The High Court of the Western Province sitting in Colombo, in the exercise of its original jurisdiction (colloquially, the Commercial High Court) (the “Court”), handed down an important judgment in Travel World (Pvt) Ltd v International Air Transport Association (2024), recognising that at Sri Lankan common law, a third party to an arbitration agreement can invoke and enforce that arbitration agreement in its favour.
Background
The Defendant, International Air Transport Association (“IATA”), is a trade association of the world’s airlines, representing some 330 airlines and over 80% of global air traffic. IATA is a Canadian body corporate that operates in Sri Lanka as a registered overseas company. Through IATA’s process of accreditation, IATA-accredited travel agents can issue and sell air tickets for and on behalf of IATA member airlines.
To that end, IATA also administers a Billing and Settlement Plan (“BSP”) for markets around the world, including Sri Lanka. A BSP enables IATA-accredited travel agents to issue standard traffic documents (i.e. air tickets) electronically and simplifies payments to participant IATA member airlines.
Travel World’s Dispute with IATA
The Plaintiff, Travel World (Private) Limited (‘Travel World’), is an IATA-accredited travel agent. In 2014, it brought damages claims in delict – totalling LKR 50 million – for financial loss (under the actio legis aquiliae) and loss of reputation (under the actio injuriarum) against IATA. Those claims were in response to action taken by IATA to, among other things, suspend Travel World’s ability to issue standard traffic documents and inform all BSP airlines of its suspension, in view of Travel World’s failure to submit a bank guarantee on time.
In particular, on 27 May 2013, IATA’s regional offices in Singapore notified all IATA-accredited travel agents in Sri Lanka, that they were to submit an industry bank guarantee (“IBG”) with an effective date of 1 July 2013. To allow adequate time for processing, those travel agents were required to “ensure” that their IBGs were submitted to IATA’s local clearing bank, Deutsche Bank AG (“Deutsche Bank”) at its branch office in Colombo “before the deadline of June 30, 2013”. Travel agents were expressly warned that a failure to submit their respective IBGs on time would result in them being “suspended from BSP ticketing” and would – in terms of IATA rules and resolutions – constitute: “two instances of irregularity”.
That date of 30 June 2013 was a Sunday, and hence, a day on which Deutsche Bank was closed. The last working day “before” 30 June 2013 was Friday, 28 June 2013. Travel World claimed that it tried to submit its IBG to Deutsche Bank on Friday, 28 June 2013 at 3.30pm, but since Deutsche Bank was closed at that time, it was unable to do so through no fault of its own. Travel World did not inform IATA that it would submit its IBG on the next working day of 1 July 2013.
Unsurprisingly, when IATA’s regional offices in Singapore opened for business on Monday, 1 July 2013, Travel World was served with two instances of irregularity, and its ability to issue standard traffic documents under the BSP was suspended. Travel World was given 30 days to remedy its default, failing which it was warned that its agency would be terminated. IATA took steps to inform all BSP airlines in Sri Lanka, that owing to its failure to submit its IBG, Travel World was served with a double irregularity and that its standard traffic documents had been withdrawn.
In the meantime, Travel World eventually submitted its IBG to Deutsche Bank on 1 July 2013 at 9.33 am Sri Lankan time. As a result, IATA subsequently informed Travel World that its agency was reinstated, but it would still need to contact each BSP airline to reactivate its ticketing authority. As per Travel World’s pleaded case, its ability to issue tickets was eventually restored at 4.30 pm on 1 July 2013. The double irregularity, however, remained in place and IATA did not accede to Travel World’s demands that it be revoked. Accordingly, Travel World brought an action – alleging two causes of action in delict – seeking redress for financial loss and damage, and loss of reputation.
In its judgment, the Court dismissed Travel World’s claims on the merits holding, among other things, that IATA acted in good faith and in line with IATA rules and resolutions. On the other hand, the Court found that Travel World “acted irresponsibly and negligently” by failing to furnish its bank guarantee on time, and this “irresponsible conduct” led to the deactivation of its ticketing authority. Therefore, the Court ruled that Travel World’s alleged loss – whether financial or reputational – was self-induced and could not be “attributed” to IATA.
Interestingly, the Court also upheld IATA’s jurisdictional objection under section 5 of the Arbitration Act, No. 11 of 1995 (the “Arbitration Act”), and it is this aspect of the judgment, which is the focus of this post.
Section 5 of the Arbitration Act is unique in that it ousts the jurisdiction of the courts to hear and decide an action:
The Contract
As an IATA accredited agent, Travel World entered into an IATA Passenger Sales Agency Agreement (the “Contract”). By way of an express choice of law clause, the Contract was generally governed by Sri Lankan law.
That Contract incorporated by reference all the rules, resolutions and other provisions contained and published by IATA, from time to time, by way of a Travel Agent’s Handbook (the “Handbook”).
The Contract also stipulated, that if any matter is reviewed by arbitration pursuant to the rules contained in the Handbook, Travel World submits to arbitration in accordance with such rules and agrees to observe the procedures therein and to abide by any arbitration award made thereunder.
Section 2.2.1 of the Handbook stipulated that:
“IATA has the right to cause for review at any time the Agent’s funds at risk and require an adjustment to any existing Financial Security provided to ensure appropriate and sufficient coverage. Such adjustment may require an increase or decrease in the Agent’s Financial Security. The Financial Security provided shall be… provided by a specified date to be determined by IATA which shall be no earlier than 30 days and no later than 60 days from the date of such written notification. On finding that the Agent failed to comply with a requirement to provide a financial security or an increase thereof, such failure shall be grounds for IATA to apply two instances of regularity and IATA shall withdraw all Standard Traffic Documents (STDs) and require the agent to comply within 30 days. The failure of the Agent to comply within 30 days shall be grounds to give the Agent notice of removal from the Agency List, … and to notify all BSP Airlines accordingly…”
The Handbook provided for multi-tiered dispute resolution culminating in arbitration. In particular, disputes were to be resolved by a Travel Agency Commissioner (the “TAC”) in the first instance, followed by a de novo arbitration settled under the Arbitration Rules of the International Chamber of Commerce, in the event that a dispute arose out of or in connection with a decision rendered by the TAC.
As regards the withdrawal of ticketing authorities, owing to a failure to submit a financial security on time, section 2.2.4, among several other provisions of Handbook, provided that:
“Where pursuant to the provisions of Subparagraph 2.2 or 2.2.1 above STDs are withdrawn or an Agent receives notice of removal, the Agent may within 30 days of such withdrawal, notice of removal or of termination, invoke the procedures,,, for review of IATA’s actions by the Travel Agency Commissioner including the possibility of seeking interlocutory relief.”
The parties to a TAC dispute necessarily included a travel agent and IATA. IATA was also expressly given the right to contest a decision of the Travel Agency Commissioner by arbitration. For that reason, the arbitration agreement itself also recognised that: “[a]ny party to a dispute settled [by the Travel Agency Commissioner] in accordance with Resolution 820e shall have the right to submit the Travel Agency Commissioner’s decision to de-novo review by arbitration.” In other words, the multi-tiered dispute resolution process provided for disputes between IATA and a travel agent to be ultimately resolved by arbitration to the exclusion of any court action.
The issue, however, was that the Contract (which incorporated the provisions including the arbitration agreement contained in the Handbook) was signed by IATA “as agent for the Carriers” who in turn were defined to mean IATA member airlines.
As a result, Travel World argued that IATA was a body corporate, having a separate and distinct legal existence from its individual member airlines, and since IATA had qualified its signature and contracted merely as “agent”, Travel World contended that the Carriers and itself were the only parties to the Contract. This was in keeping with the general principle – of the English law of agency – that where a person contracts as agent for and on behalf of a disclosed principal, whether named or unnamed, the contract is the contract of the principal and not of the agent. That principle of English law was applicable, if at all, because – by a 171 year old statute – “all questions or issues” with respect to the law of “principals and agents” must be decided in accordance with contemporary English law.
Accordingly, Travel World contended that IATA was not a party to the arbitration agreement contained in the Handbook and had no right to object to the Court exercising jurisdiction under section 5 of the Arbitration Act insofar as that section only applied: “[w]here a party to an arbitration agreement institutes legal proceedings in a court against another party to such agreement.”
In response, IATA submitted that even if it was a mere third party to the Contract and the arbitration agreement, even a third party who benefited from a contract could enforce such a contract by acceptance at Sri Lankan common law.
That was because Sri Lankan common law was primarily – though not exclusively – governed by the Roman-Dutch Law. That system of law – unlike the English common law – did not adhere to a strict doctrine of privity. Instead, it allowed a third party to sue upon a contract or a contractual provision in its favour, provided the benefit conferred by that contract or stipulation was accepted. In other words, where the parties to a contract stipulate a provision for the benefit of a third party and that third party opts to accept the same, an enforceable contractual obligation is created between third party and the relevant promisor of that contract. Expressed in the customary language of the Roman-Dutch law, once a third party accepts a contractual stipulation in their favour, a legal bond or vinculo juris is brought into existence between the third party and the relevant promisor or promisors to the agreement. In the pragmatic eyes of the Roman-Dutch law, upon acceptance, a third party was no less a party to the stipulation in its favour as the original parties to the agreement.
The learned judge of the Commercial High Court, Pradeep Hettiarachchi HCJ, having held that IATA was no mere agent to the Contract, went on to accept the thrust of that argument by – pithily – holding that: “…the law applicable to the Passenger Sales Service Agreement is the law of Sri Lanka. Therefore, even if IATA is considered a third party representing the carriers, under Sri Lankan common law, the agreement can be enforced in favour of IATA.” Hettiarachchi HCJ did so, after having noted that the proposition that an arbitration clause may be enforced by only the parties to it is merely a general rule, and that where applicable under the law of contract or the law of agency, non-signatories to an arbitration agreement “can still be required to arbitrate.”
Comment
This judgment is significant, insofar as it potentially marks the first time that a Sri Lankan court has recognised that a third party can enforce a widely drawn arbitration agreement in its favour.
That judgment, however, is entirely orthodox in that it is well-established under the Roman-Dutch law that contracts or contractual clauses for the benefit of third parties (such a contract or clause being termed a stipulatio alteri) are enforceable by acceptance. Long ago, the Dutch jurist Hugo Grotius remarked: “As equity is more regarded with us than legal subtleties, a third person may accept the promise and thus acquire a right unless the promisor revokes the promise before such acceptance by the third person.”
In the South African case of Tradesman’s Benefit Society v du Preez (1887) 5 SC 269, the great de Villiers CJ (as he then was) held: “Where there is in existence a binding agreement… between the promisor and the promisee, there can be no possible injustice in allowing a third person for whose benefit the promise was made and was intended to be made, to recover upon the same.” Similarly, in McCullogh v Fernwood Estate Ltd 1920 AD 204, Innes CJ, explained that: “The third person having once notified his acceptance and thus established a vinculum juris between himself and the promisor would be liable to be sued, as well as entitled to sue.”
Tracing the origins of this rule of the Roman-Dutch law, the late judge of the Supreme Court of Ceylon and Vice-President of the International Court of Justice, Christopher Weeramantry too says: “The rigour of the rules of the Roman law was further modified by Canon Law and by the early Dutch jurists, and by the time of Grotius it was established practice in Holland to allow a third party to sue upon a contract in his favour provided he accepted the benefit conferred upon him by the contract.” That rule has also been applied in several decisions of the Supreme Court of Ceylon.
For instance, in Jinadasa v Silva [1932] 24 NLR 244, it was agreed that, A would transfer premises to B on the undertaking that B would re-transfer the property to either A or his brother-in-law C, on payment of an agreed sum plus interest. On A’s death, C brought an action to compel B to accept the agreed sum and to convey the premises to him. Upholding C’s claim, Garvin SPJ (with whom Maartensz AJ agreed) said: “The question which has been raised and argued before us is this: The stipulation being one which was made in favour of a third party, is it actionable by or at the instance of such third party? That such an agreement may be validly made between the parties to a contract such as this, is, I think, beyond question for the Roman-Dutch law authorities… It seems clear that whatever difference of opinion there may have been between the Dutch Jurists, they were all unanimously of opinion that a stipulation in favour of a third party, once it has been accepted by the third party, gave to that party a right to obtain for himself the benefits of the stipulation by action.”
In Marthelis Appuhamy v Peiris [1946] 47 NLR 78, it was held that a covenant in a sub-lease for the benefit of the original lessors could be enforced by them. Soertsz ACJ, with whose judgment Rose J agreed (as they then were), said: “The question then arises whether the original lessors can claim the benefit of, and sue on the stipulation made in their favour, they themselves being no parties to the contract of sublease. The answer to that question is, in my opinion, that they can under the Roman-Dutch law which is the law applicable in this case.”
To enforce a clause in their favour, a third party must accept that inchoate contractual right or benefit before it is revoked by the original contracting parties to the contract. Consistent with the wider law of contract, such acceptance may take place by express words or conduct. In Ahayani Umma v Kamaldeen [1955] 58 NLR 438, it was held that the very act of suing upon a notarial instrument was good enough acceptance. In that case, there was a notarial stipulation in favour of P giving him life interest in certain premises. The instrument, however, was not a deed of donation and P had not signed the instrument accepting his life interest. On an action by P to evict D, de Silva J (with whom Fernando J agreed), held that even in the absence of any positive evidence of acceptance, the very fact that P had pleaded and brought an action to enforce his rights evinced his acceptance: “I do not think that P2 is a deed of donation in favour of the plaintiff. It only contains a stipulation for the benefit of the plaintiff… There is no evidence that …the plaintiff accepted this stipulation… that he instituted this action to enforce his rights is …indicative of his acceptance”.
That a third party’s very act of suing upon or invoking a covenant in his favour is sufficient evidence of their acceptance is important. By parity of reasoning, it may be said that the very fact that a third party has initiated or invoked an arbitration agreement to object to a court exercising jurisdiction may constitute good enough acceptance of an arbitration agreement in their favour. If that is so, it is possible to conceptualise a Sri Lankan law governed arbitration agreement in favour of third party, as being a standing offer or an inchoate right to have disputes resolved by arbitration, which may then be accepted and perfected when, for example, that third party initiates an arbitration or otherwise relies on the arbitration agreement to object to a court exercising jurisdiction.
Although operating as distinct rules of English contract law, it is sometimes thought that the English privity rule is closely linked to the English doctrine of consideration, particularly since the third-party is a gratuitous beneficiary of a promise. No such problem arises as a matter of Sri Lankan common law. Save for when English law proper applies under statute, the doctrine of consideration forms no part of the common law of Sri Lanka. As Lord Atkinson explained in Jayawickrama and another v Amarasooriya [1918] 20 NLR 289: “It may well be that according to English law, as a general rule, an existing moral obligation not enforceable at law does not furnish good consideration for a subsequent express promise [Eastwood v. Kenyon,1 Pollock on Contracts 189); but the Roman-Dutch law, by which, in their Lordships’ view, this case must be governed, be wholly different. According to this latter law it would appear that a promise deliberately made to discharge a moral duty or to do an act of generosity or benevolence can be enforced at law, the justa causa debendi, sufficient according to the latter system of law to sustain a promise, being something far wider than what the English law treats as good consideration for a promise.”
That an old rule of the Roman-Dutch law should be adapted to meet the demands of modern commercial life is unsurprising. As Bertram CJ (with whom Ennis J agreed) noted in Government Agent, Central Province v Letchiman Chetty [1922] 24 NLR 36: “We are, I think, entitled to develop the legal principles handed down to us in connection with new situations which arise in our own civilization.” That same point was made by Lord Diplock in Kondeeswaran v The Attorney General [1969] 70 NLR 337, when he said: “Although the Roman-Dutch law as applied in Ceylon under the Government of the United Provinces is the starting point of the ‘common law’ of Ceylon, it is not the finishing point. Like the common law of England, the common law of Ceylon has not remained static since 1799. In course of time, it has been the subject of progressive development by a cursus curiae (Samed v. Segutamby 25 N. L.R. 481) as the Courts of Ceylon have applied its basic principles to the solution of legal problems posed by the changing conditions of society in Ceylon.”
The case of Travel World v IATA, also provides a useful illustration of the way Sri Lankan common law intersects and interacts with directly applicable English law under statute (in this case the English law of agency) under section 3 of the Civil Law Ordinance. English law made applicable by statute can: “only apply within the area in which it was introduced. At the point at which the English law is terminated, the Roman-Dutch law comes back into operation.” Accordingly, even if IATA’s qualified signature meant that it was not a party to the Contract for the purposes of the English law of agency, that was not the end of the matter. For under the Roman-Dutch law, even a stranger to a contract can enforce a stipulation in their favour by acceptance. In any case, where the Civil Law Ordinance impinges or intrudes upon a branch of law other than the limited fields of its application – in this case the law of contract – then the general law of the land- i.e. Sri Lankan common law, which is largely, though not completely, based on principles of the Roman-Dutch law, must be applied.
This decision demonstrates that a growing pro-arbitration stance is gathering pace and that the Sri Lankan courts – including the Commercial High Court – are willing to robustly uphold the obligation to resolve disputes by arbitration. Secondly, it underscores the vital importance of understanding the way in which the Roman-Dutch law and English law intersect and interact with each other, both at the level of Sri Lankan common law and under statute, given the plurality of systems that operate within Sri Lanka’s mixed legal system. Thirdly, and relatedly, it demonstrates both the untapped potential of and the distinctive contribution that Sri Lankan law can make to the resolution of commercial disputes.
Although this litigation has already been to the Supreme Court and back, the judgment of the Commercial High Court may not be the last word on the matter insofar, as Travel World has given notice of appeal indicating its intention to pursue a final – leapfrog – appeal to the Supreme Court. That should be an opportunity for the Supreme Court to provide further guidance on the ability of third parties to take advantage of an arbitration agreement in their favour.
Avindra Rodrigo
President’s Counsel
Drushika Amirthanayagam
Senior Litigator