Introduction

In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd (Newcastle Express) [2022] EWHC 181 (Comm), the Commercial Court of the High Court of England and Wales (the “Court”) has set aside an arbitration award in a charterparty dispute on the basis that the arbitration tribunal had no jurisdiction to rule since no binding contract (nor arbitration agreement) was concluded when the fixture was expressed to be subject and such subject was not lifted.

Background

In August 2020, the Claimants (the “Charterers”) and the Defendants (the “Owners”) negotiated the terms of a fixture through the intermediary of a broker. The Owners intended the vessel (the “Vessel”) to be inspected by Rightship, a third party maritime due diligence organisation. In the email sent by the chartering broker to the Charterers regarding a fixture “recap”, there was a “subject” provision (the “Subject”) in bold context at the start of the email in the following wordings:

“SUBJECT SHIPPER/RECEIVERS APPROVAL WITHIN ONE WORKING DAY AFTER FIXING MAIN TERMS & RECEIPT OF ALL REQUIRED”

Later, the shipper pressed for a faster schedule for completion of inspection by Rightship, and ultimately decided that it did not want to wait for the Vessel. The Charterers communicated to the Owners in September 2020 that the Vessel was free as the Charterers would not be lifting the Subject and the deal had fallen through.

Arbitration

The Owners commenced arbitration proceedings against the Charterers for repudiation of the charterparty. The arbitrator (the “Arbitrator”) held that the Subject should be read together with other clause of the proforma charter such that the charterparty provided that:

“the approval of the Vessel was “subject shippers/receivers’ approval within one working day after fixing main terms and receipt of all required/corrected certificates/documents such approval not to be unreasonabl[y] withheld.”

The Arbitrator was of the opinion that the approval was unreasonably withheld and so awarded damages for repudiation to the Owners (the “Arbitral Award”).

Issue

The Charterers sought to challenge the Arbitral Award on the basis that there was no binding contract nor arbitration agreement concluded between the parties. The Charterers argued that although the parties had agreed upon all the essential terms of a fixture, the agreement was on “subjects” or “subs” – it was subject to shipper or receivers’ approval which was never lifted. The Subject showed an intention not to create legal relations unless and until the Subject being lifted. Therefore, the Charterers contended that the Arbitrator had no jurisdiction to make the Arbitral Award and applied to the Court to set aside the Arbitral Award under section 67 of the Arbitration Act 1996.

In contrast, the Owners argued that the parties had clearly and expressly agreed to arbitration and so there was a binding arbitration agreement. By the doctrine of “separability”, the arbitration agreement was distinct from the underlying charter, therefore, the invalidity of the contract would not impugn the enforceability of the arbitration agreement. Therefore, the Arbitrator had the substantive jurisdiction to decide whether or not there was a binding contract.

Legal principles

On the effect of the Subject, the Court held that it qualified everything that followed which naturally included the arbitration clause. The Court made reference to a very similar decision of Foxton J in Nautica Marine Ltd v Trafigura Trading LLC [2020] EWHC 1986 (Comm), where it was noted that:

1.       There is a particular feature of negotiations for the conclusion of contracts for the employment of ships – “subjects” or “subs” are pre-conditions to contract which remain outstanding, therefore, conclusion of such a binding contract is dependent on the agreement of the relevant party or parties to lift (i.e. remove) the subjects.

 

2.       Unless and until the condition precedent is satisfied, no binding contract is concluded.

 

The Court ruled that the Subject fell into the category described by Foxton J. The Court noted that the commercial purpose of such subject was obvious – the Charterers did not wish to make a binding contract at all unless and until both the shipper and receiver’s approval of the Vessel was given. A charterer may wish to reserve its position fully. The Court acknowledged that this was the well-recognised practice in the chartering market.

Accordingly, the Court found that there was nothing in the documents which could support the suggestion that there was any approval of the Vessel by the shippers nor the receivers at any stage. The Court took the view that the correspondence exchanged by the parties cannot be read as the communication of shippers’ approval (either by the shippers themselves or by the Charterers) since it was clear that any approval would not be given prior to the result of the Rightship inspection being known. The Court held that the Subject was not lifted, and that the Owners were aware that the shipper would not give approval until the Rightship inspection had been satisfactorily concluded.

On the Owners’ argument of separability, the Court noted that whether a contract and an arbitration agreement may stand or fall together depends upon the facts and the particular argument advanced. However, in this case, the arbitration agreement was not separable from the charter and therefore the Subject is also applicable to the arbitration agreement for a number of reasons:

1.       As the effect of the Subject was to negate the Charterers’ intention to enter into any contract at all, unless and until it was lifted, there was no reason for the Charterers intending to make any contractual commitment to arbitration.

 

2.       The natural interpretation of the positioning and use of bold text of the Subject in the recap indicated that the Subject qualified everything that followed, including the arbitration agreement.

 

3.       The arbitration agreement was not regarded as a mini-agreement separated from the main agreement. Instead, it was part and parcel of the proposed agreement as a whole. The arbitration agreement was part of the bundle of rights and obligations under negotiation, and all of those rights and obligations were subject to the Subject.

 

Accordingly, the Court held that there was no operative arbitration agreement concluded and so the Arbitrator had no jurisdiction to give the Arbitral Award. The Court ruled in favour of the Charterers on section 67 application and set aside the Arbitral Award.

Key takeaways

This case serves as a reminder on the use of subjects or conditions in contractual negotiations, especially in the charterparty context. Courts will generally hold that “subjects” indicate a pre-condition which, until the subjects being “lifted”, will preclude a binding contract. Therefore, in drafting the charterparty, one should make it clear as to what must be done, when and by whom, to lift such subjects. If one intends for the issue of whether subjects or approvals had been unreasonably withheld to be resolved by arbitration, clear and unequivocal wordings must be used.

 

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022