Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP & Ors

A third party’s statutory ability to rely on a contractual exclusion of liability may amount to enforcement under section 1(6) of the Contracts (Rights of Third Parties) Act 1999. That does not itself give the third party a right to require arbitration. Under section 8(1), an arbitration clause may qualify a substantive third-party benefit, but it does not convert that qualification into a unilateral procedural right. A right under section 8(2) arises only where the contract itself confers it. Clear contractual language is required before a third party is treated as bound by an arbitration process concerning an exclusion clause. An arbitration clause confined to disputes which the contracting parties cannot resolve did not confer that right on non-party managers.

Fortress, as assignee of a limited partner’s interest in an English limited partnership, sued the fund’s managers and others for alleged wrongdoing connected with a restructuring of the fund. The managers were not parties to the partnership deed, but were entitled to invoke its contractual exclusion and indemnity provisions through clause 17.14 and the Contracts (Rights of Third Parties) Act 1999.

Blair J refused the managers’ application to stay the claims under section 9 of the Arbitration Act 1996, although he stayed related claims against parties to the deed: [2012] EWHC 1486 (Comm). The managers appealed. The central issue was whether sections 8(1) or 8(2) of the 1999 Act made them parties to the deed’s arbitration agreement, enabling them to compel Fortress to arbitrate its claims.

1. Appeal dismissed unanimously. Tomlinson LJ, with whom Toulson and Pill LJJ agreed, upheld the refusal of a stay, although not wholly for Blair J’s reasons.

2. Section 1(6) of the Contracts (Rights of Third Parties) Act 1999 treats a third party who relies on an exclusion or limitation of liability as enforcing that term. The availability of section 8(1) could therefore not be rejected simply because the exclusion was a defence rather than a cause of action. Whether the benefit was subject to arbitration remained a matter of construction.

3. Section 8(1) addresses a conditional benefit. It permits a promisor to make a third party’s enforcement of a substantive contractual right conditional on arbitration. It does not give the third party a positive procedural right to require a claimant, who has chosen to sue it, to arbitrate that claim. Treating the managers as parties to arbitration concerning the exclusion would potentially bind them to an arbitration which they had not initiated. Such a far-reaching result required very clear contractual language, which the deed did not contain.

4. Section 8(2) concerns a different arrangement: a contractual grant to the third party of a unilateral right to require arbitration. Clause 17.11 applied to disputes which the parties hereto could not resolve. Read with the deed’s definition of “parties”, it did not confer an arbitration right on the non-party managers. Its governing-law wording could not expand that arbitration provision.

5. The court accepted that Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Law Reports 38 supported arbitration where a third party sought to enforce an indemnity. Its assignment analogy did not establish that reliance on an exclusion clause gave the third party a right to compel arbitration of the entire underlying dispute. Tomlinson LJ also considered that the contents of a defence were not ordinarily relevant to a timely section 9 application, but that point did not affect the result.

• Court of Appeal (Civil Division) — dismissed the managers’ appeal and upheld the refusal of a stay on different reasoning: [2013] EWCA Civ 367.
• High Court of Justice, Commercial Court — Blair J refused a stay of the claims against the managers, while staying the relevant claims against parties to the partnership deed: [2012] EWHC 1486 (Comm).