Nisshin Shipping Co Ltd v Cleaves & Co Ltd
Citations:  EWHC 2602 (Comm);  1 All ER (Comm) 481;  1 Lloyd’s Rep 38;  2 CLC 1097; (2003) 153 NLJ 1705;  CLY 3488.
Cleaves had negotiated nine time charters on behalf of Nisshin. Cleaves acted as Nisshin’s agent, meaning that Cleaves was not a party to the charters. The charters contained arbitration clauses, requiring disputes between the parties to the charterparty or between vessel owners and charterers to be submitted to arbitration. They also contained clauses entitling Cleaves to commission.
Nisshin later alleged that Cleaves was in repudiatory breach of contract and terminated the agency relationship between themselves and Cleaves. They argued that this meant that Cleaves was no longer entitled to commission under the charters. Cleaves attempted to refer the dispute to arbitration. Nisshin argued that Cleaves was not entitled to enforce the charters’ clauses. This was because they were not a party to the contract. Cleaves relied on the provisions of the Contracts (Rights of Third Parties) Act 1999, arguing that they gave Cleaves the right to enforce the charters. Section 1 states that:
(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if— (a) the contract expressly provides that he may, or (b) subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (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.
If section 1 applied, then section 8 would entitle Cleaves to take advantage of the arbitration clause.
- Did the commission clauses purport to confer a benefit on Cleaves?
- Did the parties not intend the commission clause to be enforceable by a third party?
The High Court held in favour of Cleaves. The commission clauses conferred a benefit on Cleaves and there was no evidence of a contrary intention. Cleaves was therefore entitled to enforce the commission clause and refer the dispute to arbitration.
This Case is Authority For…
If a clause purports to confer a benefit on a third-party, it is presumed that the parties intended the third-party to be able to enforce the clause. This is so unless there is evidence in the contract to the contrary. If the clause appears neutral, therefore, it is enforceable by the third party.
Section 8 of the Contracts (Rights of Third Parties) Act 1999 allows third parties to take advantage of arbitration clauses which relate to the clause they are trying to enforce. This is true even if that clause only specifies that it applies to disputes between the contracting parties. The purpose of s.8 is to ensure that a third-party suing under the contract is in the same position as the parties. It therefore subjects them to the same limitations for enforcing any particular clause.
Colman J noted that under the pre-1999 law, the contract would have created a ‘trust of a promise’. This would have allowed Nissin to sue the owners on behalf of Cleaves. The judge noted that this fact did not change Cleaves’ ability to sue under the 1999 Act. It was not evidence that the parties did not intend the clause to be enforceable by Cleaves.