Introduction
The Contracts (Rights of Third Parties) Act 1999 represents a major shift in English contract law. It allows a third party to enforce contract terms if specific criteria are met, even if they are not directly involved in the agreement. This law adjusted the traditional privity rule, broadening who can act on contractual terms. Conditions include explicit language in the contract allowing third-party claims and identifying the third party. This article examines the use of the 1999 Act, particularly concerning arbitration clauses, as discussed in Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38.
The Facts of Nisshin Shipping
The dispute arose from charterparty agreements between Nisshin Shipping and charterers, which contained arbitration clauses. Cleaves & Co, shipbrokers involved in negotiations, sought to use these clauses to claim unpaid commissions. The Court of Appeal evaluated whether the 1999 Act permitted Cleaves & Co, as a third party, to initiate arbitration.
Section 1(1)(b) of the 1999 Act: Intention to Provide a Benefit
The court examined section 1(1)(b) of the 1999 Act, which allows third-party enforcement if a contract term is intended to benefit them. The central question was whether the charterparties’ arbitration clauses aimed to benefit Cleaves & Co.
The Presumption of Enforceability
Lord Justice Rix’s ruling established a default position favoring third-party enforcement when a contract term (such as an arbitration clause) clearly benefits a third party. This position can be overturned if the contract indicates the parties opposed such enforcement. This method simplified evaluating third-party rights.
Application to Arbitration Clauses
The court determined the arbitration clauses in the charterparties aimed to benefit Cleaves & Co by providing a method to resolve commission disputes. Since the contracts did not exclude third-party rights, Cleaves & Co could rely on the arbitration clauses.
Implications of Nisshin Shipping
This case clarified the 1999 Act’s effect on arbitration clauses. It confirmed third parties like brokers could use these clauses unless the contract explicitly prohibits it. The decision emphasized the importance of clear contract language to indicate whether third-party rights apply. Without explicit terms, the default rule permits enforcement.
Defining “Purporting to Confer a Benefit”
The court ruled that determining whether a term grants a benefit must rely on an objective review of the contract’s language and context. Hidden motives of the parties cannot alter this.
Comparing Nisshin Shipping to Earlier Cases
The Court of Appeal distinguished this case from prior rulings where third-party claims were denied. For instance, in Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No 2) [2005] EWCA Civ 519, the clause did not plainly benefit the third party. This demonstrates the necessity to evaluate each contract separately.
Drafting Guidance After Nisshin Shipping
The case stresses the importance of precise language in arbitration clauses. To block third-party rights, contracts must state this clearly. To permit them, beneficiaries should be identified directly or through clear descriptions.
Practical Examples
In a manufacturer-distributor contract with an arbitration clause for product disputes, could a consumer invoke the clause against the manufacturer? Applying Nisshin Shipping, if the clause benefits consumers (e.g., by resolving disputes), they might enforce it. An explicit exclusion in the contract would block this.
In a construction contract between a developer and contractor, a subcontractor might try to use a payment-related arbitration clause against the developer. Success depends on whether the clause clearly benefits the subcontractor. The default rule stands unless the contract states otherwise.
Conclusion
Nisshin Shipping Co Ltd v Cleaves & Co Ltd is an important decision on the 1999 Act’s relevance to arbitration clauses. It confirmed that terms clearly benefiting third parties are enforceable by default unless the contract specifies otherwise. The decision emphasizes clear drafting to show intentions about third-party rights, minimizing disputes. The court’s analysis in Nisshin Shipping remains applicable for interpreting third-party rights under the 1999 Act, especially in arbitration. Alongside later cases, it offers a consistent approach for these issues, aiding effective resolution of commercial disputes.
