Date: Fri, 21 Nov 2003 15:37:46

From: Andrew Tettenborn

Subject: Privity

The difficulty with the argument of Clare Ambrose et al, as nicely put by Robert Stevens, is that it does seem to go against the natural interpretation of s.8. Section 8(1)(a) refers to an arbitration agreement, not an arbitration agreement which is intended to apply to claims by the third party. And two points can be made in favour of Colman J's approach:

(1) In my submission, the assignment analogy still leaves it open to the original parties to agree, with legal effect, that despite the existence of the arb clause the third party shall *not* be bound to arbitrate and can sue in the ordinary courts. This is because in assignment law it is open to the parties to give the assignee greater rights than the assignor by saying he takes free of equities, since the rule that the assignee takes subject to equities is adjustable either way: see Phoenix Assurance v Earls Court (1913) 30 T.L.R. 50 and Re Blakeley Ordnance (1867) 3 Ch. App. 154.

(2) If that is right, what we have is merely a rule that third parties are bound by an arbitration clause unless the parties specifically say he isn't. And given that most contracts don't specifically envisage third parties suing on them at all, this seems a sensible solution.

Andrew

From: "Robert Stevens"
Subject: ODG: Re: privity
Date: Fri, 21 Nov 2003 14:36:49 -0000

I am afraid I don't agree with Andrew Tettenborn's description of Nisshin as "[s]traightforward and absolutely sound."

Under section 1(4) the third party is only entitled to enforce his rights under the Act "subject to and in accordance with any other relevant term of the contract." This provision was not included in the Law Commission's draft Bill, but it does conform with the Report's approach to conditional benefits. Whether the third party's right is subject to conditions is a matter of construction of the agreement. Section 1(4) possibly creates more confusion than clarity, as the scope of the third party's rights must always be determined by the construction of the contract. The third party's rights of enforcement may be narrower or wider than the promisee's. Where the right of enforcement arises due to the operation of the presumption, the task of construction is an exceptionally difficult one as the parties will not have addressed themselves to the issue. Perhaps where the third party's right of enforcement arises due to the presumption, his right of enforcement should be presumed to be subject to all of the conditions to which the promisee's right of enforcement is subject.

Section 8(1) adopts the same approach as section 1(4) for terms providing for submission to arbitration. Section 8 was enacted because "[w]ithout this section the main provisions of the Arbitration Act 1996 would not apply" to claims brought by the third party under the 1999 Act. Again, whether a third party's right to enforce is "subject to a term for the submission of the dispute to arbitration" should be a matter of construction.

In Nisshin Shipping Co Ltd v. Cleaves & Company Ltd, Colman J. adopted a different approach. Under nine time charterparties, a commission was to be paid by the owners to third party chartering brokers. Colman J. held that the brokers acquired a right of enforcement because of the presumption created by section 1(1)(b). The charters included arbitration clauses reflecting the standard New York Produce Exchange terms. These provide for the referral of disputes "between Owners and Charterers" and two arbitrators to be appointed by "the parties hereto." Consequently it was conceded that the brokers were not parties to the arbitration agreements as a matter of construction. In the Explanatory Notes the restrictions on the third party's rights are described as "analogous to that applied to assignees." Colman J. interprets this as meaning that the third party was "in effect .. a statutory assignee." Consequently, the third party's rights of enforcement would always be subject to any condition of arbitration applicable to the promissee, and possibly any other restriction that the promissee's rights were subject to.

It is submitted that the analogy with assignment is "useful, if not exact." Like an assignee, the third party can only take the benefit of enforcement subject to its conditions. Unlike an assignee, these conditions are not co-extensive with those applicable to the promisee. Colman J.'s interpretation could have the unfortunate consequence of forcing a third party to bring his claim under the Act to a specialist arbitral tribunal regardless of its suitability to resolve the third party's claim and regardless of the contracting parties' intentions.

The interpretation of Colman J is contrary to the interpretation of most commentators who have written on article 8(1). See Burrows "The Contracts (Rights of Third Parties) Act)" [2000] LMCLQ 540 at p. 552; Ambrose, "When Can a Third Party Enforce an Arbitration Clause?" [2001] J.B.L. 415 at p. 423; Diamond, "The Third Man: The 1999 Act sets back separability?" Arbitration International (2001) 17(2) 211 at p. 214

Andrew Tettenborn MA LLB
Bracton Professor of Law

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