In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co., Ltd  EWHC 181 (Comm), the Commercial Court has set aside an arbitral award under s67 of the Arbitration Act 1996 (the “Act“) on the basis that the arbitral tribunal lacked substantive jurisdiction.
The case concerned a “subjects” provision which required “shipper/receiver’s approval“. The Court found that:
- the “subjects” provision was a pre-condition to the effectiveness of both the contract and the arbitration agreement contained within it;
- as “shipper/receiver’s approval” was not in fact obtained, the “subjects” provision was not satisfied, and so neither the contract nor the arbitration agreement became binding on the parties; and
- the arbitrator therefore had no jurisdiction to decide the dispute, and the Award was set aside.
DHL Project & Chartering Ltd (the “Charterers“) and Gemini Ocean Shipping Co. Ltd (the “Owners“) negotiated the terms of a fixture for a proposed voyage of the Owners’ vessel MV Newcastle Express (the “Vessel“) from Newcastle, Australia to Zhoushan, China in late September 2020.
After the parties concluded negotiations, a recap email was circulated reflecting the points of agreement. The recap contained 20 clauses, governed by English law, and arbitration in London as the dispute resolution mechanism. The 20 clauses were preceded by a critical “subjects” provision, which noted 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 SAILING (INTENTION 5/SEP). OWNERS WILL ENDEAVOR TO PROVIDE ALL REQUIRED CERTIFICATES/DOCUMENTS EARLIEST POSSIBLE.“
Other relevant clauses in the recap included: (i) Clause 2, which provided that the Vessel should be “Rightship approved” for the duration of the voyage, and referred to the Charterers “lifting their subjects“; (ii) Clause 20, which noted that the terms were “otherwise as per attached Charterer’s proforma C/P with logical alteration”; and (iii) Clause 20.1.1 of the proforma, which stated, “[…] and the vessel name along with its particulars, for shipper’s and receivers approval, which is not to be unreasonably withheld, within two working day”.
At no point did the Charterers provide confirmation to the Owners that there had been approval by the shipper or the receiver i.e. the “subjects” had never been “lifted“. On the contrary, on 3 September 2020, the Charterers indicated that shipper approvals had not been obtained since rightship inspections had not been carried out satisfactorily. As a result, the Charterers released the Vessel and the deal fell through. The Owners treated this as a repudiatory breach of the charterparty, and referred the matter to arbitration.
A sole arbitrator in London decided in favour of the Owners and directed that the Charterers pay damages for repudiating the charterparty (the “Award“). In particular, the arbitrator decided that:
- the “subjects” clause was qualified by Clause 20.1.1, such that the “shipper/receivers approval” was “not to be unreasonably withheld”; and
- in circumstances where there was no obligation to obtain the results of the rightship inspection before the Vessel sailed, the Charterers acted unreasonably by releasing the Vessel before the intended date of sailing “due to RightShip” issues.
Charterers’ challenge to the Award
The Charterers challenged the substantive jurisdiction of the arbitrator under s67 on the basis that the agreement was “subject” to obtaining “shipper/receivers approval“, which had never been obtained. The Charterers’ claimed that the parties had therefore not concluded a binding contractual agreement, there was no arbitration agreement for the resolution of disputes, and the arbitrator accordingly had no jurisdiction to make the Award.
In the alternative, the Charterers sought leave to appeal under s69 of the Act on the ground that, if the arbitrator did have jurisdiction to decide the dispute between the parties, his decision that the parties had concluded a binding contract amounted to an error of law. This was because he failed to give proper effect to the “shipper/receivers approval” subject by wrongly construing it as qualified by other contractual terms (i.e. Clause 20.1.1).
Since the Charterers’ submissions under s67 and s69 were closely connected, both being linked to the “shipper/receivers approval” subject, the Court heard them together.
The Court accepted the Charterers’ submissions, and held that the “subjects” provision which was positioned at the very beginning of the 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/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.
- This conclusion was reinforced by the positioning of the “subjects” provision in bold at the start of the recap, before any other clause. The natural interpretation of this was that the “subjects” clause would qualify everything that followed, including the arbitration clause.
- While the separability doctrine under s7 of the Act was important, relying on the Supreme Court’s decision in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb  UKSC 38 (see our post on this decision here), the Court held that 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  EWHC 1986 (Comm) 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 – i.e. the Charterers had not “lifted their subjects” – there was no binding contract, and no operative arbitration agreement. In addition, contrary to the arbitrator’s findings, the Court held that the “subjects” condition at the start of the recap was unqualified, and that as a matter of interpretation, there was nothing to suggest that the Charterers’ approval was constrained by a requirement of reasonableness under Clause 20.1.1.
As the parties had not entered into contractual relations of any kind, including a contract to arbitrate, the Award was set aside under s67 for lack of substantive jurisdiction.
Given its findings on s67, the Court did not need to consider the s69 application. The Court, however, remarked that, if it did have to do so, it would have granted permission to appeal, and set aside the Award under s69 given that the Award contained an error of law as to the construction of the “subjects” clause which was decisive to the award of substantial damages to the Owners.
This judgment is a rare example of a successful challenge to an award in the English courts under s67 of the Act.
The judgment also provides helpful guidance for the shipping industry by providing an analysis of “subjects” clauses commonly found in the charterparty context. Importantly, the decision confirms that the effect of a “subjects” clause is that no binding enforceable contract comes into existence until the said “subjects” are fulfilled or lifted.
This decision could potentially have an impact beyond the shipping sector as well: where conditions precedent to a contract have not been satisfied, the main contract and the agreement to arbitrate could both fall away completely – depending, of course, on the drafting. Accordingly, parties including conditions precedent in their contracts should consider whether they would like the arbitration clause to be binding even if the conditions precedent are not satisfied. If they do, they would be well advised to make this clear in the drafting.
For further information, please contact David Nitek, Partner, Elizabeth Kantor, Professional Support Lawyer, Arushie Marwah, Associate, or your usual Herbert Smith Freehills contact.