Arbitration clauses and third parties

Claims against or from third parties to an agreement containing an arbitration clause often give rise to the question of whether such third parties are bound by, or whether they can invoke, the arbitration clause.

Dispute resolution by arbitration requires agreement between the parties. The question of whether there is an arbitration agreement between the parties depends under Norwegian law generally on the ordinary rules on formation of contracts. The Norwegian Arbitration Act contains no requirement as to form to make an arbitration agreement valid. As such, an arbitration agreement will normally be in writing and will often be in the form of an arbitration clause in the agreement in question.

Starting points

Since arbitration requires agreement between the parties, a third party will normally neither be bound by nor entitled to invoke an arbitration clause. There are however exceptions to the rule.

Depending on the circumstances, there may benefits or disadvantages for the third party if the arbitration clause applies. The third party may wish to invoke the arbitration clause offensively by commencing arbitration proceedings against any of the parties under the agreement, or defensively by arguing lack of jurisdiction for legal proceedings brought against the third party before the ordinary courts. 
Transfer of the legal relationship

The Norwegian Arbitration Act section 10 (2) provides that arbitration clauses apply to third parties in the case of transfer of the legal relationship to which the arbitration agreement applies. The arbitration agreement is considered as included in the transfer and can be invoked by and towards the successor unless otherwise agreed between the parties to the arbitration agreement. Thus if A and B enters into an agreement with an arbitration clause, and B transfers the agreement to C, disputes between A and C under the agreement would be subject to arbitration.

Third party agreements and direct claims

The Arbitration Act does not have any other rules concerning the position of third parties. However, the preparatory works to the Arbitration Act raises the question of whether a third party will be bound by an arbitration clause where the third party’s claim is based upon the agreement which contains the arbi­tration clause. The preparatory works argue that it is reasonable to answer this in the affirmative, at least where the third party’s rights are based on the agreement, and suggest that this can be derived by the application of section 10 (2) directly or analogously. A similar question was considered by the Norwegian Supreme Court in the case reported in Rt-1994-1024, which was decided before section 10 (2) was enacted. The case concerned a claim from an employer against a contractor’s sub-contractor. The employer had commenced proceedings in the ordinary courts while the sub-contractor had argued that the court did not have jurisdiction because of the arbitration clause between the contractor and sub-contractor. The Supreme Court concluded that there were good reasons for the employer, as third party to the subcontractor’s contract with the contractor, to be bound by the arbitration clause in that contract when asserting rights on the basis of that contract, but pointed out that this conclusion had no support in the legislation in force at the time. It is stated in the preparatory works that the result in this case would have been different after the enactment of section 10 (2).

It is also possible for a third party to derive a right to invoke an arbitration agreement from the general legal principles of agreements in favour of a third party under Norwegian law provided that the third party is given an independent and irrevocable right to invoke the arbitration agreement. It is therefore the case that C can be given the right to invoke an arbitration clause as part of a third party agreement between A and B in favour of C.
The preparatory works also mention the situation where a third party’s claim is not based, at least not exclusively, on an agreement between other parties, but on legislation. The preparatory works conclude that there does not seem to be sufficient basis for the third party to be bound by the arbitration clause in this situation. An example mentioned is the injured party’s direct action against a liability insurer on the basis of the Norwegian Insurance Contract Act section 7-6 where the insurance contract contains an arbitration clause.

Bills of lading and charterparties

Another example is an arbitration clause in a bill of lading, where the arbitration clause will normally be binding in the relationship between the carrier and the consignee or endorsee of the bill of lading (depending on the jurisdictions involved). Such arbitration clauses were not binding on the consignee or endorsee under the law prior to the Norwegian Arbitration Act, as the requirement under the old law was that the arbitration had to be agreed in writing by both parties.

Particular problems may arise for a bill of lading issued under a charterparty where the bill of lading incorporates the terms of the charterparty and where there is an arbitration clause in the charterparty. The question in such circumstances is whether the arbitration clause has been accepted. This is one of the reasons it is recommendable to specifically mention the arbitration clause in the bill of lading.

Charterparties often contain commission clauses and a question which arises from time to time is whether the broker may invoke, and whether he is bound by, an arbitration clause in the charterparty. The charterparty is entered into between the owners and charterers and its terms, including the arbitration clause, applies as a starting point only between the owners and charterers. The commission clause may set out the amount of commission to which the broker is entitled and also how commission payments shall be divided between the owners and charterers. The legal basis for the broker’s right to commission, however, is normally not the commission clause in the charterparty, but the brokerage agreement with the owners and/or the charterers, which may be in writing or an oral agreement. In such cases the commission clause may assist as evidence of the commission agreed in the brokerage agreement, but the broker will normally not be regarded as party to charterparty and the broker is therefore normally neither bound by, nor entitled to invoke, any of the provisions in the charterparty, including the commission clause and the arbitration clause.

Conclusion

It is recommendable when drafting arbitration clauses to take into account not only the position of the contractual parties but also the position of possible third parties, since this may reduce or avoid the risk of difficult procedural questions that may arise if claims are later made by or against a third party.

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