It is a common law rule that an arbitration clause in a contract is to be regarded as a contract within a contract – which may survive if the contract itself is terminated. Herein lies a mire into which many fall.
“User-friendly, readily intelligible to those for whom English is not their first language, logically organised from first to last.” Is this a description of the Engineering and Construction Contract, Bovis’ new “white book”, or the Arbitration Act of 1996? Readers might think it applicable to all three, but by common acclaim the drafting style of the Arbitration Act has carried off all the prizes recently for intelligible law-making.

Unexciting it may be, but the gift of clear expression by contract or (parliamentary) draftsmen should be highly valued. It can reduce costs in an industry that has all-too-frequently had to go to court (not excluding the House of Lords) to ask the judges what the drafters of our standard forms really meant by a particular provision.

One only has to look at the recent crop of cases interpreting the adjudication provisions of the Construction Act to see an act of parliament at the opposite end of the quality spectrum from the Arbitration Act.

So, it was a bit of a shock to read in the House of Lords debate on the Contracts (Rights of Third Parties) Bill on 10 November that one of our leading Law Lords, Lord Wilberforce, had described the law relating to arbitration agreements as “rather a labyrinth, a mire and a difficult subject”.

He was alluding to the latest attempt of the parliamentary draftsman to make sense of the interface between the new law of third-party benefits and the old law of arbitration. The subject could be turned into a comic operetta of the kind traditionally performed at arbitrator Mark Cato’s Christmas party.

In the 1996 Law Commission report on privity of contract, the conclusion was reached that arbitration clauses should be regarded as imposing “burdens” rather than “benefits”, and so the draft bill that accompanied the report made it clear that it had no application to arbitration clauses at all – since it concerned only the conferring of benefits on third parties. When, three years later, the bill was brought before parliament, all references to arbitration had been dropped because of a rethink of the position by the Lord Chancellor’s department in the interim. There were no references to arbitration clauses at all.

However, this “black hole” in the bill left things completely uncertain, so it was no surprise when a new provision was inserted as the bill moved through its report stage in the Lords. It had been realised that, because the 1996 act requires an arbitration agreement to be “in writing”, a third party given rights on the condition that it enforced them by arbitration could not be forced to do so. It could effectively ignore the condition attached to the benefit because it was plainly not “a party to an arbitration agreement” for the purposes of that act.

Something had to be done, and an amendment was quickly tabled, which seemed to do the trick. Yet another rethink took place during the recess, with the Lord Chancellor bringing forward his latest offering on 10 November, which prompted Lord Wilberforce’s remarks.

It comes down to this: if, in a building contract, the contractor promises not to annoy the neighbours, the neighbours may be able to enforce that provision as if they were a party to the contract

The labyrinth to which he referred, and which has given rise to all this legal soul-searching, is not the result of any deficiency of the Arbitration Act itself, but stems from the common law rule that an arbitration clause in a contract is to be regarded as a contract within a contract – which may survive if the contact itself is terminated. So, for example, disputes after termination would have to be arbitrated.

What it all comes down to is this: if, in a building contract signed after the Rights of Third Parties Act comes into force (on 11 May 2000), the contractor promises not to annoy the neighbours, the neighbours may be able to enforce that provision as though they were a party to the contract. But do they have to go to arbitration to do so if the contract has an arbitration clause? The answer to that question turns on the intentions of the original parties to the contract, so we should take care to make it clear one way or another.

If the contract makes the benefit clearly subject to the arbitration clause (the so-called “conditional benefit”), the neighbours will have no choice – they will have to arbitrate to enforce the right.

But if the benefit conferred is the arbitration provision itself, so that the third party has the option to arbitrate or litigate as it pleases, then the Arbitration Act will apply if, and only if, that option is exercised. If the third party chooses to sue instead, the court will not send the proceedings off to arbitration.

All clear? No one really gives much time to thinking about disputes clauses. No one will give much time in the new third-party era to thinking about these matters either, which will be a pity. But these “procedural” questions cause untold problems and costs to the industry.

Let us hope the learned bodies that produce and promote standard form contracts will anticipate the problems and give us some much-needed guidance through Lord Wilberforce’s labyrinth.