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Arbitration and the limits of separability - the Newcastle Express

Posted: 03/01/2023

The Court of Appeal’s recent decision in the case of the ‘Newcastle Express’, which concerned a charter party that was never agreed, has clarified the long-debated limits of the doctrine of separability.

‘Arbitration, if any, London.’ There’s more to an arbitration clause than meets the eye. It is the means by which parties oust the jurisdiction of the courts and create the jurisdiction of the tribunal. The clause also identifies the parties’ choice of a seat for the arbitration, which is normally interpreted as a tacit selection of the home state’s procedural law.

Accordingly, parties opting for London may expect the arbitration to physically or nominally take place there, and for the provisions of the Arbitration Act 1996 to apply. The English courts will be available to give support if needed, for example, by ordering the preservation of evidence. English law will also imply a requirement that the arbitration is confidential.

Under the internationally renowned doctrine of separability, an arbitration clause within a contract is treated as a separate agreement for the purposes of determining the validity of that contract. This concept first appeared in Heyman v Darwins [1942] AC 356 in which the House of Lords held that, although the parties’ contract was terminated by an accepted repudiation, the arbitration clause survived, which meant the parties had to resolve their dispute by arbitration.

Separability ensures the effectiveness of arbitration by preventing parties from deploying tactical arguments to undermine the jurisdiction of the arbitration. Because of separability, there is no utility in trying to hinder the arbitration by contending that the contract containing the arbitration clause was terminated for breach of a condition, or voidable for misrepresentation. 

The Court of Appeal extended the doctrine further in Harbour Assurance Co (UK) Ltd v Kansa General International Insurance Co Ltd [1993] 1 Lloyd's Rep 455 in holding that the arbitration agreement survived even when the underlying contract was void for illegality. Thereafter, Parliament sought to codify the law in section 7 of the Arbitration Act 1996:

‘Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.’

In the landmark case of Fiona Trust v Privalov [2007] UKHL 40, the House of Lords held that even though the subject charter party was procured by bribery and therefore void ab initio, that was not enough to impeach the arbitration agreement. There was no evidence that the arbitration agreement itself was procured through bribery, and so it survived to determine the mode of dispute resolution.

After decades of expansion, and having been codified in such broad language, it was a matter of speculation what, if any, were the limits of the doctrine of separability.

The Court of Appeal has now set the matter straight in The Newcastle Express [2022] EWCA Civ 1555, which concerned a charter party that never came into existence. The fixture recap was stated to be subject to charterers’ confirmation of shippers’/receivers’ approval, which was never received. The charterers therefore walked away.

The shipowners, however, purported to hold them in repudiatory breach and appointed an arbitrator pursuant to the London arbitration clause in that charter. The arbitrator relied on another clause in the incorporated pro forma terms to the effect that the shippers’ and receivers’ approval could not be unreasonably withheld. Accordingly, the owners won the arbitration.

The charterers were, however, successful before the High Court and Court of Appeal, who found that the arbitrator had no jurisdiction, as there was no contract agreeing to arbitration. The provision ‘subject shippers’/receivers’ approval’ was a pre-condition to the conclusion of a binding charter party, and one to which the incorporated pro forma clause had no application, as the clause was concerned with a vessel to be nominated, whereas the subject charter was for a named ship. 

It would have been a step too far to bind a party to an arbitration clause they never agreed to. Although the arbitration clause was a separate contract, that contract could only be made with the making of the main contract, which never happened.

In reaching their decision, the Court of Appeal took the opportunity to resolve any ambiguity over the scope of separability. The doctrine applies to questions of contract validity only, such as whether the contract is void for illegality or fraud. In a dispute over the validity of a contract containing an arbitration clause, the clause will stand as a separate agreement binding the parties to resolve their dispute before the arbitrators.

Separability does not however apply to questions of contract formation. In a dispute over whether a contract ever came into existence, such as whether there ever was a meeting of the minds, the matter is beyond the arbitrators’ jurisdiction, and must be decided by the courts.

Of course, section 7 of the Arbitration Act 1996 still states that ‘an arbitration agreement which … was intended to form part of another agreement … shall not be regarded as … non-existent … because that other agreement … did not come into existence …, and it shall for that purpose be treated as a distinct agreement.’ The Law Commission is currently undertaking a consultation with a view to reforming certain elements of the Arbitration Act 1996. This may be an opportune time to include section 7 within that consultation.

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