The claimant charterers and the defendant shipowner negotiated the terms, including a law and arbitration clause, of a proposed voyage charter for a voyage from Australia to China with a cargo of coal. While the agreement between the parties, as set out in a main terms recap, was still expressed as being “subject” to “shippers/receivers approval”, the necessary approval of the vessel for the transport of coal was not obtained and, as a consequence, the charterer advised that it would use a substitute vessel. The owner initiated arbitration proceedings in reliance upon the arbitration clause, contending that a binding charterparty containing an arbitration clause had been concluded, and that by releasing the vessel the charterer had repudiated the contract. The arbitrator made an award for damages together with interests and costs in favour of the owner. The charterer brought a claim under section 67 of the Arbitration Act 1996 challenging the award on the ground that the arbitrator had not had any substantive jurisdiction. The judge allowed the claim, concluding that the effect of the use of “subject” in the charterparty was that no binding contract could be concluded until the subject was lifted, since just as when agreement was reached “subject to contract”, the common practice in the chartering market of a vessel being “fixed on subjects” had the effect of negativing any intention to enter into contractual relations until the subjects were “lifted”, leaving both parties free to withdraw in the meanwhile, and the subject in the present case, “subject shipper/receivers approval”, had that effect, which applied just as much to the arbitration clause as to any other clauses. The owner appealed, contending, inter alia, that the judge had failed to give proper effect to the separability principle, namely that an arbitration agreement was, or had to be treated as, a contract which was separate from the main contract of which it formed part.
On the appeal—
Held, appeal dismissed. The principle of separability applied where the parties had reached an agreement to refer a dispute between them to arbitration, which they intended (applying an objective test of intention) to be legally binding. It meant that a dispute as to the validity of the main contract in which the arbitration agreement was contained did not affect the arbitration agreement unless the ground of invalidity relied on was one which impeached the arbitration agreement itself as well as the main agreement. However, the principle had no application when, as in the present case, the issue was whether agreement to a legally binding arbitration agreement had been reached in the first place. That was an issue of contract formation, concerned with issues such as offer and acceptance and intention to create legal relations. It was necessary to pay close attention to the precise nature of the dispute to ascertain whether the ground on which the main contract was attacked was one which also impeached the arbitration clause. The principled approach whereby the question whether a binding arbitration agreement had been concluded was subject to ordinary principles of contract formation, applied. An arbitration agreement was a contract like any other, so that there was no justification for treating the question whether such an agreement had been concluded as subject to special presumptions uniquely applicable in arbitration cases. In the present case what the parties had agreed in their negotiations was that, if a binding contract was concluded as a result of the subject being lifted, that contract would contain an arbitration clause. The “subject” in the present case was a pre-condition whose effect was to negative any intention to conclude a binding contract until such time as the subject was lifted, which it never was. 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. Accordingly, the judge had been right to conclude that no binding contract had been concluded with the result that the arbitrator had no substantive jurisdiction (paras 46–47, 54–57, 62, 74–75, 80, 84, 87, 88).
Timothy Young KC (instructed by Holman Fenwick Willan LLP) for the owners.
Charles Holroyd (instructed by Reed Smith LLP) for the charterers.