Nisshin Shipping Co Ltd. v Cleaves & Company Ltd. & Ors

A contractual term purports to confer a benefit on an identified third party where, on its proper construction, it provides for payment to that third party. Under section 1(2) of the Contracts (Rights of Third Parties) Act 1999, contractual neutrality does not rebut the third party’s right of enforcement. The contract must indicate an intention against enforcement.

Where the promisee could enforce the substantive term only through arbitration, section 8 treats the third party as a party to that arbitration agreement for enforcement of the term. It is enough that the arbitration agreement covers a dispute between promisor and promisee about performance of the term. The agreement need not expressly contemplate arbitration by the third party.

Nisshin Shipping Co Ltd applied under section 67 of the Arbitration Act 1996 for a declaration that arbitrators lacked jurisdiction over commission claims made by Cleaves & Company Ltd. Cleaves had negotiated nine time charterparties for Nisshin. Each charterparty promised commission to Cleaves and contained an arbitration clause, although Cleaves was not a party to the contract or arbitration agreement.

The arbitral tribunal held that sections 1 and 8 of the Contracts (Rights of Third Parties) Act 1999 gave Cleaves a direct right to enforce the commission terms and required arbitration. The court had to decide whether the commission clauses conferred an enforceable benefit and, if so, whether Cleaves was entitled and obliged to enforce it through arbitration.

1. The application was dismissed. Cleaves could enforce the commission clauses under section 1 of the Contracts (Rights of Third Parties) Act 1999. Section 8 required those claims to be referred to arbitration, and the arbitrators had jurisdiction.
2. A clause requiring a two per cent commission “for equal division” between two named brokers conferred a separate one per cent benefit on each. Nothing indicated that the whole commission was payable first to one broker or that enforcement had to be joint. A joint and indivisible right would lack a conceivable commercial purpose without much clearer wording.
3. Section 1(2) asks whether the contract indicates that the parties did not intend third-party enforcement. It does not require a positive indication that they intended such enforcement. Contractual neutrality therefore leaves the right under section 1(1)(b) intact. The arbitration clauses’ references to owners, charterers and contractual parties did not show an intention to deny the brokers direct enforcement.
4. The pre-existing trust analysis recognised in Les Affreteurs Reunis SA v Leopold Walford (London) Ltd [1919] AC 801 did not rebut the statutory right. Although the charterer remained trustee of the owner’s promise to pay commission, the availability before 1999 of only that cumbersome enforcement mechanism did not imply an intention to exclude the additional direct remedy created by Parliament.
5. Section 8(1) embodies a conditional-benefit approach analogous to assignment. If the promisee could enforce the substantive term only by arbitration, the third party stands in the promisee’s shoes for that limited purpose. It is sufficient that the arbitration agreement would cover a dispute between promisor and promisee concerning performance of the substantive term. The parties need not have expressed a separate intention that the third party could invoke the arbitration agreement.
6. All nine arbitration agreements were wide enough to cover a dispute between owners and charterers about payment of the brokers’ commission. Cleaves was consequently both entitled and obliged to arbitrate its commission claims.
7. This construction did not infringe article 6(1) of the European Convention on Human Rights. The legislation supplied a remedy previously unavailable to the third party while attaching the contractual means of enforcing it. Article 6 did not require an enforcement facility unavailable to both the third party and the promisee before the legislation.

• High Court (Commercial Court): The court dismissed Nisshin’s jurisdictional challenge and upheld the arbitrators’ conclusion that Cleaves was entitled and obliged to arbitrate its claims.
• Arbitral tribunal: By an interim final award dated 24 January 2003, the tribunal held that sections 1 and 8 of the Contracts (Rights of Third Parties) Act 1999 gave it jurisdiction over the commission claims.