Nisshin Shipping Co Ltd. v Cleaves & Company Ltd. & Ors

Factual and Procedural Background

In 1999, Parliament enacted the Contracts (Rights of Third Parties) Act 1999 ("the 1999 Act") to reform the doctrine of privity of contract, enabling third parties to enforce contractual promises made for their benefit. This case represents the first judicial consideration of the 1999 Act, particularly its application to the shipping industry and arbitration clauses within charterparty agreements.

The dispute concerns nine time charters negotiated by the Respondent chartering brokers ("Cleaves") on behalf of the Applicant owners/guarantors ("Nisshin"). Each charterparty contained an arbitration clause. Nisshin challenges Cleaves' entitlement to commission, alleging repudiatory breach of the agency relationship due to Cleaves' principal becoming involved with a competitor, which Nisshin contends terminated the agency relationship.

Cleaves referred the commission entitlement claims to arbitration despite not being parties to the arbitration agreements. The arbitral tribunal, consisting of two experienced maritime law arbitrators, ruled that sections 1 and 8 of the 1999 Act conferred jurisdiction on them to hear the claims.

Additionally, four other charterparties without coverage under the 1999 Act are involved, with Cleaves commencing court proceedings to claim commission on all thirteen charterparties. The Applicant seeks consolidation of all claims before the court.

Legal Issues Presented

1. Whether the Respondent brokers fall within the scope of section 1 of the Contracts (Rights of Third Parties) Act 1999 and thus have a direct right to enforce commission clauses against the Applicant owners.
2. Whether the arbitration clauses contained in the underlying charterparties bind the Respondent brokers under section 8 of the 1999 Act, thereby obliging the brokers to arbitrate disputes relating to their commission claims.
3. Whether the mutual intention of the parties to the charterparties precludes the brokers from enforcing commission clauses directly or through arbitration, particularly given historical agency and trust relationships.
4. Whether the application of sections 1 and 8 of the 1999 Act infringes Human Rights principles, specifically the right of access to courts under Article 6(1) of the European Convention on Human Rights.

Arguments of the Parties

Applicant's Arguments

• The commission clauses in some charterparties did not purport to confer a benefit solely on the Respondent brokers but rather on multiple brokers jointly, negating a direct enforceable right under section 1(1)(b) of the 1999 Act.
• The arbitration clauses refer only to disputes between Owners and Charterers, excluding brokers from arbitration agreements, indicating no intention to bind brokers to arbitrate commission disputes.
• The parties to the charterparties did not intend brokers to have enforceable rights directly, relying instead on a trust relationship whereby charterers enforce commission claims as trustees for brokers.
• Enforcement of brokers' rights should not be subject to arbitration unless clearly agreed, respecting party autonomy and Human Rights principles, especially access to courts.

Respondent's Arguments

• Although brokers were not parties to arbitration agreements, section 8 of the 1999 Act deems brokers to be parties for enforcement purposes, obliging them to arbitrate commission disputes.
• The commission clauses confer a direct benefit on the brokers individually, enabling them to enforce commission rights directly under section 1 of the 1999 Act.
• The arbitration agreements, while between Owners and Charterers, are sufficiently broad to cover disputes over commission payment, including those involving brokers as third parties.
• The 1999 Act removes the historic requirement for brokers to rely on charterers as trustees to enforce commission, providing a statutory direct cause of action enforceable by arbitration or court proceedings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Les Affreteurs Reunis SA v. Leopold Walford (London) Ltd [1919] AC 801	Confirmed that brokers could only enforce commission through charterers acting as trustees, as brokers were not parties to the contract.	The court used this to explain the historic legal position of brokers and contrasted it with the statutory framework introduced by the 1999 Act.
Robertson v. Wait (1853) 8 Ex 299	Established the principle that a charterer contracts as trustee for a broker to enforce commission rights.	Supported the explanation of the traditional trustee relationship between charterers and brokers prior to the 1999 Act.
The Jaybola [1997] 2 Lloyd's Rep 279	Illustrated the principle that assignees stand in the shoes of assignors regarding arbitration clauses and procedural burdens.	Used as an analogy to interpret section 8 of the 1999 Act, treating third parties as statutory assignees bound by arbitration agreements.
The Jordan Nicholev [1990] 2 Lloyd's Rep 11	Confirmed that assignment of a cause of action includes the right to arbitrate and the obligation to accept arbitration clauses.	Supported the court's reasoning that third parties enforcing rights under the 1999 Act are bound by arbitration clauses applicable to the original contracting parties.
The Padre Island [1984] 2 Lloyd's Rep 408	Held that statutory assignees must pursue rights in accordance with arbitration clauses, even if clauses refer only to original parties.	Reinforced the analogy of statutory assignment underpinning section 8's application to third parties.
T W Thomas & Co Ltd v. Portsea Steamship Co Ltd [1912] AC 1	Discussed incorporation of arbitration clauses and jurisdiction clauses into related contracts via agency and Himalaya clauses.	Distinguished from the 1999 Act context, emphasizing the different legal basis for third party rights under the Act.
The Makhutai [1996] AC 650	Considered the availability of Himalaya clauses to third parties based on mutual intention of contracting parties.	The court found this precedent unhelpful for construing section 8 of the 1999 Act due to differing legal principles.

Court's Reasoning and Analysis

The court began by interpreting section 1 of the 1999 Act, focusing on whether the commission clauses purported to confer a benefit on the Respondent brokers and whether the parties intended that benefit to be enforceable by them. The court rejected the Applicant's argument that the commission clauses did not confer a direct benefit on the brokers, holding that the clauses clearly identified the brokers and the amount payable to them individually. The court emphasized that absent clear wording, it would not construe the clauses as creating a joint and indivisible right of enforcement.

Regarding the Applicant's submission that the parties did not intend third party enforcement, the court noted the statutory presumption under section 1(2) that the benefit is enforceable unless there is clear evidence to the contrary. The court found the charterparties neutral on this point and rejected the argument that the historic trust relationship between charterers and brokers precluded direct enforcement under the 1999 Act. It reasoned that the statutory right to enforce directly was a new facility intended to overcome the inconvenience and potential injustice of the old trustee-based enforcement mechanism.

On the issue of arbitration under section 8 of the 1999 Act, the court accepted the analogy to statutory assignment, whereby the third party stands in the shoes of the promisee for enforcement purposes and is bound by the arbitration agreement applicable to the promisee. The court held that the arbitration clauses, although only between Owners and Charterers, were sufficiently broad to cover disputes over commission payment, including claims brought by brokers as third parties under the 1999 Act.

The court rejected the Applicant's contention that the brokers' right to arbitrate depends on the mutual intention of the parties to the arbitration agreement, holding instead that the statutory provision deems the third party to be a party to the arbitration agreement for disputes relating to enforcement of the substantive term. The court also dismissed Human Rights arguments, reasoning that the 1999 Act enhances rather than restricts third party enforcement rights and that requiring arbitration in accordance with the contract does not violate the right of access to courts.

The court gave weight to ministerial explanatory notes and scholarly commentary supporting the conditional benefit approach and the assignment analogy underlying section 8. It distinguished the present statutory regime from the principles governing Himalaya clauses and agency law, finding no basis to apply those to the construction of the 1999 Act.

Holding and Implications

The court held that the Respondent brokers are entitled to enforce the commission clauses directly under section 1 of the Contracts (Rights of Third Parties) Act 1999.

Further, the brokers are bound by and entitled to enforce their rights through the arbitration agreements contained in the charterparties by virtue of section 8 of the 1999 Act.

This decision confirms that third parties who benefit from contractual promises may enforce those promises directly and are subject to arbitration agreements applicable to the original contracting parties for disputes concerning enforcement. The ruling clarifies the application of the 1999 Act in the shipping context and resolves uncertainties about third party arbitration rights, without creating new precedent beyond the statutory framework. The decision also affirms that such statutory enforcement mechanisms do not infringe Human Rights protections regarding access to courts.