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Contracts (Rights of Third Parties) Act 1999

Nisshin Shipping Co. Ltd. -v- Cleaves & Co. Ltd. and Others

November 2003

This was the first case in which the courts were called upon to give effect to the Contracts (Rights of Third Parties) Act 1999 ("the Act"), the purpose of which is to enable a third party to a contract, under which one party has promised to confer a benefit on that third party, to enforce that promise against the promisor. The Act is of particular importance to brokers and to those who negotiate contracts under which one party promises to pay them commission.

These proceedings related to nine time charters which Cleaves & Co Ltd. ("the brokers") had negotiated on behalf of Nisshin Shipping Co Ltd ("the Owners"). Each of the charterparties provided for the payment of commission as follows:

"A commission of 2 per cent for equal division is payable by the vessel and owners to Messrs Ifchor SA Lausanne and Messrs Cleaves and Company Ltd. London on hire earned and paid under this Charter, and also upon any continuation or extension of this charter."

Each charterparty also contained a London arbitration clause. The Owners disputed their liability for brokers' commission, alleging that the brokers had committed a repudiatory breach of the agency relationship, which the Owners had accepted, thereby terminating the relationship. In order to resolve the dispute the brokers commenced arbitration under the charterparties, notwithstanding the fact that they were not a party to those contracts. The Owners challenged the arbitrators' jurisdiction to deal with the brokers' claim. However, in an interim final award published in January 2003, the arbitrators concluded that they did have jurisdiction by virtue of sections 1 and 8 of the Act. The Owners appealed to the Commercial Court.

The first question that Mr Justice Colman had to consider was whether the brokers came within section 1 of the Act, given that it was common ground that none of the commission clauses expressly provided that the brokers could enforce those clauses directly against the Owners. The issues were: (i) whether those clauses purported to confer a benefit on the brokers within the meaning of section 1(1)(b) of the Act; and (ii) whether section 1(2) rendered sub-section (1)(b) inapplicable because "on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party".

In relation to the first issue, the judge held that the effect of the commission clauses was to confer a benefit (to the extent of 1 per cent commission) on Cleaves alone. As to the second issue, the judge took the view that if the contracts were neutral - in the sense that they did not express any intention that the brokers should not be entitled to enforce the commission term - section 1(2) would not render sub-section 1(b) inapplicable. In his judgment these charterparties were indeed neutral in that sense.

The cases decided before the Act came into force showed that brokers could not sue owners direct for the non-payment of commission; the charterer was regarded as the trustee of the brokers' right to recover commission and that right could only be enforced if action was taken against the owners by the charterers. In those circumstances the Owners had submitted that the court should infer from this underlying trustee relationship that the Owners and charterers had intended that the brokers should not be entitled to avail themselves of the rights that the Act conferred on third parties. However, the judge rejected that submission. There were, he said, very strong grounds pointing against any mutual intention to confine the brokers to the old procedure and to deny them the right to rely on the Act. The judge concluded, therefore, that the brokers were entitled to enforce the commission clauses in their own right by reason of section 1 of the Act.

It remained necessary, however, to consider whether the enforcement of the brokers' rights was subject to the agreements to arbitrate contained in the charters. The brokers contended that, though they were not a party to the arbitration agreements, the effect of section 8 of the Act was that the brokers were deemed to be bound by the arbitration clauses for the purpose of enforcing their entitlement to commission.

The judge observed that it was apparent that the draftsman of section 8 had adopted an approach analogous to that which English law applied to assignments, including the concept that the assignee of a contractual right is bound by an arbitration clause in the contract (since he cannot assert the assigned right without also accepting the obligation to arbitrate: The "Jordan Nicholev" [1990] 2 Lloyd's Rep. 11). A dispute relating to non-payment of the brokers' commission clearly fell within the scope of all nine arbitration agreements and, by analogy with the position which would have applied had the charterers assigned their rights against the Owners in this respect to the brokers, the latter were to be treated by virtue of section 8 as standing in the charterers' shoes for the purpose of enforcing the commission clauses. The brokers were, therefore, entitled and, indeed, obliged to refer the disputes to arbitration, and the arbitrators had jurisdiction to determine them.

In the result, therefore, the judge arrived at the same conclusion reached by the arbitrators.

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