REUTERS | Ilya Naymushin

Arbitration clauses, third party rights and stays

It seems that the question of remedies in arbitration for parties seeking to exercise rights under the Contracts (Rights of Third Parties) Act 1999 (Third Party Rights Act 1999) was an afterthought in the Bill’s progress through Parliament.

At section 8, the Third Party Rights Act 1999 provides that if a third party’s right to enforce a contract term is subject to an arbitration agreement, the third party is treated as a party to the arbitration agreement in any dispute as to enforcement of the relevant term. In practice, this means that where the underlying agreement has an arbitration clause, the third party is forced to go to arbitration to enforce its rights if that is what the promisor insists upon (Nisshin Shipping v Cleaves & Co).

Blair J’s judgment in the Commercial Court in Fortress v Blue Skye is a variant on this theme.

A variant on the theme

The facts in Fortress v Blue Skye were complex and related to a partnership deed, which the claimants were parties to. They issued proceedings against a number of parties, including two third parties, who argued that they were entitled to the benefit of indemnities and an exclusion clause under the partnership deed.

By section 1(6) of the Third Party Rights Act 1999, references to a third party enforcing a term are construed as references to it relying on the exclusion or limitation in the underlying contract. Here the defendant third parties proposed to rely on the indemnity and exclusion clause in the partnership deed but had not amended their pleadings to do so.

Arbitration clause and stay for arbitration

The partnership deed also contained an arbitration clause. The defendants said that the claim against them should have been made in arbitration and therefore applied to stay the proceedings under section 9 of the Arbitration Act 1996.

The court rejected the application for a stay of the proceedings on the ground that there was no dispute relating to the indemnities and exclusion clause (the defendants’ pleadings had not been amended).

The court went further, and considered what would have been the position had the defendants pleaded reliance on the indemnities and exclusion clause. It concluded that the defendants were putting forward a contractual defence, rather than pleading a positive right of action (as in Nisshin), and could do so in whatever proceedings were brought against them. However, a contractual defence was not subject to the arbitration clause. In addition, the court held that the question of whether a stay should be granted must be determined by reference to the claims made at the time proceedings were issued (at a stage when no defence could have been raised), rather than any defences raised subsequently.

What does this mean?

Is it possible that there is room for further factual variations on this theme? For example, where a party in the defendants’ position takes the initiative and commences arbitration proceedings for a negative declaration that it is not liable by virtue of an exclusion clause? If that happened, Fortress indicates that any concurrent court proceedings should not be stayed.

Similarly, it may be thought that section 1(6) of the Third Party Rights Act 1999 equates the defendants’ position in Fortress v Blue Skye with that of the third party in Nisshin, even though the court in Fortress considered that section 1(6) raised different issues from section 8.

Following Fortress v Blue Skye, it is arguable that the result should not vary depending on which party commences proceedings or the procedural route adopted. There is some support for this in the Commercial’s Court’s judgment in Lombard North Central v GATX Corporation, where Andrew Smith J held that the court would look to the nature of the claims not their formulation when considering an application to stay proceedings under section 9(1) of the Arbitration Act 1996.

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