Nisshin Shipping v. Cleaves

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DMC/SandT/03/50
Nisshin Shipping Co Ltd v Cleaves & Co Ltd & Others
London Commercial Court: Colman J: 7 November 2003
Michael Ashcroft, instructed by Jackson Parton, for Nisshin (Applicant)
Philippa Hopkins, instructed by Ince & Co, for Cleaves (Respondent)
PRIVITY OF CONTRACT: CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 ss.1 and 8: THIRD PARTY'S RIGHT TO ENFORCE CLAIM AGAINST PROMISOR BY ARBITRAL REFERENCE: ARBITRATORS' JURISDICTION TO DETERMINE BROKER'S CLAIMS FOR COMMISSION UNDER CHARTERPARTIES
Summary
The case, apparently the first of its kind under the 1999 Rights of Third Parties Act, raised important questions for the shipping industry as to how a chartering broker, as a third party, could enforce a promise of a benefit for him in the charterparties, where they contained an arbitration clause. The shipowner applied under s.67 of the 1996 Arbitration Act, to challenge the arbitrators' jurisdiction to determine the broker's claim for commission allegedly due under a number of time charters. The judge dismissed the application and upheld the arbitrators' decision that the 1999 Act entitled the broker to enforce his claim against the owner as promisor, by means of arbitration.

DMC Category Rating – Developed

Case note contributed by Ann Moore, Law Correspondent for Fairplay International Shipping Weekly. Ann Moore is a contributor to this website.

Facts
Cleaves negotiated nine time charters on behalf of Nisshin Shipping, each providing for payment of commission to Cleaves as broker, and containing an arbitration clause. The arbitration clauses referred to disputes between 'the parties to the charterparty', or between 'Owner and Charterer' but, although the wording varied, it was wide enough to cover a claim by the charterers against the owner for failing to pay the promised commission.

Cleaves claimed commission from the owner, but Nisshin refused to pay, alleging the broker was in repudiatory breach of the agency relationship because its controlling interest had become involved at a senior level with one of Nisshin's competitors. The owner was said to have accepted that as terminating the contractual relationship, and with it Cleaves’ entitlement to commission.

Cleaves referred the dispute to arbitration although it was not a party to the arbitration agreements. Nisshin contended that under sections 1and 8 of the 1999 Rights of Third Parties Act the tribunal had no jurisdiction to determine the chartering broker's claims for the commission said to be due under the charterparties. In a joint interim award dated 24 January 2003, maritime arbitrators ruled that they did have jurisdiction under sections 1and 8 of the 1999 Act.

Nisshin applied to the Commercial Court under the 1996 Arbitration Act, s.67, for a declaration that the arbitrators had no jurisdiction to determine Cleaves' claims.

Judgment
(1) Was the respondent within section 1 of the 1999 Act?
Section 1. reads "... a person who is not party to a contract (a 'third party') may in his own right enforce a term of the contract ..." as qualified by subsections (1)(a) and (b).
Nisshin first contended that the wording of the commission clauses in four of the charterparties was insufficient to confer a benefit on Cleaves alone: "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".

The judge ruled that the identity of the payee, and the amount to be paid, was clear. He held that: "the effect of the clause was to confer a benefit to the extent of 1 per cent commission on Cleaves alone."

Nisshin further argued that the parties did not intend the commission clause to be enforceable by Cleaves, so subs.1(1)(b) was nullified by subs.1(2). Subsection 1(1)(b) provides that a 'third party' may enforce a term of the contract if "... subject to subsection (2), the term purports to confer a benefit on him". Subsection 1(2) provides that subs.(1) (1)(b) "does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party."

Mr Justice Colman rejected Nisshin's first argument under this heading that, as some of the arbitration clauses used different standard wordings, they did not all explicitly provide for the broker enforcing a commission claim. He held that the broker's ability, under the Act, to enforce his right to commission was not affected by the absence of an express provision.

Nisshin claimed, secondly, that the contracts did not positively indicate that the parties actually intended Cleaves to have enforceable rights, or any mutual agreement for Cleaves to have the right to claim against Nisshin as if it were a party to the contract.

Colman J rejected this argument on the grounds that subs.1(2) did not provide that subs.1(1)(b) was to 'disapply' unless the parties expressed a positive intention that the benefit term should be enforceable by a third party. On the contrary, it only disapplied if it appeared the parties expressly did not intend third party enforcement. If, as in this case, the contract was neutral in that it did not express any intention against the broker's entitlement to enforce the term, "subsection 1(2) does not disapply subsection 1(1)(b)".

The owner's third argument was that the 1999 Act had not altered the previous position - that the owner and charterers mutually intended to create a "trust of a promise" in the broker's favour. This could be enforced against the owner by the charterers as trustees, who must be joined by the broker as co-claimants.

The authority for this 'trustee relationship', said the judge, was Les Affrèteurs Réunis SA v. Leopold Walford (London) Ltd [1919] AC 801. In that case, the House of Lords approved the decision in Robertson v. Wait (1853) 8 Ex 299 that "in such cases charterers can sue as trustees on behalf of the broker". A person making a contract for someone else's benefit was in effect acting as a trustee for that person, who was then entitled to that benefit.

Colman J said that under the 1999 Act "the charterer is no less the trustee of the owner's promise to pay the commission, having regard to the fact that the charterer contracts for payment of the commission on behalf of a non-contracting party." The difference now was the broker's statutory direct right of action, as a non-contracting party on whom the contract purported to confer a benefit. This got rid of the "very cumbersome and inconvenient" procedure based on the "cumbrous fiction" of the trustee relationship.

Nisshin's argument was "unsustainable", because it depended on inferring - from the existence of the underlying trustee relationship - that the owner and charterers intended the broker should not be entitled to the benefits of the Act. It was illogical to think that once a statutory facility had been introduced, the pre-existing procedure would automatically apply, and in some circumstances might mean the broker could not obtain his entitlement. There were therefore "very strong grounds" against any mutual intention to deny the broker's right to rely on the Act.

Colman J therefore held that the arbitrators were right, and Cleaves was entitled to enforce the commission clauses in its own right by reason of section 1 of the 1999 Act.

(2) Could the broker enforce its rights at arbitration, under the charterparty clauses?
Section 8 : "Where (a) a right under s.1 to enforce a term ... is subject to" an arbitration agreement, which is (b) within the Arbitration Act 1996, Part I - "the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards disputes between himself and the promisor relating to the enforcement of the substantive term by the third party."

Nisshin pleaded that the brokers' rights to commission were not "subject to the arbitration agreements" as the arbitration clauses contained no clear wording to "shut out the parties from the courts", and it would be wrong to presume such an intention.

The judge explained that the neither the Law Commission's original text, nor the bill as introduced in the House of Lords provided expressly for arbitration. Section 8 was added at the Report stage in the House of Commons, and the Lord Chancellor’s Department issued Explanatory Notes to assist the debate. Note 33 advised that:

"Section 8 ensures that, where appropriate, the provisions of the Arbitration Act 1996 apply in relation to third party rights under this Act. Without this section, the main provisions of the Arbitration Act 1996 would not apply because a third party is not a party to the arbitration agreement between the promisor and the promisee... This approach is analogous to that applied to assignees who may be prevented from unconscionably taking a substantive benefit free of its procedural burden (see, for example, DVA v. Voest Alpine, The 'Jaybola' [1997] 2 Lloyd's Rep 279)..."

Although the Notes did not have the force of law, Colman J said the courts were entitled to assume that the s.8 wording was enacted by Parliament "with some regard to the ministerial explanation". The Note's reference to The 'Jaybola' was "clearly directed" to the meaning of the words (subs.8(a)): "a right under section 1... is subject to" an arbitration agreement. The earlier case of The 'Jordan Nicholev' [1990] 2 Lloyd's Rep 11 had stated the principle that where the cause of action has been assigned, under s.136 of the Law of Property Act 1925, "it will, in the absence of some agreement to the contrary include ... all the remedies in respect of that cause of action. The relevant remedy is the right to arbitrate and obtain an arbitration award in respect of the cause of action."

In the present case, the judge continued, the promise under the charterparties to pay the broker's commission "was clearly a promise made to and enforceable by the charterers." Failure to perform would "clearly fall within the scope of all the arbitration clauses." Under the assignment analogy, the third party was not stated to be a party to the arbitration agreement, but became in effect a statutory assignee of the charterers' right of action against the owner. Under subs.1(4) he was confined to the promisees' (charterers') contractual means of enforcement - arbitration - and was to be treated as standing in the promisees' shoes "for the purpose only of the enforcement of the substantive term". The wording of subs.1(a) entirely reflected the assignment analogy referred to in the Notes.

Having held that all the arbitration agreements were apt to cover a dispute between owner and charterers as to commission payments, Colman J concluded that Cleaves was both entitled, and obliged, to refer the disputes to arbitration, and that the arbitrators had jurisdiction to determine them.

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