Contract formation v contract validity – separate applications of the separability principle?

Contract formation v contract validity – separate applications of the separability principle?


In November 2022, the Court of Appeal handed down its judgment in DHL Project & Chartering Ltd v. Gemini Ocean Shipping Co Ltd [2022] EWCA Civ 1555 ("The Newcastle Express"). The judgment provides useful guidance on the courts' likely approach to challenges to an arbitral tribunal's jurisdiction, under the Arbitration Act 1996 ("the Act").

The decision is particularly important for commercial parties considering the inclusion of arbitration clauses in their contracts.  The judgment provides insight into what the courts perceive to be the limits of the separability principle, the governing principle of arbitration law which holds that an arbitration agreement is, or must be treated as, a contract which is separate from the main contract of which it forms part.

The approach of Males LJ builds on the Supreme Court's approach to determining the governing law of the main and arbitration agreements in Enka v Chubb (on which see our briefing here). Like the majority's approach to governing law in that case, Males LJ suggests we should treat the issue of contract formation consistently between the main and the arbitration agreement. This points to a coherent approach to arbitral jurisdiction which may make London-seated arbitrations more attractive to commercial practitioners in the years to come.

The Legal Framework

The Newcastle Express concerned the application of the separability principle under s7 of the Act and its resulting effect on the jurisdiction of the arbitrator for the purposes of s30 and s67 of the Act.  The separability principle is the fundamental principle that where a binding agreement between two parties contains an arbitration clause, this clause creates a further, separate agreement to arbitrate, legally distinct from the parties' main agreement.  The arbitration clause shall not be regarded as invalid or ineffective because that other agreement is invalid, did not come into existence, or has become ineffective, and shall, for that purpose, be treated as a distinct agreement. 


August-September 2020:

Two parties, DHL, ("The Owner"), and Gemini ("The Charterer"), negotiated the charter of The Newcastle Express, a cargo ship, for a proposed voyage.

25 August 2020:

The broker circulated a Main Terms recap for the charterparty ("the Recap"). The Recap contained a subjectivity (a precondition) (meaning that while the main terms of the charterparty had been agreed, the parties had not yet entered into contractual relations pending the satisfaction or removal of that subjectivity by the relevant party). It was common ground that the Charterer had not "lifted the subject" of the "shippers/receivers approval".    

3 September 2022:

When approval had not been obtained, the Charterer wrote to the Owner to release the vessel. The Owner commenced an arbitration against the Charterer, on the basis that a binding charterparty and arbitration agreement had been concluded – and that by releasing the vessel, the Charterer had repudiated the charterparty.

Due to an error by one of the Charterer's employees, the Charterer was not informed that the dispute had been referred to arbitration. The arbitration commenced without its involvement. The arbitrator decided both that he had jurisdiction and that there was a binding charterparty which the Charterer had repudiated. He made a damages award in the Owner's favour, which was communicated to the Charterer.

On learning of the award, and of the existence of the arbitration, the Charterer made an application under s67 of the Act for a jurisdiction challenge, and under s69 of the Act, challenging the arbitrator's decision on a point of law. At first instance, the challenges were heard in one "rolled up" hearing in the High Court, by Mr Justice Jacobs, on 31 January 2022. On appeal, Males LJ gave judgment in the Charterer's favour, with which Birss and Snowden LJJ agreed.

At First Instance

For the Charterer it was submitted that the agreement was "subject to" approval, no such approval had been obtained, and therefore no agreement had been concluded by the parties. Because no contract had been formed, it was submitted that the arbitrator did not have jurisdiction to determine the dispute, and that the award should be struck down under s67.  

The Owner's argument had two parts. First, the language of s7 of the Act contemplated the wide application of the separability principle, such that it was unnecessary to consider the "subjects" provision at all in the context of a s67 challenge. The parties had clearly and expressly agreed to arbitration, and therefore, the arbitration clause survived the non-formation of the main agreement, and the s67 challenge should not be upheld.  Second, so far as s69 was concerned, it was argued that this statutory provision was only engaged where the arbitrator's decision was "obviously wrong". It was possible to construe the "subjects" provision in the Owner's favour so that it amounted to a "performance condition", not a precondition to a contract; there was thus no reason to interfere with the conclusion that the charterparty and arbitration agreement bound the parties.

Jacobs J found for the Charterer on the basis that the effect of the "subject" provision was to impeach the formation of both the charterparty and the arbitration agreement.  He held that where a subject has not been lifted, it "negates the Charterers' intention to enter into any contract at all", including an agreement to arbitrate. This was a case where the contract and arbitration agreement "stand or fall together".

Arguments On Appeal

The Owner appealed on the primary ground that Jacobs J had erred in allowing the s67 challenge, developing its argument at first instance into five propositions of law:

  1. Where parties have made or purported to make an agreement containing an arbitration clause, the court should start with the presumption that as rational business people they intend all disputes arising from their relationship to be determined in a single arbitration, even if there is a dispute as to the existence or validity of the main agreement.

  2. That presumption can only be displaced by very clear language or by circumstances which directly relate to and impeach the validity of the arbitration clause.

  3. There is no reason why the invalidity or even non-existence of the purported main agreement should necessarily entail the invalidity of the arbitration clause within it.

  4. There may be cases where, on their special facts or language, the main agreement and the arbitration agreement will sink or swim together; but there will need to be clear and powerful reasons for this to be the case.

  5. The function of the court is to support arbitration agreements and not to undermine them.

The Charterer restated its original argument, suggesting that the question of whether an arbitration agreement has been entered has to be answered by applying ordinary principles of contract formation, and while parties who conclude an arbitration agreement are generally presumed to favour one-stop adjudication, this presumption says nothing about whether an arbitration agreement has been entered into in the first place.  In this case, the "subjects" clause rendered both the main agreement and the arbitration clause non-binding, and thus the arbitrator did not have any jurisdiction to determine the dispute.

Judgment of Males LJ

Males LJ upheld the first instance decision. In doing so, however, he took Jacob J's reasoning in two competing directions.  The first direction, explored most pertinently in paragraphs (47), (62), (72), and (80)(5), appears to draw a line in the sand between two situations in which the separability principle is sometimes invoked.

The first situation is where the question in issue is the arbitral tribunal's jurisdiction to determine a question of contract validity, i.e., where an otherwise binding contract is rendered void or voidable. The second situation is where the question is one of contract formation, i.e., where no main contract containing an arbitration clause has been concluded at all.

Males LJ noted that it was with only the first of these two situations that the House of Lords dealt in the Fiona Trust case (the leading judgment on separability), where it held that an arbitration agreement survived the invalidation of the main contract by reason of the agent of one of the parties having been induced to enter the contract by bribery.  Males LJ suggested that "where the issue is one of contract formation, it will generally impeach the arbitration clause ... but where the issue is one of contract validity, that is not necessarily so" (47).

His reasoning, here, points towards a general rule: where the main agreement is not formed, the arbitration clause generally sinks with it; conversely, if the main agreement is invalid, the arbitration agreement may survive the main agreement's invalidation.

The judgment also points in a second direction, more in keeping with the Fiona Trust decision, which suggests that the non-existence of the main contract does not necessarily mean that an arbitration agreement is also non-existent.  Rather, the separability principle means that the question of contract formation must be asked twice, once in relation to the main contract and again in relation to the arbitration agreement.  In most cases the same answer will be given to both questions, but it is theoretically possible for parties to conclude a binding agreement to arbitrate even if they have not yet agreed on the main contract.   


Parties negotiating terms of an agreement that are "subject to contract" should be advised that their arbitration clause may not be binding unless both parties specifically agree to be bound by it prior to entering the main contract. 

Where it is argued that an arbitration clause is not binding because there is no contract, it may fall to the courts to determine the issue, unless, as the Court of Appeal referred to at (86), and as is suggested above, the parties can make an ad hoc agreement to submit the issue whether a binding contract has been concluded to arbitration, without prejudice to any issue whether such an ad hoc agreement is necessary.  As Males LJ noted, "there could be no serious objection to that course.  One party wants to arbitrate its claim, while the other party was prepared to arbitrate any dispute if a contract had been concluded and can therefore have no sensible objection to arbitration as a process to resolve a dispute of this nature".   

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