In DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd  EWHC 181 (Comm), DHL (“Charterers”) succeeded in an application against Gemini (“Owners”) to set aside an arbitration award pursuant to section 67 of the Arbitration Act 1996 (the “Act”).
Mr Justice Jacobs held that a “subject” provision in a putative fixture requiring “shipper/receivers approval” was of an unqualified character. The Court found that the contract would not become binding unless and until Charterers lifted the “subject”, and on the facts, this had never occurred. Accordingly, no arbitration agreement came into existence and the Tribunal did not have substantive jurisdiction when it determined that Charterers had repudiated the charterparty.
The Charterers and Owners negotiated the main terms of a putative fixture for a proposed voyage of the “Newcastle Express” (the “Vessel”) from Newcastle, Australia to Zhoushan, China in late September 2020. The critical “subject” provision was contained in bold at the start of the email, with 20 clauses following it. It stated (abbreviations expanded for ease of understanding):
SUBJECT SHIPPER/RECEIVERS APPROVAL WITHIN ONE WORKING DAY AFTER FIXING MAIN TERMS & RECEIPT OF ALL REQUIRED/CORRECTED CERTIFICATES/DOCUMENTS.
=> RIGHTSHIP INSPECTION WILL BE CONDUCTED ON 3RD/SEP. OWNERS WILL PROVIDE REQUIRED CERTIFICATES LATEST BEFORE VESSEL SAILING (INTENTION 5/SEP). OWNERS WILL ENDEAVOR TO PROVIDE ALL REQUIRED CERTIFICATES/DOCUMENTS EARLIEST POSSIBLE.
An unsigned 2017 proforma charterparty in respect of a vessel yet to be nominated was attached to the recap, which contained the following relevant clauses (and which were also considered in the determination of the case):
- Clause 2 provided that Rightship approval was to be maintained throughout the voyage and referred to Charterers “lifting their subjects”.
- Clause 17 provided for arbitration in London, with English law to apply.
- Clause 20 provided that the terms were “otherwise as per attached Charterer’s pro forma C/P with logical alteration”.
- Clause 20.1.1 stated “…and the vessel name along with its particulars, for shipper’s and receivers’ approval, which is not to be unreasonably withheld, within two working day”.
No approval was received from either the receivers or the shippers at any stage. Charterers never lifted the “subject”. Instead, on 3 September 2020, before Rightship approval had been obtained, Charterers informed the broker that the shippers had requested a new vessel and they were releasing the Vessel.
Owners treated this as a repudiatory breach of the putative fixture and commenced arbitration. Charterers did not participate in the arbitration at all as the employee who had negotiated the putative fixture failed to inform anyone at DHL of the proceedings.
The Tribunal’s decision
The Tribunal accepted Owners’ submission that there was a binding charterparty and that the “subject” provision in the recap was to be read together with Clause 20.1.1 of the pro forma charterparty, meaning that “shipper/receivers approval” was “not to be unreasonabl[y] withheld”. The Tribunal found that the shippers and Charterers’ “release” of the Vessel was unreasonable because the Rightship inspection had not yet occurred and the opening text of the recap only obliged Owners to provide the results at the latest by the time the Vessel sailed from Zhoushan, set to take place on 5 September 2020.
On 15 January 2021, the Tribunal issued its award in favour of Owners.
Section 67 application
Charterers challenged the substantive jurisdiction of the Tribunal by way of a section 67 application. The question was whether, as Charterers contended, the effect of the “subject” was that there was no arbitration agreement to resolve disputes, as well as no binding main agreement for the charter of the Vessel.
The Court found Charterers’ submissions to be “correct and compelling”, determining that the effect of the “subject” was that the recap was evidence of a non-binding putative contract, which would remain as such “unless and until the Charterers lifted their subject”. As Charterers never confirmed to Owners that “subjects” were lifted, there was no binding charterparty as at 3 September 2020, meaning Charterers were free to withdraw from the negotiations.
As to whether the “subject” precluded the arbitration agreement from coming into existence, the Court concluded as follows:
- The effect of the “subject” was to negate the Charterers’ intention to enter into a contract prior to the lifting of that “subject”, and there was no reason to think the parties intended any contractual commitment to arbitration.
- The placement of the “subject” before any contractual clauses and the use of bold indicated that it qualified everything after it, including the arbitration clause.
- While the separability doctrine is important, an arbitration agreement is not a mini agreement divorced from the main contract. It is part of the bundle of rights and obligations under negotiation, all of which in this case were subject to the “subject” provision.
- The conclusion that the fixture and arbitration agreement “stood and fell together” was reinforced by the fact that they were contained in the same document.
- Whilst the approach of Mr Justice Eder in The Pacific Champ  EWHC 470 (Comm) was not binding on the Court, it provided valuable guidance. The Court dismissed Owners’ attempts to distinguish the nature of the “subject” in that case and held that it was wrong to characterise this “subject” as simply requiring approval of a third party. Whilst the “subject” referred to the approval of two third parties – shippers and receivers – it was the Charterers’ confirmation that the “subject” was lifted that would give rise to a binding contract.
- Importantly, Charterers would be legally permitted to lift their “subject” even if one or both of the shipper and receiver had not given approval. It was equally open to Charterers to choose not to lift the “subject”, notwithstanding they may have received shippers and receivers’ approval.
- It was emphasised that this sort of “subject” is unlikely to be a performance condition given its relevance to the commercial viability of the charterparty to Charterers.
- The legal effect of the “subject” clause was not impacted by the fact that no other outstanding terms were left to be agreed.
- The Court’s conclusions were also supported by the decision and reasoning of Mr Justice Foxton in The Leonidas  EWHC 1986 (Comm) where the relevant “subject” was “stem/suppliers/receivers/management approval”. The Court found that any differences in the wordings of the “subject” in The Leonidas were insufficient to lead to a different result, and in fact, both cases involved “receiver’s approval”. Further, the Court held that “shipper’s approval” was not materially different to “supplier’s approval”. In The Leonidas, the Court had held the “subject” indicated the issues that still needed to be resolved and was therefore simply a negotiating signal of movement towards a deal. The Court agreed with Foxton J’s key conclusion that the charterer was not bound until it communicated a decision to be bound, i.e. the key pre-condition was a charterer lifting the “subject”.
In addressing the Tribunal’s analysis that the “subject” was qualified and limited by the “not be unreasonably withheld” provision from Clause 20.1.1 of the pro forma, the Court held that if Charterers had intended to impose criteria requiring the shippers and receivers’ approval to be reasonable, they would have made it clear in the operative provision (i.e. in the recap). The usual approach to construction and the wording of Clause 20 of the putative fixture that the charterparty was “otherwise as per … pro forma c/p with logical alteration” indicated that primacy was to be given to the expressly agreed terms in the recap. The Court highlighted that imposing the “not to be unreasonably withheld” qualification would be a significant commercial imposition because it would force Charterers to bear the risk of other parties acting unreasonably.
In light of the above reasons, the Court held that the Tribunal did not have substantive jurisdiction and the arbitration award was set aside.
Section 69 application
Charterers’ alternative application under section 69 of the Act was not required to be determined, given the section 67 conclusion, but the Court granted permission to appeal pursuant to section 69(3)(c)(ii) of the Act.
Mr Justice Jacob’s finding that the “subject shipper/receivers approval” negatived any intention to enter into contractual relations and left both parties free to withdraw unless and until the “subject” was lifted will be welcomed by the shipping community. It is in line with previous first instance decisions, and the decision:
- Recognises that fixing a vessel on “subjects” or “subs” is commonplace in the chartering market, the Court provided interesting commentary on its commercial purpose.
- Notes the importance of enabling charterers to reserve their position in terms of any contractual commitment to owners, pending the receipt of shippers and receivers’ approval.
- Confirms the general understanding existing in the chartering industry that a “subject” will not be watered down by reference to an incorporated pro forma.
- Confirms that the effect of such a “subject” is that no binding arbitration agreement is entered into until that “subject” is lifted.
Owners’ leave to appeal
On 7 February 2022, Owners were granted leave to appeal against the section 67 decision (under section 67(4) of the Act). Although Mr Justice Jacobs specifically stated that “I was not persuaded that the proposed appeal had a real prospect of success”, he allowed Owners’ appeal as “there was some other compelling reason for the appeal to be heard” pursuant to CPR 52.6(1)(b).
The Court reasoned that leave should be granted to provide clarity on issues of general public importance, primarily on the issue as to the inter-relationship between “subject” provisions in a fixture recap and the terms of a charterparty which were incorporated into the agreement, but also on the issue as to the jurisdiction of an arbitrator to decide whether or not a concluded contract was reached.
In short, it was held that “a decision of the Court of Appeal would provide guidance and certainty in these two areas”.