Insurance And (Re)Insurance - 23 April 2013

Fortress Value Recovery v Blue Skye

Whether third party to a contract could obtain stay of legal proceedings against it and rely on arbitration agreement in the contract

http://www.bailii.org/ew/cases/EWCA/Civ/2013/367.html

Section 8(1) of the Contracts (Rights of Third Parties) Act 1999 provides, broadly, that where a third party has a right to enforce a term in a contract to which it is not a party, that right will be subject to any obligation imposed by the contract to arbitrate (ie the third party will be obliged to arbitrate any dispute about its entitlement to enforce the right). Section 8(2) provides that if the third party does not fall within section 8(1), it may submit a dispute about enforcement of a right to arbitration (but is not obliged to do so).

The claimants brought proceedings in court and the defendants sought to stay these proceedings, relying on an arbitration agreement contained in a contract to which they were not a party, but the claimants were (the contract referred to the 1999 Act and advised that any rights given to a third party in the contract would be enforceable under the Act. Furthermore, the defendants argued that the contract had provided them with a defence to the claimants' action).

At first instance, the judge refused to grant a stay on the basis that the defendants were not seeking to enforce a substantive right but instead were seeking to raise a contractual defence (see Weekly Update 20/12). The defendants appealed against that decision. The Court of Appeal has now held as follows:

(1) The judge had been wrong to draw a distinction between a right of action and a contractual defence: “the third party availing himself of the exclusion is the equivalent of his enforcing a term in the contract”.

(2) However, the Court of Appeal accepted that, whereas a third party might choose to rely on a term in the contract (in which case it should be obliged to arbitrate), a third party has no choice if a party to the contract sues it (and the third party then wishes to raise a defence). It was thought to be contrary to the principle that arbitration is consensual to force the third party to have his right to rely on the defence conclusively determined by arbitrators, even if the third party does not consent to such arbitration. Furthermore, such consequences would be so undesirablethat it must be questioned whether they were really intended. Accordingly, the third parties here could rely on a contractual defence in...