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Operation of separability considered by the English Court of Appeal
Operation of separability considered by the English Court of Appeal
5 December 2022
Series
Blogs
5 December 2022
In DHL v Gemini [2022] EWCA Civ 1555, the English Court of Appeal revisited, in a dispute over the formation of a charterparty, questions concerning the scope and application of the principle of separability under English law. The judgment illustrates important aspects, and practical consequences, of its operation.
At the heart of the dispute was a question about whether a charterparty had been concluded. The charterers and shipowner (through a broker) negotiated terms. The broker circulated a terms sheet which (the parties accepted) set out where negotiations had got to. This included a proposed term that the contract would be governed by English law and disputes referred to London seated arbitration.
The terms also expressly stated that the proposed charterparty was “subject” to “shipper/receivers approval.” This approval turned out not to be forthcoming (because the ship did not receive suitability clearance from a vetting company). Accordingly, the charterer informed the shipowner that it would not be proceeding. The shipowner took the view that a binding charterparty and arbitration agreement had been formed, and commenced an arbitration (the charterer did not participate) in which the arbitrator agreed and awarded damages against the charterer.
The charterer sought to challenge that award (under s.67 Arbitration Act 1996 - the "AA") on the basis that the arbitrator had no substantive jurisdiction. The High Court agreed, essentially on the basis that the use of “subjects” in shipping contracts was a common industry practice to negative contractual intent until that became lifted and, in this case, the relevant “subject” applied just as much to the arbitration clause as to the rest of the contract.
The shipowner disagreed with this and, before the Court of Appeal, argued that the principle of separability meant that the arbitrator should have been left to determine whether there was a binding charterparty without any challenge to its jurisdiction. One aspect of that principle is that, broadly, an arbitration agreement is not automatically ineffective if the main contract in which it is found is also impugned. But what, precisely, does that mean? In this case, in summary, the shipowner suggested [30-32] that separability should, to effect a “one-stop” shop presumption, be applied expansively to support arbitration agreements even if the facts were that the main contract was non-existent.
The case, therefore, required the Court of Appeal to revisit that aspect of separability as it applies under English law. In a survey of the key authorities [43-77] the Court of Appeal rejected the shipowner’s suggested approach; the presumption it sought to rely on being about interpretation of the scope of dispute resolution agreements rather than whether one has been concluded in the first place. In that latter respect, the Court of Appeal found that the cases, including the well-known House of Lords decision in Fiona Trust, consistently drew a distinction between two situations. The first is where there is an argument that no contract was ever concluded at all (“contract formation”). In those situations, such arguments will, generally, by their very nature, necessarily go to the arbitration agreement as much as any other part of the contract. The second is where the argument is whether a contract is void/voidable (“contract validity”). In that situation the ground of invalidity relied upon must, by contrast, be shown to directly impeach the arbitration clause before it will be presumed to affect it.
In the Court of Appeal’s judgment it was cases in the second situation that the principle of separability was properly concerned with in so far as it prevents attacks on the main contract from affecting the jurisdiction of the tribunal. Here, however, the case fell into the first; the Court of Appeal also concluding that the relevant “subject” in the present case had the effect of postponing any intention to contract at all until that subject was lifted/fulfilled (which never happened). Accordingly, the parties had never entered into an arbitration agreement and the judge’s conclusion on that, and that the award should be set aside under s.67 AA, was correct [80-83].
Why does this matter? Aside from the Court of Appeal’s informative elucidation of principle, the case re-illustrates some important practical consequences for English seated arbitrations in situations where a party seeks to leverage attacks on the main contract into undermining an arbitration agreement. If that course is properly available (for example, where English law applies to the arbitration agreement and the situation is, using the Court of Appeal’s terminology, a “contract formation” case) then it stands to reason that s.67 AA may be available to challenge an award (assuming that a party has not, procedurally, lost its right to object). If not, any complaint is then, properly analysed, likely to be against the tribunal’s view of the main contract; in respect of which any challenge could only proceed under the AA’s provisions providing (limited) recourse against substantive awards.
Click here for the judgment.