In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co., Ltd  EWHC 181 (Comm) charterers applied to the Commercial Court under sections 67 and 69 of the Arbitration Act 1996 to challenge an arbitration award in which damages were awarded against them for breach of a charterparty. The basis of the charterers’ application was that no binding charterparty had been concluded and that no binding agreement to arbitrate had been reached between the parties with the arbitrator therefore lacking jurisdiction to make an award.
There was a series of communications between the claimant charterers and the defendant shipowners through an intermediary chartering broker relating to the chartering of the vessel m/v Newcastle Express for a proposed loading of a consignment of coal in Newcastle, Australia for carriage to Zhoushan, China in September 2020. The fixture “recap” for the charterparty was set out in an email dated 25 August 2020 from the intermediary broker to the charterers. The recap began as follows:
“As per your authority/instructions, in line with negotiations/ exchanges, please to confirm having – fixed main terms as follows:
Subject shipper/receivers approval within one working-day after fixing main terms & receipt of all required corrected certificates/documents
- Rightship inspection will be conducted on 3rd/Sept. Owners will provide required certificates latest before vessel before vessel sailing (intention 5/Sep). Owners will endeavor to provide all required certificates/documents earliest possible.”
The recap then set out 20 clauses. Clause 17 provided for arbitration in London with English law to be applied. The recap attached a number of documents which were also to apply.
The vessel was in Zhoushan and was expected to become available on 5 September. The shipowners intended the vessel to be inspected by Rightship on 3 September before departing Zhoushan. Clause 2 of the recap provided that the vessel was to be approved by Rightship with such approval to remain throughout the voyage. However, the charterers wrote to the brokers on 3 September 2020 forwarding confirmation from the shipper that it did not want to wait for the Rightship inspection and it requested an alternative vessel. In light of this, the charterers confirmed that they were “releasing” the vessel. The shipowners treated this as a repudiation of the charterparty and sought damages in an arbitration in London.
London arbitration award
A sole arbitrator in London found in favour of the shipowners. The arbitrator did not find that the approval of the shipper and the receiver had been confirmed by the charterers. However, the arbitrator construed the terms of the recap to provide that the approval of the shipper and receiver was not to be unreasonably withheld. The arbitrator found that such approval had been withheld unreasonably on the basis that the shipowners were not obliged to provide the results of the Rightship inspection until at the latest by the time the vessel departed Zhoushan intended for 5 September 2020. The arbitrator found that the charterers had repudiated the charterparty and he awarded damages to the shipowners.
Application to the Commercial Court to challenge the award
The charterers did not participate in the arbitration but they applied to challenge the award before the Commercial Court in London. They applied under section 67 of the Arbitration Act 1996 on the basis that the arbitrator lacked substantive jurisdiction in that there was no binding agreement to arbitrate. They also applied in the alternative under section 69 of the 1996 Act on the basis that the arbitrator had made an error in law in holding that “shipper/receiver approval” for the purpose of the subject required approval not to be unreasonably withheld. As the two applications were closely connected they were heard together and if the application under section 67 was successful then it would not be necessary to deal with the application under section 69. The applications were heard before Mr Justice Jacobs.
In summary, the charterers argued that until the “subjects” (i.e. the qualification that the contract was “subject” to the approval of the shipper/receiver) had been lifted, there was no binding contract. In this regard, the common use of “subjects” in the chartering market was akin to the term “subject to contract” and that its use showed an intention not to create legal relations under those subjects had been “lifted” and that this applied to both the charterparty and any agreement to arbitrate.
The shipowners contended that there was a clear agreement to arbitrate notwithstanding the “subject” term in the fixture recap. They relied on section 7 of the Arbitration Act 1996 which 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.” The shipowners argued that there had been a clear agreement to arbitration in London and that the “subject” qualification referred to the approval of the vessel by a third party which did not impact upon the agreement to arbitrate. It was therefore for the arbitrator to decide whether the main charterparty contract was binding.
The court agreed with the submissions on behalf of the charterers and found that the arbitrator did not have substantive jurisdiction. Amongst the judge’s conclusions were the following:
The starting point was to consider the “subject” provision at the start of the fixture recap. In the judge’s view it was significant that this provision was placed at the start of the recap and he concluded that “it qualified everything that followed. That naturally includes the arbitration clause.”
Previous authorities and commentaries had observed that in charterparty negotiations it was common practice for the terms of a contract to be agreed but for this agreement to be on “subjects” signifying that there are conditions to be satisfied before contractual relations have been concluded. The judge concluded that the “subject” – i.e. the “shipper/receivers approval” meant that the charterers did not wish to make a binding contract “at all” unless and until both the shipper and receiver had approved the vessel which the charterers were intending to use. He observed that “A binding contract will only come into existence as and when the Charterers communicate to the Owners that the subjects are lifted. In the present case, that never happened. Since there was no binding contract as at 3 September 2020, the Charterers were free to withdraw from the proposed contract, which they did.”
The judge also concluded that the “subject” precluded both the main charterparty contract and the arbitration agreement from coming into existence. He made the following observations on the separability of the main contract and the arbitration agreement:
The effect of the subject was to negate the charterers’ intention to enter into any contract at all until the subject had been lifted with the effect that the charterers were entitled to walk away from the proposed contract; “there is no reason to think that the parties intended any contractual commitment of any kind, including any contractual commitment to arbitration.”
The positioning of the “subject” at the beginning of the recap ahead of the contractual clauses and its bold font was significant and “the natural interpretation is therefore that the “subject” qualified everything that followed.”
Although section 7 of the 1996 Act reflects the doctrine of separability, the arbitration agreement was not divorced from the main agreement; “It was part and parcel of the proposed agreement as a whole”.
It was also of significance to the notion that the arbitration agreement was part of a bundle of rights and obligations under negotiation, that the arbitration agreement and the alleged charterparty were in the same document.
The judge also found that the “subject” at the start of the recap was unqualified and there was nothing to suggest that the charterers’ approval was constrained by a requirement of reasonableness.
In conclusion, the judge allowed the section 67 application finding that the “subject” was unqualified and it was of a character which meant that the parties had not entered into contractual relations of any kind. The “subject” condition precedent had not been satisfied and so there was no binding contract with the agreement to arbitrate and the proposed charterparty to stand or fall together. The judge did not need to consider the application under section 69 of the 1996 Act, however he noted that had it been necessary to determine the application then he would have granted permission to appeal under section 69.
The judgment provides a helpful analysis of the court’s approach to construe the commonly used “subjects” term found in charterparties and its approach to address the doctrine of separability in determining the issue of the binding nature or otherwise of an arbitration agreement and the main contract.