SEPARABILITY IN ARBITRATION – NEWCASTLE EXPRESS
In this week’s blog, we look at the recent England and Wales Court of Appeal decision of DGL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd (Re “Newcastle Express”) [2022] EWCA Civ 1555 (“Newcastle Express”), and specifically, on how Males LJ addressed the principle of separability.
The doctrine of separability. The principle, or the doctrine, of “separability” is not new. In essence, the principle provides that an arbitration agreement may have a life independent of the main contract of which it forms part ([2] Newcastle Express).
As observed by Vinodh Coomaraswamy J at [76] BNA v BNB and another [2019] SGHC 142, the doctrine “… is most commonly invoked where the parties’ substantive contract is invalid, in order to avoid that invalidity nullifying the arbitration agreement.”
This is because frequently (if not most of the time), the arbitration agreement comes in the form of an arbitration clause found within the underlying contract. If the validity of the arbitration agreement is not separate from the underlying contract which it forms part of, then if the underlying contract is invalid, the arbitration clause (and hence the arbitration agreement) will also be invalid. In many situations, this result goes against the parties’ intention: the raison d'être for the arbitration clause is for disputes arising out of and in connection with the contract to be submitted to arbitration.
However, if a party to the underlying contract argues that the underlying contract has not been formed, would the doctrine of separability apply such that the dispute over whether the underlying contract had been formed would be subject to arbitration?
Newcastle Express. This is where Newcastle Express comes in. In Newcastle Express, the dispute concerned whether the proposed charterparty, which was expressly stated to be subject to the shipper’s / receiver’s approval, contained a binding arbitration agreement which conferred jurisdiction on an arbitrator to determine if the charterparty contract has been concluded ([1] Newcastle Express).
For ease of reference, we will adopt the same referring as per the Court in Newcastle Express.
Brief facts. On 25 August 2020, the broker circulated what has been described as the “M’Term recap” (“M’Term” standing for Main Terms) (hereinafter the “Recap”), which reflected the state of negotiations then ([8] Newcastle Express).
It began by stating the following:
“AS PER YOUR AUTHORITY/INSTRUCTIONS, IN LINE WITH NEGOTIATIONS/EXCHANGES, PLEASED TO CONFIRM HAVING – FIXED M'TERM AS FOLLOWS:
SUB SHIPPER/RECEIVERS APPROVAL WITHIN ONE WORKING DAY AFMT & RECEIPT OF ALL REQUIRED/CORRECTED CERTS/DOCS
=> RIGHTSHIP INSPECTION WILL BE CONDUCTED ON 3RD/SEPT. OWNERS WILL PROVIDE REQUIRED CERTS LATEST BEFORE VESSEL SELLING [sc. SAILING] (INT. 5/SEP). OWNERS WILL ENDEAVOR TO PROVIDE ALL REQUIRED CERTS/DOCS EARLIEST POSSIBLE."”
(emphasis in original)
This was followed by a set of terms. Relevantly, the terms included:
Clause 2, which “… provided among other things that "prior to charterers lifting their subjects" the Owner would provide speed and bunker consumption figures and a detailed itinerary for the proposed voyage.” ([10] Newcastle Express);
Clause 17, the law and arbitration clause, which stated “GA/ARBITRATION TO BE IN LONDON, ENGLISH [sc. LAW] TO BE APPLIED, SMALL CLAIMS PROCEDURE TO APPLY FOR CLAIMS USD 50,000 OR LESS.” ([11] Newcastle Express); and
Clause 20, which provided “CHARTER PARTY: OTHERWISE AS PER ATTACHED CHARTERER’S PROFORMA C/P WITH LOGICAL ALTERATION” ([12] Newcastle Express). The attached proforma was a charterparty form, which included a clause 20 headed “Nomination” that provided, among others, that “… the vessel to be nominated should be acceptable to the charterer, but that acceptance in accordance with detailed provisions set out in clause 20.1.4 "shall not be unreasonably withheld".” ([13] Newcastle Express).
The Owner had intended the vessel to be inspected by Rightship, with said inspection due to take place on 3 September 2020, and Clause 2 of the Recap provided that the vessel should be “RIGHTSHIP APPROVED”. ([19] Newcastle Express).
However, by 3 September 2020, Rightship approval had not been obtained. On the morning of 3 Sep 2020, the Charterer advised that “Shippers is not accepting Newcastle Express due to Rightship not rectified, kindly consider this vessel free”. The Charter then forwarded the following message to the broker from the shipper, which stated “We prefer not to wait for the said rectification from Owners and please arrange for substitute vessel …”, and the Charterer added “We hereby release the vessel due to Rightship and not holding her any longer. Really appreciate owners' understanding and cooperation in this respect.” ([20] – [22] Newcastle Express).
The arbitration. While it was common ground that the Charterer had not provided confirmation to the Owner that there had been approval by either the shipper or receiver, the Owner claimed that “a binding charterparty containing an arbitration clause had been concluded, and that by releasing the vessel in this way the Charterer had repudiated the contract.” ([23] Newcastle Express).
The Owner commenced arbitration and obtained an award in its favour. The arbitrator found, among others, that the requirement of “subject to shippers / receivers approval” had to be read with clause 20 of the proforma, such that the charterparty provided “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 unreasonably withheld.” ([24] – [25] Newcastle Express).
The appeal. In the interests of brevity, we will just focus on the salient issue as highlighted by Males LJ, with whom Birss and Snowden LJJ agreed.
“Subject”: no binding contract. At [34] – [41] Newcastle Express, Males LJ held that “… [t]he use of a "subject" in the context of charterparty negotiations is … well known as a device to ensure that a binding contract is not yet concluded, just as is the case with the term "subject to contract" in other contexts.”
As such, in the present case, the “subject to shippers / receivers approval” was a “… a pre-condition the purpose of which was to prevent a binding contract coming into existence”, and what mattered was “… whether the Charterer has communicated to the Owner that the subject is lifted.”
If no binding contract had been entered into, it would suggest that all the terms of the contract would not bind the parties. So, no arbitration agreement.
Separability. However, it was argued that “… because of the separability principle, the "subject" did not negative contractual intent so far as the arbitration clause in the recap [clause 17] was concerned.” ([42] Newcastle Express).
Males LJ traversed various authorities on this subject at [44] – [77]. What is of note is that Males LJ referred to Justice Steven Chong’s decision in BCY v BCZ [2017] 3 SLR 357; [2016] SGHC 249 (“BCY v BCZ”) as representing “… the fullest (and if I may say so, clearest) treatment cited to us of the application (or rather non-application) of the separability principle to issues of contract formation …” ([72] Newcastle Express). Among others, Males LJ referred to [60] – [61] BCY v BCZ, which we set out below:
"60. The suggestion that the arbitration agreement is a distinct agreement with a governing law distinct from that of the main contract is often justified by the doctrine of separability. However, the doctrine of separability serves to give effect to the parties' expectation that their arbitration clause -- embodying their chosen method of dispute resolution -- remains effective even if the main contract is alleged or found to be invalid. It does not mean that the arbitration agreement forms a distinct agreement from the time the main contract is formed. Resort need only be had to the doctrine of separability when the validity of the arbitration agreement itself is challenged. This is clear from article 16 of the UNCITRAL Model Law on International Commercial Arbitration set out in the first schedule of the [International Arbitration Act] ("Model Law") …
61. Separability serves the narrow though vital purpose of ensuring that any challenge that the main contract is valid does not, in itself, affect the validity of the arbitration agreement. This is necessary because the challenge to the validity of the arbitration agreement often takes the form of a challenge to the validity of the main contract. However, as Moore-Bick LJ noted in Sul América [Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, [2013] 1 WLR 102], separability does not 'insulate the arbitration agreement from the substantive contract for all purposes' (at para 26). It is one thing to say that under the doctrine of separability, a party cannot avoid the obligation to submit a dispute to arbitration by merely denying the existence of the underlying contract; it is quite different to say that because of this doctrine, it is intended to enter into an arbitration agreement independent of the underlying contract. This does not reflect commercial reality."
(our emphasis added)
As such, Males LJ held that the “presumption” that the parties had intended to have a “one-stop” dispute resolution was not engaged on the facts off the case, as the presumption “… has nothing to do with the question whether the parties have concluded a contract (including a contract to arbitrate) in the first place” ([75] Newcastle Express).
Returning to the facts of the case, Males LJ held at [89] Newcastle Express that as the effect of the “subject” in Newcastle Express was a “pre-condition whose effect was to negative any intention to conclude a binding contract until such time as the subject was lifted”, and as the subject was never lifted, there was no binding arbitration agreement.
This is because the “negativing of an intention to conclude a binding contract applied as much to the arbitration clause as to any of the other clauses set out in the recap”; these conclusions would not be affected by the doctrine of separability as the doctrine “has no application when, as in the present case, the issue is whether agreement to a legally binding arbitration agreement has been reached in the first place.”
Males LJ also rejected the arbitrator’s view that the “subject” needed to be read together with clause 20 of the proforma charterparty, stating that if this was the correct reading, then it would mean that “the "subject" was properly to be regarded as a performance condition, rather than a pre-condition which had the effect of negativing contractual intent”, which would be untenable as “clause 20 of the proforma… is concerned with the nomination of a vessel under a charterparty for a vessel to be nominated [and] has no application to a charterparty for a named vessel” ([81] – [83] Newcastle Express).
Conclusion. It may be said that the issue raised in Newcastle Express is not new. For instance, at [48] of Jiangsu Overseas Group Co Ltd v Concord Energy Pte Ltd and another matter [2016] 4 SLR 1336, Steven Chong J stated “… If the arbitration agreement is contained in the contract itself, and the validity of the arbitration agreement is challenged on the basis that no binding contract had been concluded, the validity of the arbitration agreement and the existence of a binding contract “stand or fall together” …”. This passage has from Jiangsu has also been recently referred to at [83] CUG & 3 Ors v CUH [2022] SGHC(I) 16).
However, while Newcastle Express does not make new law, it is nonetheless is an important reminder on how the doctrine of separability operates. The doctrine operates to give effect to parties’ intention to arbitrate. But this doctrine has its limits. It cannot be stretched so far as to “bind” the parties into entering into an arbitration agreement independent of the underlying contract.
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