The High Court of England and Wales has ruled that the doctrine of separability in service out of jurisdiction cases should not extend to litigation cases where there is no application of the Brussels Regulation.

Introduction

In a judgment dated 24 November 2009, the High Court of England and Wales in Rimpacific Navigation Inc v Daehan Shipbuilding Co. Ltd [2009] EWHC 2941 (Comm) rejected the Claimant’s attempt to apply the doctrine of separability governing arbitration clauses equally to jurisdiction clauses in litigation cases.

Mr Justice David Steel (presiding) held that the doctrine of separability in Section 7 of the Arbitration Act 1996 (the “Act”) and in Fiona Trust & Holding Corporation and others v Privalov [2007] UKHL 40 does not extend to jurisdiction clauses in cases where there is no application of the Brussels Regulation, when parties to the dispute were domiciled outside the European Union. Steel, J commented that the Civil Procedure Rules (CPR) governing jurisdiction clauses are “quite distinct” from the provisions of the Act and place less emphasis on the existence of any clause.

McDermott represented the Defendant, Daehan Shipbuilding Co. Ltd.

The Facts of Daehan

The case relates to charterparties in which the Claimant agreed to charter two vessels to the Defendant. Although the charterparties contained arbitration clauses, they included a guarantee letter signed by Mr Oh, a man identified as the CEO/President of Daehan Shipping. The guarantee contained the jurisdiction clause stating that the guarantee shall be governed by English law and that any disputes arising under the guarantee shall be referred to the English courts.

In 2008, the dry freight market collapsed and the charterers failed to pay hire due under the charterparties. The Claimant obtained arbitration awards in respect of the outstanding hire. The Claimant also issued claim forms against the Defendant under the guarantees and obtained permission to serve them on the Defendant in South Korea. The Defendant issued proceedings in South Korea for a declaration of non-liability under the guarantees. The Defendant argued that Mr Oh had not obtained board approval to authorise the guarantees, a requirement under South Korean law. The Defendant contended that under the relevant English law, the person signing a contract is acting “in accordance with law of the territory in which the company is incorporated”. In other words, South Korean law would apply to that issue, meaning that the English courts would have no jurisdiction in determining the claim.

Proceedings were brought in the High Court of England and Wales where two applications were heard: an order applied for by the Defendant pursuant to CPR 11.1 that the English court has no jurisdiction to determine the claims, and an order applied for by the Claimant for an anti-suit injunction restraining the Defendant from pursuing related proceedings issued in South Korea. The Claimant was concerned that if the matter headed to South Korea, the judges there would be likely to set aside the award on the basis that the main contracts were invalid under South Korean law.

The Issue of Separability

At the heart of the dispute between the parties is the Defendant’s contention that the guarantee letters on which the Claimant seeks to rely are not binding. Thus the first issue that arises is whether the Claimant has a good arguable case that there is jurisdiction under the CPR governing cases in which service out of the jurisdiction is necessary, specifically CPR 6.36 and 6BPD 3.1(6). Under these rules there are a number of constituent elements which a claimant would have to prove (“Gateways”):

(a) the contract was made within the jurisdiction;

(b) the contract was made by or through an agent trading or residing within the jurisdiction;

(c) the contract is governed by English law; or

(d) the contract contains a term to the effect that the court shall have jurisdiction to determine any claim in respect of the contract.

This in turn gives rise to a threshold point raised by the Claimant: is this issue to be determined by reference to the existence and validity of the guarantees or to the existence and validity of the jurisdiction clause? In other words, does the doctrine of separability apply to this case? If it does, then the jurisdiction clause in the guarantees is regarded as a separate, independent agreement, which will not necessarily be impeached by the factors which affect the validity or existence of the “host” guarantee contract.

The Claimant relied on Fiona Trust to establish that even if the underlying guarantees were voidable, the jurisdiction clause would survive by virtue of the doctrine of separability. In Fiona Trust, it was held by the House of Lords that an arbitration agreement will be impeached only if there are independent vitiating factors which directly affect the arbitration agreement, and not merely the main host agreement. Even in situations where bribery on the part of an agent is alleged to make a contract unauthorised, the arbitration clause remains unaffected.

The Claimant also relied on Deutsche Bank AG v Asia Pacific Broadband Wireless Communications Inc [2008] EWCA Civ. 1091 where it was held that the doctrine of separability applies equally to jurisdiction clauses as to arbitration clauses. Thus, the Claimant contended by analogy that the Act also applies to jurisdiction clauses similar to those seen in the Daehan guarantees.

The Defendant maintained that the correct approach when assessing whether the doctrine of separability applies to out of jurisdiction cases is to apply the “good arguable case” test found in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 that the contract being sued upon contains a term to the effect that the court shall have jurisdiction to determine the claim in respect of the contract. On this basis Fiona Trust and Deutsche Bank can both be distinguished as there was no arbitration clause in the guarantees and the jurisdiction in the latter case was based on Article 23 of the Judgments Regulation – now the Brussels Regulation – in respect of which, permission of the court to serve out of the jurisdiction was not required.

The reasoning in Seaconsar was followed by the High Court in Marubeni Hong Kong and South China Ltd v Mongolia [2002] 2 All ER (Comm) 873 where it was held that the relevant guarantee which contained an English jurisdiction clause had been executed without actual or ostensible authority. The relevant contract for the purposes of satisfying the “good arguable case” was the guarantee and not the jurisdiction agreement. In neither of these service out of jurisdiction cases is there any hint or argument that the concept of separability has any application whatsoever (see also Vitol SA v Arcturus Merchant Trust Ltd [2009] EWHC 800 (Comm)).

Following Seaconsar and Marubeni, the Defendant submitted that it is not enough for the Claimant to assert simply that if there was a contract, it would contain a jurisdiction clause that would automatically be separable from the host guarantee. The Defendant maintained that as Mr Oh, who signed the guarantee, lacked the requisite authority, and as the jurisdiction clause was not separable, it followed that the invalidity of the guarantees impeached the validity of the jurisdiction clause contained in the guarantees, and as such the English courts had no jurisdiction to determine the case under CPR 11.1.

The Decision

The court following Seaconsar and Marubeni, agreed with the Defendant that the test for satisfying the gateways is that a “good arguable case” had to be made that the underlying guarantee contracts existed. In determining whether there is a “good arguable case”, the relevant contract for the court in determining the existence and validity of the guarantee is the host guarantee contract as a whole and not the individual jurisdiction clause. The doctrine of separability, applicable under the Arbitration Act and developed in Fiona Trust and Deutsche Bank, therefore did not apply in the present context as there was neither an arbitration clause nor an exclusive jurisdiction clause falling under the Brussels Regulation. The doctrine of separability therefore has no application to cases where the court’s permission is required to serve out of the jurisdiction.

Comment

It is clear that the doctrine of separability cannot be used by claimants to short-cut or bypass the requirements for service out of jurisdiction cases clearly set out in Seaconsar. Any other approach would give rise to the surprising if not absurd result that a claimant would have to show a good arguable case as to the existence of a contract for Gateways (a) – (c) but not for the purposes of Gateway (d) of CPR 6BPD 3.1(6) – a contract contains a term to the effect that the court shall have jurisdiction to determine any claim in respect of the contract. On this basis, if claimants relied on Gateway (d) to effect service out of jurisdiction, they could effectively ignore the “good arguable case” test by virtue of the doctrine of separability. This application would be contrary to the reasoning established in Seaconsar and there is no basis in the wording of 6BPD 3.1(6) for any such intention. Indeed, the editors of the White Book (Civil Procedure 2009) describe Seaconsar as one of the “two most important authorities” on the principles on which permission to serve out of jurisdiction is granted (the other authority is Spiliada Maritime Corp v Cansulex [1987] AC 460).

The decision in Daehan reminds us that the doctrine of separability is simply a “legal fiction” that was developed in order to make arbitration a more practical and efficient method of dispute resolution. It was never intended to apply to litigation cases where the Brussels Regulation does not apply. Extending this fiction in order to force the courts to fetter their discretion in considering whether there is a “good arguable case” in service out of jurisdiction cases is therefore untenable.