Nisshin Shipping Co Ltd v Cleaves and Co Ltd

Facts

Cleaves & Co Limited was a firm of chartering brokers. It negotiated charterparties between Nisshin Shipping Co Limited, the shipowner, and various charterers. Although Cleaves was not a party to any of the charterparties, in each charterparty Nisshin expressly agreed to pay a commission to Cleaves. In each charterparty was an agreement between Nisshin and the charterer to arbitrate disputes. Nisshin subsequently declined to pay the commissions to Cleaves.

Cleaves commenced arbitration against Nisshin, purportedly under the arbitration agreements in the charterparties, seeking to recover the unpaid commissions. The arbitral tribunal decided that it had jurisdiction to decide the dispute because, first, under s. 1 of the Contracts (Rights of Third Parties) Act 1999 (“CRTPA”), Cleaves have a right to enforce the provisions in the charterparties under which Nisshin agreed to pay Cleaves commission (the “substantive term”); and, second, under s. 8 CRTPA, Cleaves had a right to enforce the substantive term through commencing arbitration under the arbitration agreement in each charterparty.

Nisshin appealed to the High Court under s. 67 of the Arbitration Act 1996 to challenge both grounds of the tribunal's decision seeking a declaration that the arbitral tribunal would have no jurisdiction to hear the claims.

Whether Cleaves had a right to enforce the substantive term

The Court held that the issues under this question were: (i) whether the clauses in the charterparties providing for commissions “purported to confer a benefit” on Cleaves within s. (1)(b) CRTPA; and (ii) whether s. 1(b) was disapplied by s. 1(2) because “on a proper construction of the contact it appears that the parties did not intend the term to be enforceable by the third party”.

Whether the clauses purported to confer a benefit on Cleaves

Each of the relevant clauses provided:

Nisshin argued that these clauses meant the payment should be made to Messrs Ifchor and then subsequently divided by that firm between itself and Cleaves and, accordingly, that the benefit was not conferred by the clause directly on Cleaves. The Court disagreed, finding that its meaning was in substance exactly the same as if the clause had provided that there was to be a commission of 2 per cent of which 1 per cent was to be paid to Messrs Ifchor and 1 per cent to Cleaves.

Whether on a proper construction the parties did not intend that Cleaves should be able to the enforce the substantive term

Nisshin argued that on a proper construction of the charterparties the parties had not intended that Cleaves would be able to enforce the substantive term because: (i) the arbitration clauses in all of the charterparties did not make express provision for enforcement by a broker of a claim for commission; (ii) there is no positive indication in the charterparties that the parties did intend the brokers to have enforceable rights; and (iii) the parties’ mutual intention on the proper construction of each contract was to create a trust of a promise in favour of Cleaves – a trust enforceable against Nisshin at the suit of the charterer as trustee.

As to (i), the Court decided that the wording of the arbitration clauses was of little or no materiality: (a) even if the parties only intended to arbitrate only disputes between the parties, that was entirely consistent with a mutual intention that Cleaves should be obliged to enforce the substantive term through the courts; (b) if, on the proper construction of CRTPA (as the Court went on later to find in relation to the second main issue in the case) the third party is obliged to enforce the commission benefit by arbitration even where the agreement does not on its proper construction provide for any participants in an arbitration other than the parties to the main contract, then the strength of any inference derived from the absence of express provision that the third party may arbitrate could be little more than negligible.

As to (ii), the Court decided that s. 1(2) only disapplies s. 1(b) if on a proper construction of the contract the parties did not intend the third party to be able to enforce the substantive term. Accordingly, s. 1(2) had no effect where it appears the parties did intend that the third party should be able to enforce the substantive term nor where the contract is neutral as to whether they did. The Court found that the clauses in issue were neutral as to the parties’ intention and therefore that s. 1(2) did not disapply s. 1(b) in this case.

Finally, as to (iii), the Court decided that Nisshin’s argument could only succeed if it could be inferred from the existence of the underlying trustee relationship (by which the charterer was trustee for Cleaves of Nisshin’s promise to pay the commission) that it was the mutual intention of Owners and Charterers that the broker beneficiary should not be entitled to avail himself of the facility of direct action by CRTPA. The Court found that inference “entirely unsustainable”: it did not follow from the underlying trustee relationship that the parties had intended that Cleaves would not have been able to benefit from the (relatively) new statutory right under CRTPA instead of using the “cumbrous fiction” of the earlier trust-based route.

Accordingly, the Court decided that Cleaves was entitled to enforce the substantive term against Nisshin.

Whether Cleaves had a right to arbitrate the dispute

The Court’s reasoning on this issue is difficult to understand and has been criticised by commentators.

In essence, the Court appears to have been persuaded by Cleaves’ argument based on an analogy drawn in the Explanatory Notes to CRTPA (notes published by the Government to accompany an Act of Parliament and in this case similar to those published to accompany the Bill). Those Explanatory Notes suggested of s. 8 that:

The Court decided that:

The Court thus decided that Cleaves was bound (and thus entitled) to enforce the substantive term through arbitration under the arbitration clauses in the charterparties. It found that the parties’ expressions of mutual intent were “irrelevant” in this regard.

The Court's decision on this issue is perhaps best treated with caution. It has been commented that the interpretation given to CRTPA by the Court appear to be wrong as a matter of interpretation and fails to afford sufficient prominence to the parties’ autonomy to contract. Furthermore, it has been noted that if CRTPA is ambiguous in this respect, then the decision was taken in apparent ignorance of statements in Hansard, admissible under the rule in Pepper v Hart, which seem clearly to show that Parliament intended that it should be a matter for ordinary construction of the contract whether or not a third party should be entitled to enforce an arbitration agreement.