Ship Broking : Tuesday 3rd October

12.00 - 12.30 Andrew Jamieson - ITIM

Setting it Out - Shipbroking Agreements and Disclaimer Wordings

Traditionally the relationship between shipbrokers and their principals has been an informal one. Written agreements setting out the brokers’ duties have been rare and, I suspect for many, regarded as undesirable. The belief that the relationship should be governed by unwritten understanding and trust is a strong one.

It appears, however, that things are changing. ITIC has for many years advised its members, shipbrokers as well as ship agents and ship managers, on how written agreements may affect them and specifically how they could impact upon their ITIC cover. In the last few years we have seen an increasing number of agreements relating to shipbroking. Some of these set out the brokers’ duties in an "exclusive" or, at least, close relationship. Other documents relate to services being put out to tender to which detailed written bids have to be submitted. Looking at the delegate list I was struck by the number of firms present that ITIC has advised on various types of agreements. No one would suggest that in future all business will be done under the terms of a written agreement with the principal but it is something that will become more common.

The wordings of valuations has been a regular concern (its funny how reports of an over 30 million dollar claim can focus the mind). Valuation wordings are more in the nature of disclaimer notices than agreements although at least one bank has sent out an agreement setting out the terms under which the brokers were to act as valuers. You won’t be surprised to learn that this provided that the broker was responsible should the ship not be worth what it was valued at. No suggestion that the bank should look at what they were lending on or that the market could be volatile!

The use of disclaimers to reduce potential liabilities has become increasingly common in many spheres and one area that the Club has worked on recently is the use of such disclaimers in connection with services provided over the internet.

What I wish to do in this session is to look at some of the issues that arise and some of the pitfalls to avoid in these three areas:

1. Agreements to provide shipbroking services
2. Valuation wordings and other disclaimers
3. Internet service

(a) Agreements to provide shipbroking services

There appear to be a number of reasons for the increase in such written agreements. The prevalence of quality assurance certification with its focus on systems is one motivation for creating a paper trail. The nature of shipbrokers’ clients is changing. Large chartering concerns are looking towards shipbrokers to provide them with detailed solutions to their shipping needs. This goes beyond simply fixing ships to what was described in one agreement as "maritime logistics support services".

The trend in many trades towards the outsourcing of services means that brokers are looked upon as another contractor by staff who do not have the traditional shipping careers. There is a tendency to want such contractors to be subject to a written agreement.

When negotiating agreements an obvious problem for brokers is the feeling that there is an inequality of bargaining power. Some large, often governmental or quasi governmental bodies have a habit of insisting that everyone signs their "standard terms for suppliers". The room for negotiation is, or at least is stated to be, limited. A major problem is that such agreements are not specifically drafted to cover shipbroking services and while perfectly suitable for maintenance contractors simply have no application when it comes to fixing ships.

We appreciate that brokers faced with such standard form agreements often decide the only available option is to "sign and shut up". This tactic, while perhaps understandable, has its obvious downside. Even if the broker feels unable to do much about the provisions of such a contract it is important to, at the very least, consider the possible affect of some of the clauses. We have had examples of brokers being presented with agreements which effectively make them liable for the failure of the other principal to perform. You will appreciate that underwriting the contract for 1.25% commission is a bad bargain.

Another way that the perceived lack of bargaining power manifests itself is the desire to reduce the contract to the shortest document possible and so avoid any possible controversial issues. The problem with this understandable and sometimes beneficial tactic is that the widely drafted outline can often favour the principal by providing the broker with widely drafted duties.

It is not possible in a talk like this to provide a blue print for every eventuality. The following are just some of the points that may arise when reviewing an agreement.

It is worth beginning by considering who your contractual partner is. It is common for agreements with owners to be between the broker and a "management company" rather than the owning company of the ship. Often this reflects the reality of the owning group structure. The broker, however, is being authorised to enter into charterparties on behalf of the individual owning company. Where the relationship between the owner and the manager is "at arms length" it is worth considering what will happen if they part company. We have been left with a situation where the broker has a contract which states something like "the broker will promptly pay all freight deadfreight and demurrage received to the manager" but an owner who says that the manager has been dismissed and the freights are his. A variation on the theme is where the owning company becomes insolvent. The manager, with whom the broker wishes to do more business and who faces a loss, and the liquidator (who is an accountant) both want the money.

A seemingly simple point, but one which frequently comes up, is that it is important to get company names right.

When describing their services brokers should be careful about using undefined expressions such as "exclusive broker". You will note that I used this phrase earlier in the talk competitive brokers will represent other owners and charterers in the course of their business. They must bear in mind that they have duties to all their clients. Bimco Shipman 98 is the standard form agreement under which many commercial managers operate. It refers to managers being entitled to have regard to all vessels under their management. Brokers cannot offer preferential treatment to one client over cargoes or vessels they are marketing for other clients. It is a basic provision of agency law that an agent should not accept a position which conflicts with his duties to the principal. Conflicts of interest will become a concern if loosely drafted contracts give the impression that the principal is entitled to preferential treatment. On the other hand principals who do not wish to be restricted to one broker should make sure that they insert wording that they reserve the right to acquire broking services from other companies.

A shipbroker is employed to fix ships and one of the central features of a broking agreement is to set out what authority the broker has in negotiations. The way brokers and principals work together varies from the principal authorising each line of every offer to brokers who, once the initial authority is received, do not require any specific authority until the negotiations are almost concluded or unless an unusual provision is proposed. It is very hard to put such understandings into writing. The majority of agreements I have seen provide that the broker has an authority to negotiate but not enter into a legally binding agreement. The important considerations for brokers are that the wording should be wide enough to cover their usual practices and that they do not exceed the authority that such contracts give them.

The majority of shipbroking agreements refer to the broker providing market information. We will look at the sort of disclaimers that can be put on market circulars in a moment. It is, however, important for the broker to remember that the flow of information cannot be one way. Information from the principal should be sufficient to enable the broker to provide his services, locate the market vessels as the case may be. Agreements should include the provision of adequate information as an obligation of the principal.

What can happen if the principal is stuck with an agreement which is stated to last for a fixed term is that the principal will not give the broker the information required to do the job and subsequently allege that the broker is not providing the services to a high enough standard. The principal will then "terminate" the Agreement and a favourite trick is to decline to pay commissions owed. Clearly obliging the principal to provide sufficient information will not prevent the relationship ending but it will provide some ammunition when pursuing the unpaid commissions.

A common obligation is that the broker will hold all information acquired in confidence. Confidentiality agreements are also sent to shipbrokers on a stand alone basis.

The problem when drafting confidentiality agreements is that it is difficult to define what should be confidential. Agreements, therefore, generally start with a wide definition of what constitutes confidential information. This will normally be virtually anything. Clauses then limit that definition to exclude information which is in the public domain or which the broker already knew. Brokers should study these clauses carefully to ensure that they do not contract in such a way that they are prevented from using information which becomes in the public domain or which they receive from alternative sources.

A particular point to watch for is whether the confidentiality agreement only excludes information which the broker can show "by written evidence" was available from another source. This type of restriction may prove unacceptably restrictive. It would also be prudent to ensure that the agreement has a set period of time.

The most important aspect of any agreement is the provisions specifying how the broker is to be paid. It is common in agreements entered into between brokers and chartering concerns that the charterer will not pay the broker but the broker will receive commission from owners "in the usual way". Brokers should make it clear that their right to commission on fixtures entered into will survive the termination of the agreement between themselves and the charterers. It would be unfortunate if (as has happened) a long term time charter was fixed during the currency of an agreement but the principal then said that the broker no longer had the right to be paid because the agreement only referred to them receiving commission "during the period of this agreement".

Another common term is for charterparties to contain a provision that the commission will be deducted. It is worth attempting to insert a clause that where the principal deducts commission then the principal shall pay the commission over to the broker and shall not use it to offset any other amounts outstanding from the owner.

In addition to outlining brokers’ roles in fixing the vessel, agreements will often provide for post fixture services. Brokers traditionally will attempt to resolve disputes on behalf of their principals and help collect freight. It is important that the broker makes sure that these clauses are worded so that they are not responsible for costs such as legal fees incurred in resolving disputes or collecting unpaid freight. Much worse, as I mentioned earlier it is important that they are not responsible for uncollected freight.

A final point on drafting or reviewing agreements is please ensure that they have a clause which sets out which law they are governed by and where any disputes will be heard. Please try to avoid the type of compromise which led to one ITIC member agreeing that "the contract will be governed by the laws of England and Jordan and subject to the jurisdiction of the courts of both countries".

(b) Valuation Wordings and Other Disclaimers

One of the most common written documents in shipbroking is the written valuation. As mentioned earlier this is an area which has attracted a lot of publicity. The legal position is simple, a valuation is a professional opinion and as such the broker can be held liable if the opinion is given negligently.

The fact that the valuation is given in writing means that there is a natural tendency to attempt to lessen the potential liability by the use of standard disclaimer wordings. The use of these may, however, be of limited effect. Most legal systems place limits on the way that parties may exclude their liability for their own negligence. This is the position in England where the Unfair Contracts Terms Act 1977 provides that such a term or notice must satisfy a requirement of reasonableness if it is to be enforceable. A clause which simply states that the broker cannot be liable for any consequences whatsoever will not be upheld by the court. It is not possible to hide a defective value behind such wordings.The main benefit of the wording of a valuation document will not arise from simply disclaiming liability but from setting out the basis upon which the valuation has been made and therefore the limitations involved in the valuation process.

There are a number of points that should be covered by a standard valuation wording. If you have not already asked the Club to review your documents then please do make use of our services. They are, of course, a free benefit to members.

There are a number of points to consider when reviewing a valuation certificate. It is important that a desktop valuation makes it clear that it is not akin to a survey of the vessel and that no physical inspection has been made of either the ship or its classification records. If the basis of a valuation is that the vessel is assumed to be in good and seaworthy condition then the valuation should say so. It should also advise that the condition should be verified by inspection or otherwise before any transaction is entered into.

The majority of valuations are done on the basis of a sale between a willing buyer and a willing seller. This is particularly important as the majority of cases where a valuation or opinion is challenged arise out of circumstances where the ship has been the subject of a forced sale. It is also prudent to provide a date on which the valuation is valid and to state that no assurance can be given that the valuation will be sustained or is realisable in an actual market.

A number of circumstances can arise which are not covered by a standard valuation. When a fleet, as opposed to a single vessel, is valued consider if it would be accurate to insert wording that each valuation has been made on the basis that the vessel will be individually sold and that if the fleet is placed on the market as a whole there can be no assurance that the total amount obtained would be the sum total of the individual valuations.

Most valuations are stated to be on the assumption that the vessels are charter free at the time of sale. There are circumstances where the valuation is made on the basis, for example, of long term time charters. Brokers should amend their wording to state that the opinion does not extend to any analysis of the validity of those charterparties or the standing of the charterers.

Another consideration is where the valuation is intended to be used in relation to some sort of public offering of securities or a similar financial document. Your cover in ITIC will cover you for valuations which are given on a private basis in the normal course of business. The basic cover does not extend to valuations given for documents such as bond issues and share prospectuses. If you have been approached to provide such a valuation please contact your usual ITIC account executive for guidance on the insurance position. When agreeing to provide the valuation make it clear that the valuation must appear in full and that you have the right to approve the context in which it appears.

It is important when doing valuations to remember that the wording of the valuation is only part of the picture. The valuer will not be held liable simply because the valuation is found to be inaccurate but because the valuer failed to act with reasonable skill and care. It is, therefore, vital that the broker should maintain records as to the basis of the valuations he or she has given. These would ideally be notes of comparisons made and other factors taken into consideration at the time the valuation was given.

There are a number of other circumstances in which it is appropriate to use disclaimer wordings to reduce the brokers’ exposure to claims. Brokers routinely circulate market information including details many of which are taken from the brokers’ own database. There is a danger that a disgruntled recipient could attempt to blame the broker on the grounds they relied upon the information and found that it was erroneous. We have seen claimants take this to extreme levels. In one case a sale and purchase broker received a vessel from a contact in the Far East. The broker circulated details of the vessel, including speed and performance figures, drawn from their own databases. The claimant was one of the recipients but did not revert through the broker. They went back through another channel, inspected the vessel, made an offer and then cut that broker out. Having done the deal directly the claimants found that the vessel’s speed and performance did not match those in the circular. The claimant then tried to claim against the original broker. Although that was a case of a principal protesting a little too much. You will appreciate that it would be useful to include wording that details have been given without guarantee.

Market reports are another area where brokers should include wording restricting the potential for a claim. A general report should state that the information is provided as a general guide and is not intended to be used for any specific purpose.

One of the problems facing brokers providing more specific information to clients is that there is a grey area where market knowledge and assessment is combined. A number of reports sensibly point out that factors such as market confidentiality may mean that information is incomplete and the report may be based on assessments. An example would be ship prices where o sales information for comparable ships is available. In addition information which has been obtained from third parties may be believed to be accurate but it is subject to limited audit and validation procedures.

Disclaimer wordings are often given a negative press. I would agree that the much quoted Swedish chainsaw instructions "Do not attempt to stop chain with your hands" was taking caution too far and "warning : contains nuts" on a packet of peanuts was stating the obvious. Shipbrokers being sued for not telling their clients the obvious has a long history. When ITIC was one year old a Scottish Court in Carlisle Steamship Co v Simpson Spence & Young rejected a claim with the remark that the collapse of the freight market was such a matter of common knowledge that the defendants might just have reasonably been required to tell the plaintiff that the sun had risen as that the freight rates had fallen.

I’m sure that many of you have received messages in which two lines of text is accompanied by a page of warnings. A common notice is an attempt to guard against confidential e-mails going astray. Three weeks ago Tradewinds had a story of an internal memo which was inadvertently spread around the market. I am unaware of a case in which the fact that a message had a confidentiality notice proved to be the central point of the case but clearly the notice would help secure an injunction to prevent the further publication of an accidental leak.

The thing about disclaimers is that it is only afterwards that you wish you had used one.

The latest trend in warning notices on e-mails is an attempt to protect the sender against liability for transmitting a virus. The following example was sent to me on a message from an Australian lawyer:

Virus Warning and Disclaimer:

Although we virus scan all outgoing e-mail, we cannot guarantee this communication is free from viruses, trojan horses, worms or anything else that may interfere with or damage the operation of your computer systems, and we accept no liability for any such interference or damage. You should check this communication (and all other incoming e-mail) with current virus scanning software.

I know that this may provoke a groan but I believe that that is a sensible notice to a problem that concerns a lot of our members.

(c) The Internet

I am not going to look at the terms and conditions that may govern exchanges and other such sites. A large number of our members, however, have existing websites which provide a variety of information and services.

The publication of market circulars and reports on a website means that many of the points we have discussed already are of importance.

In particular warnings as to the nature and limitations of information on the site should be clearly given.

There are, however, some additional considerations when providing information over the internet. The market report circulated in physical form will be dated and although it does not have a "sell by date" it is clear that the information becomes dated. Publication of the same information on the internet is slightly different. The information is maintained by the site owner. It is advisable to put in a provision that while the site is updated on a regular basis the company’s data collection procedures are ongoing and accordingly it cannot be guaranteed that the information contained on the site will be the latest that has been received. Another consideration is that the wording should make it clear that you cannot guarantee that the facility will be on line at all times. This can be combined with a virus warning as we looked at earlier.

An aspect of websites is their ability to link up with other such sites. When providing so called "hyperlinks" it should be specified that these are only for convenience and that the shipbroker is not making an endorsement or recommendation of the site and no responsibility can be accepted for any consequences.

My final word about the internet is that in the world of cyberspace it is even more important that you include wording that specifies that the terms and conditions are subject to the laws of a particular country and disputes will be heard in a particular place.

In conclusion the frequency with which shipbrokers have to consider written documents which affect their position, whether in the form of an agreement or a disclaimer, is on the increase. Other intermediaries in shipping, such as ship agents and freight forwarders operate under standard terms and conditions which limit their liabililties. A series of Shipman agreements have performed the same function for ship managers while bills of lading have reduced the liabilities of owners. Whether brokers in the future will similarly limit their liabilities remains to be seen.