Arbitration Clauses/Contract (Rights of Third Parties) Act 1999

The Contracts (Rights of Third Parties) Act 1999 and enforceability of arbitration clauses on third parties

In the first case on the Contracts (Rights of Third Parties) Act 1999 the Commercial Court has held that the wording of a simple two-party arbitration clause does not rebut a presumption that contracting parties intended to confer a benefit on a third party. The Court further found that notwithstanding the limitations of the arbitration clause the third party would still be bound to enforce his rights by arbitration.

Background

In Nisshin Shipping Company Limited -v- Cleaves & Co Limited & Others [2003] EWHC 2602 (Comm) shipowners' Nisshin Shipping Company challenged the jurisdiction of an arbitration tribunal to determine claims by the brokers to commission in respect of nine time charters negotiated by the brokers. The brokers were not party to the time charters. Therefore, they relied on the Contracts (Rights of Third Parties) Act 1999 ("the 1999 Act"). The relevant time charters did not contain express provisions entitling the brokers to commission. Accordingly, the brokers could not rely on section 1(1)(a) of the 1999 Act. The brokers instead relied on section 1(1)(b) on the basis that a term within the charters "purported to confer a benefit on them".

Section 1(1)(b) gives rise to a presumption that a term which purports to confer a benefit on a third party can be enforced by that third party. However, that presumption can be rebutted if, in accordance with section 1(2), "… on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party".

The shipowners, among other arguments, relied on the fact that the arbitration clauses in the time charters did not make any express provision for enforcement by the broker of a claim for commission. The relevant arbitration clauses clearly envisaged disputes between two parties (namely the shipowner and relevant charterer).

Decision

The Judge considered that in relation to the question of an intention to confer a benefit on a third party, the wording of the arbitration clause was of little or no materiality. The Commercial Court took the view that the purpose of the arbitration clause was to express the parties' mutual intention that disputes should be arbitrated and that the absence of express wording that a broker's claim should also be brought by arbitration was not inconsistent with a benefit being conferred on the broker at all. The Court further found that a lack of positive indication that the parties did intend the brokers to have enforceable rights was not sufficient to oust the presumption under section 1(1)(b) and that an existing mutual intention to create a trust of a promise in favour of the brokers did not mean that the parties to the charters did not intend for rights under the 1999 Act also to be available to the broker.

Having found that a right was conferred upon the broker, the Commercial Court then considered whether the enforcement of those rights was subject to the arbitration agreements in the time charters. In this respect, Section 8 of the 1999 Act provides that a right under section 1 to enforce a term is subject to any term for the submission of disputes to arbitration. This introduces the concept of the conditional benefit under the 1999 Act: the benefit of a right conferred on a third party is conditional on the third party's right being enforced by arbitration. Accordingly, the Court held that not only did the arbitral tribunal have jurisdiction to determine the claims by the broker but the broker was bound to pursue its claims by way of arbitration.

Comment

The case makes it clear that if parties to a contract wish to ensure that a benefit is not conferred upon third parties, the parties should ensure that express wording is adopted in order to rebut a presumption that might otherwise be made under section 1(1)(b) of the 1999 Act.

The case also makes it clear that the 1999 Act does not require a specific arbitration clause expressly requiring third parties to enforce their claims by way of arbitration in order to bind those third parties to arbitration. This is entirely consistent with the philosophy behind the 1999 Act that rights conferred on third parties should not fall outside any arbitration clause to the contract on the basis that the parties have chosen arbitration as the method by which to enforce their obligations.

For further information please contact Guy Pendell at guy.pendell@cms-cmck.com