In Nisshin Shipping v. Cleaves & Co the Commercial Court decided that a third-party beneficiary of a right to enforce a substantive term under the Contract (Rights of Third Parties) Act 1999, s 1 is bound to enforce its right in accordance with an arbitration clause in the contract so long as a similar dispute between the parties would have fallen within its scope, whether or not the parties (or indeed the third party) intended that the third party should be required (or entitled) to do so. The decision has been largely accepted by commentators. This article suggests that, on a proper interpretation of the Act, whether a third party is so bound and entitled is a matter for construction of the contract and that Nisshin was wrongly decided.
After a little over a decade in operation, the main effects of the Contracts (Rights of Third Parties) Act 1999 (the “Act”) are by now familiar to most commercial practitioners. It is well known that a term which expressly or purportedly confers a benefit on a third party may now be enforceable by the third party where previously it was not, unless, in the case of a purported benefit, a proper construction of the contract shows that it was not the parties’ intention that the third party should have a right to enforce the term. What is less obvious from a reading of the Act, and may come as a surprise to many, is that the Act has been interpreted by the High Court, in Nisshin Shipping Co
automatically to require the third party to enforce his right in accordance with an arbitration agreement in the relevant contract if that arbitration agreement is sufficient in scope to cover a dispute between the parties to the contract on the same subject matter. The court held that the intentions of the parties in this regard are “not relevant”.2
The consequences of this decision, if correct, are stark. In such cases, the Act can make a hostage of the unwilling third party and a hijacker of the willing: even in a case where no one, whether a party or the third party, intended that the third party should be required (and thus entitled) to proceed by arbitration (which may in some cases represent a major tactical or substantive benefit for the third party which he would not otherwise have), Nisshin
entails that the third party is required to do so and the parties are bound to arbitrate with the third party.