arbitration clause, this in itself did not amount to an arbitration agreement.
The Court of Appeal's decision clarifies that where there is a dispute as to whether an arbitration agreement has been entered into, the ordinary principles of contract formation will apply.
While the Court acknowledged that it is "theoretically possible" for parties to conclude a binding arbitration agreement even if they have not yet agreed a matrix contract, the Court held that in most circumstances this will not be the case. In particular, when considering the intention of the parties the Court referred to the judgment in Enka v Chubb,2 which states:
the principle that an arbitration agreement is separable from the contract containing it is an important part of arbitration law but it is . . . likely to be much better known to arbitration lawyers than to commercial parties. For them, a contract is a contract; not a contract with an ancillary or collateral or interior arbitration agreement.
Parties should therefore be mindful of the fact that their arbitration clause may not be binding during pre-contractual negotiations, unless specifically agreed. The Court acknowledged this concern in its decision and suggested that parties may wish to make an ad hoc agreement to submit the issue of whether a binding contract and/or arbitration agreement has been concluded to arbitration. Commercial parties and lawyers may wish to consider such an ad hoc agreement during negotiations moving forward. In the meanwhile, one regrettable aspect of the decision could be a significant increase in jurisdictional challenges in cases where the parties dispute the formation of a contract containing the arbitration clause.