Taking direct action

Jeremy Biggs, a solicitor with Ince & Co, looks at how Nisshin v Cleaves helped clarify the rights of shipbrokers to bring direct action against shipowners for unpaid commission.

THE Contracts (Rights of Third Parties) Act 1999 is a relatively new piece of legislation designed to enable shipbrokers to enforce their rights to collect unpaid commission. In the recent case of Nisshin Shipping Ltd v Cleaves & Co and Others, which ended up, in part, on appeal in the Commercial Court, the workings of the Act came under the spotlight.

Prior to the Act, a contract could only be enforced by or against the parties to that contract. Under English law, this is known as the doctrine of privity of contract and applies to all contracts, not least of all charter parties, meaning that only the contracting parties - typically the shipowners and charterers - could enforce the charter party terms or bring suit in respect of a breach of those terms. As a result, a shipbroker who was not a party to the charter party, which it had broked on behalf of its principals, was not entitled to bring an action in its own name directly against the owners for unpaid commission.

The enforcement of the shipbroker’s right to commission had to be achieved by the charterers claiming as trustees of the shipbroker’s rights. If the charter party in question contained an arbitration clause, the charterers would have had to bring their claim in arbitration just as they would for any other claim brought against the shipowner.

This complex way of circumnavigating the problems caused by the doctrine of privity of contract has been referred to by the courts as a ‘cumbrous fiction’ and was finally addressed by the coming into force of the Contracts (Rights of Third Parties) Act 1999. However, it is important to note that the 1999 Act does not render the doctrine of privity of contract obsolete. Privity of contract remains. The 1999 Act simply allows a third party to enforce directly terms in a contract in certain circumstances.

The 1999 Act received Royal Assent on November 11, 1999. Although the general rule is that it applies only to contracts entered into six months thereafter, i.e., on or after May 11, 2000, the 1999 Act will also apply to contracts entered into in the six-month period after November 11, 1999, if the contract expressly provides that the 1999 Act applies. But this is likely to be rare in practice.

It was not until July 16, 2003, that the first case concerning its application came before the courts. Cleaves had broked nine long-term charter parties on behalf of its shipowner principal, Nisshin. The charter parties were all concluded for the same shipowner but with different charterers. They were predominantly on the standard NYPE form and contained a commission clause which provided that “a commission of 1 per cent is payable by the vessel and owners to Cleaves & Co on hire earned and paid under this charter party”. Each charter party was for around five years’ duration, with commission payable monthly. Each contained an arbitration clause providing for arbitration in London, with English law to apply.

After the conclusion of the fixtures, but prior to any of the vessels having been delivered into service and hire having started to flow, the shipowners purported to terminate the agency relationship with the broker and refused to pay any commission on hire earned. The broker sought to recover the outstanding commission due under the nine charter parties for the remaining years of the contracts.

Prior to the 1999 Act, the broker would have had to obtain the assistance of each of the different charterers to commence nine separate arbitrations against the shipowners. This would have been costly, time-consuming and potentially damaging to the commercial relationship it had with the charterers. However, as the charter parties had all been concluded after May 11, 2000, Cleaves was able to bring proceedings in its own name directly against Nisshin without involving the charterers at all.

A consolidated arbitration against the shipowners was commenced. The owners took the position that the 1999 Act did not apply and that the tribunal had no jurisdiction to hear the broker’s claim. That application was determined as a preliminary issue and the tribunal found in favour of the broker. Having been unsuccessful before the arbitrators, the shipowners appealed the tribunal’s decision to the Commercial Court.

The shipowner’s arguments fell into two camps – the broker’s right to bring a direct claim, and the proper forum for such a direct claim.

The broker’s right to bring a direct claim

Section 1 of the 1999 Act provides that:

(1) Subject to the provisions of this Act, a person who is not 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;
(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.

The commission clause in each of the charter parties was a term which purported to confer a benefit upon the broker such that it could enforce that term in its own right. The shipowners, however, asserted that the broker had no right to enforce the commission clause for two reasons:

1. As some of the charter parties contained a commission clause which provided for commission of two per cent to be payable to Cleaves and another broker for ‘equal division’, this did not purport a benefit on Cleaves alone. It was, in fact, a joint benefit and Cleaves could not enforce it without joining the other brokers. Mr Justice Colman, however, was in no doubt that the wording of the clauses referring to ‘equal division’ did indeed confer a benefit on Cleaves alone to the tune of one per cent.
2. Section 1(1)(b) was disapplied by Section 1(2) of the Act because, on a proper construction of the charter parties, the parties, i.e., the shipowners and the charterers, did not intend the commission clauses to be directly enforceable by the broker. Their main argument was that, prior to the Act, the parties’ intentions had been that the broker could not directly enforce its rights against the shipowners and such rights could only be enforced via the charterers as trustees. The shipowners asserted that the parties’ intentions were to be assumed to be the same after the Act came into force.

Mr Justice Colman found this proposition to be “entirely unsustainable”. Section 1(2) is drafted in the negative, i.e., for it to apply, the contract must show that the parties intended that the 1999 Act would not apply. The judge held that in circumstances where the contract is silent as to whether or not the Act applies, the shipowners could not establish that it showed a positive intention by the parties that the Act should not apply, and the broker was accordingly entitled to use the Act.

The proper forum for the direct claim

The second issue was whether Section 8 of the Act meant that the broker was obliged to bring its claims in arbitration or, if not, elsewhere, presumably in court. Section 8 of the Act states that:

“Where:

(a) a right under section 1 to enforce a term (“the substantive term”) is subject to a term providing for the submission of disputes to arbitration (“the arbitration agreement”); and
(b) the arbitration agreement is an agreement in writing for the purposes of Part 1 of the Arbitration Act 1996;

the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards disputes between himself and the promisor relating to the enforcement of the substantive term by the third party.”

The shipowners argued that, as the arbitration clauses only referred to covering disputes between ‘owners and charterers’, the broker’s right to enforce its claim for commission was not covered by the clause and therefore not ‘subject to’ the arbitration agreement. Mr Justice Colman found no force in this and held that the broker is “to be treated as standing in the shoes of the promisee”, i.e., the charterers, with the effect that the broker was bound by the arbitration clause.

Nisshin v Cleaves clearly demonstrated that, for contracts entered into after the coming into force of the 1999 Act, a shipbroker is entitled to bring a direct claim against shipowners and is obliged to do so in accordance with the arbitration clause in the contract. It should be noted, however, that commencing arbitration proceedings in the name of the charterers as trustees is still possible, although it is difficult to see in what circumstances a broker would prefer to use this route as opposed to direct action against the shipowners.

This is an edited version of the speech given by Jeremy Biggs at the International Transport Intermediaries Club (ITIC) Forum 2004 in September last year.