Ship Agency : Tuesday 3rd October

09.40 - 10.10 Paul Smith - PS Associates

AGENCY AGREEMENTS WATCH OUT!

PRESENTED BY PAUL SMITH MICS, ACIArb, SOLICITOR OF THE SUPREME COURT

Principal - Paul Smith Associates

www.psassociates.co.uk

Introduction

At a general meeting of BIMCO which was held in Istanbul a few years ago I had the honour to chair a workshop entitled: "Brokers, Agents & Principals - Partnership and Trust". The panel consisted of some distinguished names in the shipping industry including yesterday’s speaker Inchcape Shipping Services Director, Simon Morse. The debate was very stimulating and I would like to draw on some of the features of that workshop in addressing you today on the subject of liner agency contracts - particularly with reference to problems which agents may often encounter.

The Liner Agency Agreement

In my experience, one factor, which invariably influences the contents of liner agency agreements, is the relative strength and bargaining positions of the two contracting parties. Unfortunately, when advising agents to negotiate more favourable terms in order to reduce the severity of certain clauses, I am frequently met with the response that: "there are no prospects of making any amendments since the principal has indicated that this is a take it or leave it situation". Over the past few years the extent of the competition between liner agents for new business has often resulted in agents being prepared to accept almost any terms - no matter how unfavourable. This is unfortunate and short-sighted because experience has shown that agreements that are unduly onerous and against the interest of the agent are frequently short-lived. They may also end up in a dispute that ultimately results in litigation or arbitration. I will in fact be referring to one such case later.

The variations to be found in different liner agency agreements are, of course, considerable and most are "tailor made" by the particular liner principal depending on the trade, geographical area, scope of the agents' functions etc. It is perhaps surprising that relatively few contracts are based on the FONASBA Standard Liner Agency Agreement. FONASBA, for those who are unfamiliar with this organisation, is the Federation of National Associations of Shipbrokers and Agents. I presently hold the position of Vice Chairman of the Documentary Committee of FONASBA. The FONASBA Standard Liner Agency Agreement was first issued in 1978 and has subsequently undergone several revisions. The Baltic and International Maritime Council (BIMCO) have also approved it. I will be returning to the FONASBA agreement a little later.

I referred just now to liner agents being prepared to accept almost any terms incorporated in the liner agency agreement. In my former capacity as a Director of the management company of ITIC (and indeed in my present capacity as a consultant) a large number of agency agreements come across my desk. I think it would be quite useful for me to draw to your attention some of the more difficult clauses that I have seen included in these documents.

Firstly, it is sometimes the practice of certain liner principals to impose a very tight deadline for comments on the draft agreement. In a recent case, a member of ITIC sent the Club a letter from their principals that enclosed a revised draft agency agreement that demanded a response within seven days. Failing a reply the agent would be considered as having accepted all the terms and conditions of the new agreement and its appendices. The document alone consisted of over 20 closely typed A4 pages.

Indemnity clauses are frequently included in liner agency contracts. More often than not, this clause will only be in favour of the principal. By this clause the agent undertakes to indemnify, defend and hold the principal harmless from all claims, penalties, costs and expenses resulting from any negligent act or omission. In a well balanced document there should be a reciprocal clause in which the principal undertakes to indemnify the agent against all claims, charges, losses etc which the agent may incur in connection with the fulfilment of his duties under the agreement. There is an exception saying that the indemnity will not extend to acts arising due to wilful misconduct or negligence of the agent. Such a clause is included in the FONASBA agreement.

On the subject of "principal biased" agency agreements the following clause was recently brought to my attention:

"In the event of the agent disclaiming responsibility for any loss, damage or expense then the burden of proof shall not be upon the principal but on the agent".

In other words, in this case the agent must prove that he has not caused any loss or damage to the principal thus reversing the normal burden of proof that is normally required. Under English Civil Law, the claimant must prove his case on the balance of probabilities. Under this contract, the agent is effectively guilty until he proves his innocence. I trust that this will not be an increasing trend. Although I am the first to recognise that the agency business is extremely competitive and that commercial considerations must be taken into account, agents should not be pushed beyond a limit. In my view, such a clause is well past that limit.

Principals frequently feel they are vulnerable in relation to the financial risk to which they believe they are exposed. This is to some extent justified following the failure in the past of a number of well-known agency companies. In their attempt to overcome or reduce this exposure, several methods have been adopted by a number of liner principals. These often include the establishment and maintenance by the agent of separate trust bank accounts in order to receive freight and other income on behalf of the principal. The object is to keep the funds entirely separate from those belonging to the agent or to other principals so that they can be easily identified. An alternative method is for the agent to open a separate bank account in the name of the principal but operated jointly by both parties. All freight collections are deposited by the agent in this account without any deductions. In case of the bankruptcy of the agent, the freight income belonging to the principal is thus protected.

Freight Pre-Paid Bills of Lading

I would now like to turn to an issue that is a rather controversial subject. I am referring to the issue of freight pre-paid bills of lading when no freight has in fact actually been paid. This practice has been a regular feature in the liner trade for a number of years particularly within Europe. The purpose of course is to give the shipper (or freight forwarder) credit where, for example, the shipper has sold the goods under a CIF contract in which he has agreed to give the buyer credit provided the latter has arranged for an irrevocable letter of credit to be opened.

If everything proceeds smoothly, the system works to everyone's satisfaction. The shipping company benefits to the extent that it may not have secured the business without the credit being granted; the agent receives remuneration by way of commission on the freight and the shipper or forwarder benefits from the extended credit period he receives. However, it is becoming harder to predict whether even the largest and most reputable shippers and freight forwarders will remain solvent during the credit period. What happens if the shipper fails to pay the freight? If this happens and the cargo has already been shipped where will the agent stand in relation to his principal and the shipper? The answer will depend on how the agent is regarded in law. There are several possibilities. The agent may be required or authorised by his principal to give credit to the shipper. And he may be a "del credere" agent who guarantees to his principal the shipper's payment of freight. In this event, he should expect to earn rather more than the usual 2.5 % commission on freight. On the other hand, he may have no actual authority from his principal to give credit and no apparent authority towards the shipper. His status will affect not only his liability to his principal but also his position as regards the shipper.

What will be his position as regards his principal? Let us first look at the agent who is authorised or required by his principal to extend credit. In some liner agency contracts, the agreement between the principal and his agent is to the effect that the agent will remit to the principal freight that he has collected. You will see in the FONASBA standard liner agency agreement that the position is made very clear in Clause 3.45. The third sentence of this clause reads as follows: -

"The Agent shall advise the Principal of the customary credit terms and arrangements. If the Agent is required to grant credit to customers due to commercial reasons, the risk in respect of outstanding collections is for the Principal's account unless the Agent has granted credit without the knowledge and prior consent of the Principal." You will see from the above that the onus is on the agent to make sure that the principal has consented to credit terms being granted. So long as the agent can prove the prior consent of the principal then the principal bears the risk and must seek recovery from the shipper if the latter defaults.

I referred a moment ago to a del credere agent. A del credere agent is one who guarantees to his principal due payment from another party usually for a special, additional commission. In other words, the del credere agent takes the risk of, for instance, the shipper failing to pay the freight. Such an agency can be created by the wording of the agency contract, by custom or by a course of dealing between the principal and agent. If the shipper does default, the principal need look no further than his agent for payment of the outstanding freight. Thus in a del credere agency extending credit would not amount to the agent being in breach of his agency contract - it is simply that a sum becomes due under the agency contract - rather like commission. What about the agent who is not clearly authorised or required by his principal to extend credit? The position of such an agent is much more difficult where the arrangements between the principal and agent gives no clear indication as to whether the agent may extend credit and who, as between the principal and the agent, bears the risk of unpaid freight.

The general rule is that an agent who is authorised to receive payment of money has no authority to give credit on behalf of his principal. On the other hand, however, agents who are authorised to obtain cargoes in particular trades can rely on a general proposition that they would "have authority to do whatever is usually done by persons occupying such positions".

This means that agents will have authority to act in accordance with the reasonable customs and usages of the countries in which they act, even if their principals have no knowledge of those customs. For instance in the ports of the north continent, it is standard procedure for agents to give credit to shippers.

Furthermore, an agent is usually contractually bound to promote its principal's business and an obvious way of doing so is to allow credit to its principal's customers. It is perfectly possible, in law, for an agent to show that he had implied authority to sell on credit. Nevertheless, even if the agent has implied authority to extend credit, he must do so carefully and sensibly and maintain proper procedures for the collection of outstanding freight.

Consequently, whether or not the agent is in breach of his agreement with his principal will depend on the terms of the agency contract and the circumstances of each case. Where a principal has found himself bearing the risk of uncollected freights from a shipper, he may of course issue instructions to his agent covering all future business forbidding or restricting the giving of credit. In such a case naturally the agent will no longer have authority to give credit and must cease to do so.

What are the consequences of the agent's breach vis-à-vis his principal? There are two possibilities. Firstly the agent with apparent but not actual authority and secondly the agent with neither actual nor apparent authority.

In the first case if, so far as the shipper is concerned, the agent was acting within his principal's apparent authority in waiving a strict adherence to payment terms, the principal is bound by the contract of carriage and must carry the cargo to destination despite the non-payment of freight. However, the principal will be able to claim damages from his agent for the unrecovered freight and possibly for any other losses that he has suffered (which the agent could reasonably have foreseen) and interest on the lost freight. However, the principal must mitigate his loss and make reasonable attempts to recover the freight from the shipper. This may not extend to actually suing the shipper and the principal would probably not be required to pursue an insolvent shipper through liquidation proceedings before recovering from his agent.

If the shipper has defaulted while the principal still has a chance of liening the cargo, he should try to mitigate his loss by exercising any lien he may have (of course the issuance of freight pre-paid bills of lading usually means that the carrier no longer has the right to lien the cargo for unpaid freight. Nevertheless, the right may still be available in some jurisdictions).

I would now like to turn to the agent with neither actual nor apparent authority. It is possible that in extending credit the agent is not only acting outside his actual authority from his principal but is also acting outside his apparent authority as far as the shipper is concerned. This would be so if the agent's inability to extend credit were actually known to the shipper. In such a case, the principal could refuse to be bound by the contract made on his behalf. Thus if he discovers the position in time, he can refuse to load the cargo. If, as is more likely, the principal only discovers the failure to pay freight at a much later date he may still argue that the contract does not bind him and he may claim "reasonable remuneration" for carrying the cargo. This could conceivably be more than the actual rate of freight charged and would be recoverable from the agent as damages.

What is the agent's position vis-à-vis the shipper? Where the agent has extended credit and the shipper has defaulted, the agent has a fundamental problem to overcome if he seeks to recover the freight himself (even assuming the shipper has assets and has not disappeared or gone bankrupt). In most cases, the principal must sue the shipper for the unpaid freight. He may be willing to sue the shipper in his own name or lend his name to an action against the shipper against his agent's undertaking to conduct and pay for the litigation. However, if the principal cannot or will not sue the shipper, or allow the agent to use his name, what steps are available to the agent to recover the freight from a still solvent shipper?

If the agent is sued by his principal for the outstanding freight, under English law the agent will be able to join the shipper in that action by way of third party or contribution proceedings. Alternatively, the agent might base his action on a collateral or constructive contract between himself and the shipper. The subject of collateral or constructive contracts is rather complicated and I would not wish to pursue that aspect in any detail today.

The third possibility is that the agent may be able to sue the shipper under a Letter of Undertaking. In a case which was heard in 1987 in Germany an agent was held entitled to recover unpaid freight from a forwarding agent under the terms of a standard Letter of Undertaking given by the forwarding agent in exchange for the issuance of freight pre-paid bills of lading. The forwarding agent had argued that the only effect of the Letter of Undertaking was to postpone the date by which the payment of freight should be made and did not allow the ship agent to sue the forwarding agent direct. The Supreme Court in Germany rejected this argument and also found the Letter of Undertaking binding on the forwarding agent, notwithstanding the fact that the undertaking required the issuance of freight pre-paid bills of lading even though the freight had not actually been paid. The Court held that the endorsement "freight pre-paid" did not prejudice the holder of the bill of lading and in particular the receiver even if the freight had in reality not been paid.

I would like to conclude these remarks by referring to a recent case on this subject heard by the Court of Appeal in England. This case is called Cho Yang Shipping v Coral (UK) Ltd. The case involved the shipment of 20 containers of sugar from Hamburg and Bremerhaven to Dubai and Mina Qaboos. Coral were named in the bill of lading as shippers and the bill of lading was marked "freight pre-paid". As is frequently the case there was a chain of parties involved in the transaction. Coral contracted with forwarders called Nortrop. This company contracted with Interport who in turn contracted with a company called EOS as liner agents for the carrier, Cho Yang. Coral became liable to pay Nortrop US$1,010 per container. Nortrop had to pay Interport US$1,000 per container and Interport to pay EOS (as agents) US$980 less 2_% commission. Coral had no knowledge of the existence of Interport and had no dealings with them. Coral paid the freight to Nortrop and Nortrop paid Interport. The latter then found themselves in financial difficulties and failed to pay EOS on behalf of the line. Cho Yang therefore sued Coral for the freight. The judge at first instance gave judgment for the line. He said: " In my view the expression freight pre-paid serves in no way to affect the basic liability of the shipper if freight has not in fact been pre-paid."

The Court of Appeal disagreed with the lower court. They said that the bill of lading is only evidence of the contract between the shipper and the carrier. The correct inference is that there was no agreement by Coral to pay freight to Cho Yang but only to his forwarder.

I assume from the facts that EOS, as agents, were the actual losers in this case especially if they had been obliged by their agreement with Cho Yang to pay the freight whether actually collected or not.

We should finally consider whether there are any solutions to this problem from the point of view of agents. In some countries, including Germany, the local Ship Agents Association puts forwarders on a "white list". The forwarder must satisfy certain financial criteria and sign a credit agreement. If the forwarder fails to pay on time he is removed from the list and theoretically becomes uncreditworthy. Although this system is very helpful, it does not provide the perfect solution as is demonstrated by the Cho Yang case.

Freight guarantees or undertakings are also a possibility. These give the agent a direct right of action against the forwarding agent for any freights or charges unpaid whilst preserving the carrier's rights against the shipper.

Finally, there may be the possibility of obtaining credit insurance from specialist insurers - but in my experience, this is very rare.

Termination of Agency Contracts

I am now going to briefly refer to termination of contracts and particularly the rights and remedies of agents in the event that the contract is prematurely concluded.

Obviously, being an English lawyer my experience is primarily with the law and jurisdiction of that country. However, I appreciate that there will frequently be occasions when agency contracts are subject to other systems of law.

Nevertheless, we can generally say that one of two systems is likely to prevail:

Under English law, there is no general remedy that will allow the agent to be compensated in the event that a principal terminates the contract prematurely. In other words, the liner agency agreement must include a specific clause providing that compensation is to be paid. It is also important to state precisely how the compensation is to be calculated. If this is not done you will be left with no remedy whatsoever. Clause 6.04 of the FONASBA Liner Agency Agreement includes a clause that deals with the position. I will quote the text to you:

"The basis of compensation shall be the monthly average of the commission and fees owed during the previous 12 months or if less than 12 months have passed then a reasonable estimate of the same multiplied by the number of months from the date of cancellation until the contract would have been terminated."

Many of you will say that it is difficult to use the FONASBA contract because most principals will regard it as too favourable to the agent. I can understand that criticism, but there is no reason why you should not try to use this clause when negotiating terms with your principals - either when your contract comes up for review or preferably at the start of negotiations when you are appointed as agents for a particular line.

Having looked at the situation under English law let us now turn to a slightly happier position under the continental system. For instance in The Netherlands a ship agent is regarded as a commercial agent and thus comes within certain regulations implemented under an EC directive relating to self-employed commercial agents. This directive includes the right of the agent to claim goodwill on termination of the agency by the principal. What do we mean by goodwill? Effectively it will allow the agent to claim compensation for the customers the agent has brought to the principal. It may also allow the agent to claim for having substantially expanded the business of existing customers, provided that the principal is still receiving considerable benefit therefrom. The burden of proof is always on the agent. He should therefore make sure that he maintains good statistics on his performance over the years. Also, if possible proof that his principal has acknowledged that performance.

There is a further condition. Paying this compensation should be fair taking into account all the circumstances. Particularly the commission lost by the agent on cargo bookings. This seems reasonable as in some cases the agent may try to fill the gap when representing another line in the same trade. If of course the same shippers who previously booked with him continue to do so for the succeeding shipping line, there will in principle be no commission lost apart from a possible difference in the commissions earned from the old and the new principals.

How is goodwill calculated? The maximum which can be claimed is remuneration for one year calculated based on the average commission earned during the last five years of the agency. If the agency did not survive that period then during the shorter period. In any event, goodwill should be claimed within one year after the date on which the agency was terminated. Otherwise, the claimant may be time barred. In practice, I do not think any agent in this audience would wait longer than one year in order to claim compensation.

There are obviously some exceptions to the right to claim goodwill. Not unnaturally, you cannot make a claim where the agency is terminated because of some default on your part.

It is interesting to note that the Dutch courts will be very happy to accept jurisdiction for the resolution of a dispute between the agent and the principal even where neither of the parties has any connection whatsoever with the Netherlands.

Conclusion

I hope that I have demonstrated that liner agency contracts may often contain difficult clauses which invariably will be against the interests of the agent. In my view it is far better to tackle these problems right from the outset by trying to amend the contract when it is first presented to you rather than waiting for a problem to occur at some later stage. I would also suggest that although the agreement may contain an arbitration clause it is preferable to negotiate a solution with your principal rather than spend large sums of money on legal and arbitrator’s fees. And I say this as an arbitrator myself so ultimately this advice is against my own interests.