No binding fixture and no concluded arbitration agreement where subjects not lifted

By Paul Crane and Sophie Henniker-Major, Ince

 

In a recent charterparty dispute in case DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd (Newcastle Express) [2022] EWHC 181 (Comm), the Commercial Court set aside an arbitration award on the basis that the Tribunal had no jurisdiction to rule in circumstances where the parties had not concluded a binding contract (or arbitration agreement) after conditions to which the fixture were expressed to be subject (“subjects” or “subs”) were not lifted.

The parties had negotiated the terms of a fixture which was expressed to be subject to the shippers’/receivers’ approval (i.e. “on subjects”). With the shipper not approving the fixture until a RightShip inspection had been satisfactorily concluded, the charterer released the Vessel: they advised the owner that they would not be lifting subjects and the deal had fallen through.

The Tribunal held that the charterer was in repudiatory breach of charter and awarded the owner damages. 

There was no finding in the award that the subject of shippers’ or receivers’ approval had been lifted by the charterers. However, to reach its decision, the Tribunal construed the “subjects” provision as being qualified by a separate clause of the charter, such that the shippers’/receivers’ approval was not to be unreasonably withheld. On the basis of this construction and in circumstances where the owner was not obliged to provide the RightShip inspection results until the vessel sailed, the Tribunal held that approval had been unreasonably withheld when the charterer released the vessel prior to the intended date of sailing ‘due to RightShip’.

There was no finding in the award that the subject of shippers’ or receivers’ approval had been lifted by the charterers

Commercial court decision

The charterer applied to the Commercial Court under s.67 of the Arbitration Act 1996 (“the Act”) to challenge the award on the grounds that the Tribunal had no jurisdiction to make the award. They also sought permission to appeal under s.69 of the Act on the alternative basis that if the Tribunal did have jurisdiction, then their decision was wrong in law.

The charterer contended that although the parties had agreed the terms of a fixture, the agreement was subject to the shippers’/receivers’ approval and these subjects had not been lifted. Unless and until the subjects were lifted, there was no binding contract between them and the owner. Whether or not there was also a binding arbitration agreement (the requirement for the s.67 application) stood and fell with this argument. They further argued the Tribunal was wrong to conclude that the subjects clause should be qualified by clauses in the proforma charter: rather, the “subject” provision qualified the entirety of the charterers’ agreement to the fixture, including their agreement to the separate clause which introduced the reasonableness qualification.

The owner relied on s.7 of the Act (separability of arbitration agreement) to argue that the arbitration agreement contained in the fixture should be distinct or separate from the fixture itself and so even if the charter fixture was invalid, it should not affect the enforceability of the agreement to arbitrate. The parties had clearly agreed on London arbitration, even if the existence or terms of the charter itself had not been finally agreed.

The Court found in the charterers’ favour and set aside the arbitration award pursuant to s.67 of the Act. In these circumstances, the need to consider the s.69 application did not arise, although the Court commented that permission to appeal would have been granted if it did because the issue raised - the interrelationship between a “subject” provision in a charterparty recap and the terms of a proforma charter - was one of general public importance and the arbitrator’s decision was at least open to serious doubt.

This case provides a welcome reminder on the use of subjects or conditions in contractual negotiations, specifically in the charterparty context

“Not binding”

The Court found that the subject fixture was not binding unless and until the charterer communicated to the owner that the subjects were lifted, which they never did. The commercial purpose of such a clause was obvious: a charterer would not wish to enter into a binding contract until both the shipper and receiver had approved the vessel which the charterer was proposing to use and would reserve its position in full until such time.

The Court’s conclusion - that the vessel was "on subs", and unless and until the subs were lifted, there was no binding contract - was supported by a very similar decision in The Leonidas [2020] EWHC 1986 (Comm). That was the meaning and effect of the "subject" provision at the start of the recap. The "subs" were never lifted. While the wording of the “subs” provision in The Leonidas was different, the reasoning in that case was equally applicable here.

The Court also held that the “subjects” in the fixture recap extended to the arbitration agreement contained within it. The effect of the “subject” was to negate the charterers’ intention to enter into any contract unless and until the subject was lifted. Furthermore, the natural interpretation of the position and use of bold text in the subjects clause in this case was that the “subject” qualified everything that followed. 

The Court also referred to the recent Supreme Court decision in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 to dismiss the owner’s separability argument on the basis that an arbitration agreement was not to be regarded as "a different and separate agreement" from the rest of the contract.

This case provides a welcome reminder on the use of subjects or conditions in contractual negotiations, specifically in the charterparty context. It demonstrates that the English courts will generally hold that “subjects” indicate a pre-condition which, until “lifted”, will preclude a binding contract. It further highlights the importance of parties ensuring that they are clear as to what must be done, when and by whom, to lift such subjects.

The owner has been granted leave to appeal against the s.67 decision.

Paul Crane is a partner and Sophie Henniker-Major is a managing associate at Ince. Both can be contacted on +44 (0)20 7481 0010.