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Ship Broking : Tuesday 3rd October 09.10 - 09.40 Sian Herd - Sinclair Roche & Temperley |
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Collecting your Commission
I hope that not many members of the audience here today have had to spend time effort and money collecting commission. On occasion, however, shipbrokers are cut out of deals or just not paid at all. In those circumstances hard choices have to be made: do you sue to recover the amount due, which may of course involve suing your principal, or do you simply absorb the loss? In this talk I will look at entitlement to commission, some legislative changes which make collection of unpaid commission much easier, at least in the UK and, finally, procedures - what steps can be taken to collect the commission due.
An agent is entitled to remuneration if, and only if, his contract with his principal so provides. Often, of course, a written contract will not exist, particularly in competitive broking. In such circumstances the employment of a professional to do a particular job raises a presumption that the professional will get paid for that job. This does not mean that brokers will always get paid for their time and effort. Usually they will be entitled to receive payment only on the happening of a future event: on hire being paid, or freight being earned, or on payment of a price. If the events which trigger commission do not happen, then no commission is earned. This will be so even though the broker has invested substantial time, effort and money in the negotiation. In the past complaints by brokers that they had been prevented from earning their commission have reached the highest courts in the land. Time and again, the principle that commission is earned only on the happening of particular event has been upheld. In French v. Leeston, for example, an 18 month time charterparty provided that commission was payable on hire earned and paid. After 4 months, the charterers bought the ship and cancelled the charterparty. The brokers claimed they were entitled to payment of commission for the remaining 14 months of the charterparty. The House of Lords rejected the claim. If the broker had wished to secure his remuneration in the event of an early termination, they said, he should have done so expressly. Easier said than done, perhaps. A slightly different set of circumstances arose in Howard Houlder v. Manx Isle Steamship Co. There a 5 year time charter gave an option to purchase at £125,000. If the option was exercised, the broker would receive 3.5%. After one year the charterers bought the ship for £65,000. The judge held that the broker was not entitled to commission as he could not show that the agreement had been fulfilled. The judge's reasoning was that although the owner may have been willing to pay commission on the original, higher, price, it did not follow that he would be willing to do so on the much lower sale price actually achieved. The judge in that case took a strict view, and that view has generally prevailed to date: unless the contract provides for the broker to receive remuneration in the event that the contract breaks down, the broker will receive nothing.
In Moor Line v. Louis Dreyfus the commission clause provided that commission, of 2_%, was due "on shipment of cargo". The Court of Appeal held that commission was due only on freight, and did not in the absence of specific provision, extend to demurrage payments. Look carefully, therefore, at the commission clause. A fair selection of clauses appears in the materials attached.
Termination of a successfully concluded contract, whether by way of breach or otherwise, before commission becomes payable, will usually terminate the broker's right to commission. The aggrieved broker may feel that the fruits of his efforts should not be allowed to go unrewarded in such situations. After all, he has performed his side of the bargain. In some situations, the court will imply a term that the principal will not, by breaking the contract made through the efforts of his agent, deprive the agent of his commission. The operative phrase here is "breach by principal". I think that the most succinct explanation for this is that freedom of contract has consistently been held to be sacrosanct. The courts will not, on an action by an agent, interfere with a legitimate termination of a contract which takes place before the right to commission arises, or arises from the actions of a third party with whom the agent has no relationship. The position is neatly illustrated by the "Manifest Lipkowy" . There the shipbroker, retained by the buyers, negotiated and achieved an agreement to sell the vessel on an NSF 66 form. The vessel was not ready for delivery by the cancelling date. The buyers cancelled and recovered their deposit. The broker sued the sellers, claiming that there was an implied term that the sellers would not, by breach of the MoA, deprive them from earning their commission. The claim was rejected at first instance and on appeal. It was held that a shipbroker, in the absence of a specific provision, was not entitled to commission merely because he had negotiated the successful conclusion of the contract for sale. He was only entitled to remuneration when the contract had been completed by delivery of the vessel and payment of the purchase price. It was, however, accepted that the result of this case may have been different if it had been the buyers' principal who had been in breach. This was the situation in Alpha Trading Ltd v. Dunnshore-Patten Ltd (1981) 1 LR 122. There, the plaintiff, P, became aware that a company, X, wished to buy a cargo of 10,000 mt of cement. The plaintiff originally intended to buy the cement from D and sell it to X at a profit. Ultimately it was decided that it would be more sensible for D to sell the cement to X via P as agent, P earning a commission. Although X opened the letter of credit and established a performance bond, D defaulted. P's claim for damages, representing the commission lost, succeeded. It was said by Brandon LJ that where an agent has introduced a buyer to a seller and a contract has been made with a benefit reserved to the agent, the seller, D, in that case, should not be entitled to break his contract with the buyer without being under any liability to the agent. In shipping, some charterparties now make specific provision for early termination. The Baltime clause, for example, provides that if hire is not paid owing to a breach by either party the party liable for the breach must indemnify the brokers against loss of commission. The Gencon charterparty provides that one third of commission is to be paid by the party responsible for "non-execution".
A slightly different situation arises under the NYPE charterparty. The commission clause there does not provide for commission in the event of early termination, but provides that commission is payable "upon any continuation or extension of this charter". This provision has only been tested in US arbitration. In the "Atlantic Rainbow" the claimant brokers had negotiated the original charterparties of two vessels on the NYPE form. The charterparties were extended on several occasions, through the same brokers. In September 1985, the charterers assigned the charterparties to another company. That company renegotiated a new rate of hire and chartered a third vessel. New charterparties were drawn up and signed. Different brokers were used. The owners then notified the claimant brokers that the original charterparties had been terminated. The brokers claimed that the new agreements were, in substance and effect, extensions of the originals. The owners contended that no commissions were due or payable on charters that were mutually cancelled. It was held that parties to a charterparty might cancel that agreement without compensating brokers and that to the extent that the new agreements reflected an ongoing business relationship after the term of the original extensions had ended, the brokers were not entitled to commission. However in this case the arbitrators took a dim view of the owners' conduct. Their failure to advise the brokers of new negotiations with the charterers during the currency of the extension periods of the previous charterparties, showed what was described as "a total lack of good business judgment". Although the shipowners were entitled to terminate the earlier charterparties, it was held that the continued employment of the ships for the period up to the end of the extended period of the original charterparties was, in effect, a continuation of the original charterparties, albeit at a reduced rate of hire. The shipowners continued to earn and be paid hire on the two ships and were therefore liable to the brokers for commissions on the hire actually received during the period up to the end of the original extended period. I am not sure that the same result would be obtained if tested again: the parties had, after all, terminated the original charterparties by mutual consent. To that extent, the situation sits at odds with the position in French v. Leeston. Nevertheless, the arbitrators clearly felt that the shipowners' conduct in that particular case fell below an acceptable standard and that they should compensate their brokers for the remaining period of the original contracts. Generally speaking, however, where a reorganisation or restructuring of a group or anything else results in the termination of a contract and the renegotiation of something altogether different, it will be difficult to argue successfully that the original charterparty has been extended or renewed. Where, however, a charterparty is extended on substantially the same terms and between substantially the same parties, a broker would be entitled to commission on the extension of the period under the NYPE form.
Sometimes, a shipbroker may feel he has been cut out of a deal that through introductions he has made and/or his efforts generally, he has brokered. A commission will be earned in such situations if and only if the contract permits or, the broker is the, or, at the very least, an "effective" cause of the ultimate transaction. Whether or not commission is due will therefore require a close analysis of the nature of the particular agency relationship and the events leading up to the conclusion of the contract. One of the most recent authorities in this area is HMH v. CECAR where the placing of political risk insurance filtered down through a chain of brokers based in London and Paris. It was agreed that the commission would be split 50/50 between the London and Paris brokers and the London brokers would split the commission between themselves. One of the London brokers, HMH, introduced another broker, X, who successfully placed the risk, but only after he had changed job to another brokerage firm, at which time HMH had been dismissed from the negotiations. The court ultimately held that HMH had, by introducing X to the transaction, performed the most important part of what it had been contracted to perform. HMH was an effective cause of the final placing of the risk and in all the circumstances of that particular case was awarded a "reasonable remuneration", which the court decided was 20% of the commission amount. The court, in deciding whether the broker had to be "the" or only "an" effective cause, gave particular importance to the large number of brokers involved in the particular transaction, but noted that where the choice is essentially between two rival claimants for the same commission, the court will have to determine which one of them is the effective cause. Where numerous brokers are involved, it was said that the test cannot simply be which one of all the brokers involved was the effective cause. The roles and responsibilities of those brokers may be very different. In such circumstances, it was said, it was more important to stress and construe the word "effective" than the definite or indefinite article. This, more than any other area of commission recovery, has to be approached with caution. Litigation is expensive, and I would advise that, if you feel that you have been cut out of a deal, you should make a cool assessment of the prospects of obtaining compensation and how you will achieve your desired result before issuing proceedings. If possible, and in the more complex transactions this should be possible, secure a commission agreement, setting out how and when commission is earned, from the outset of your engagement.
Up until 1999 a third party could not, by direct action, enforce a contract made for its benefit to which it was not a party. This is the "third party" or "privity" rule - and the reason for its existence is that the English courts had long held that only a party to a contract who had provided consideration could sue under that contract. The rule presents no problem if the broker is not paid by his principal. Direct action against the principal is permissible under the contract of agency to which both principal and broker are a party. Where, however, the defaulting party is the other party in the contract, the broker has no direct right of action (unless he falls within the new legislation: see below), since he has no contract with that other party. In those circumstances the English courts would allow the broker's principal to sue that the defaulting party, on the basis that the broker's principal was trustee of the defaulting party's promise to pay commission. This is very well, if the broker's principal consents to be involved in the litigation. If he refused, the broker could issue proceedings in his own name joining the trustee, ie his own principal, as a defendant. The law, therefore, provided a route for the aggrieved broker, but not a particularly easy or desirable route.
The Contracts (Rights of Third Parties) Act came into force on 11 November 1999. It applies to contracts governed by English law entered into on or after 11 May 2000 or to contracts entered into after 11 November 1999 which expressly provide that the Act will apply. The principle provisions and consequences of the Act are as follows:
Section 2 of the Act endeavours to find a compromise between allowing parties freedom to contract, but preserving a third party's rights in the event of termination. It thus provides that the contracting parties may not, without the consent of the third party, rescind or vary the contract in such a way as to alter his rights under the Act if, as will be the case with shipbroker, the contracting parties are aware that the broker has relied on the term or it was reasonably foreseeable that the third party would rely on the term and he has in fact relied on it.
In conclusion, the Act makes recovery of commission much easier for those to whom it applies. The party who should gain the most under the Act is the charterers' broker, who previously was not able to sue an owner direct for his commission.
To conclude this talk, I will discuss what action is available to a broker in order to recover commission. In short, the potential steps are as follows:
The Baltic Exchange's mode of dealing with parties who do not pay their debts is to publicise default. The commercial embarrassment of being "posted" for non-payment will often compel the defaulting party to pay. This is the first step I would normally recommend.
The first hurdle to overcome is identifying the proper forum. In most shipping contracts the parties will choose the law they wish to govern the contract. This does not mean, however, that the broker's right to commission is also subject to the same law. If he is a member of the EEC or any other country which is a signatory to the Lugano Convention, for example, the law which governs his rights will, in the absence of any express stipulation, be the law of the country in which he is domiciled. The first step, therefore, is to correctly identify where a claim should be brought. Once the correct forum is identified and the claim issued, it must be served before the claim can be progressed. Service can, however, take some time: particularly where, as is usually the case, the debtor is based overseas. After service, the claim can be progressed. In some situations, immediate judgment can be given, provided it is shown that there is no reasonable defence to the claim. After judgment, the broker may proceed to enforcement.
If the Contracts (Rights of Third Parties) Act 1999 applies, a broker may avail himself of the arbitration clause, provided it is not limited to claims between charterers and owners. The advantages of arbitration can be considerable.
Mediation is growing in popularity. We find that parties who mediate usually settle. It is, however, a consensual process and the findings of a mediator are not binding. He or she will make recommendations only. It is, nevertheless, proving a popular and reasonable inexpensive method of dispute resolution.
APPENDIX 1 Sample Commission Clauses
Part II 40: "A brokerage commission at the rate stated in Box 33 on the freight, deadfreight and demurrage earned is payable by the Owners to the party mentioned in Box 33"
Clause 16 "… per cent. Brokerage on the gross amount of freight and deadfreight is due by the shipowners upon shipment of cargo to …"
Clause 31 "A brokerage commission of … per cent on gross freight, deadfreight and demurrage is payable by the owners to …. at the time of the owners receiving these payments"
Clause 22 "The brokerage at the rate stated in Box 33 upon the freight, deadfreight and demurrage (if incurred), is due by the owners to the brokers named in Box 33 upon shipment of the cargo. In case of non-performance 1/3rd of the brokerage on the estimated amount of freight and deadfreight to be paid by the owners to the brokers as indemnity for the latter’s expense and work. In the case of more voyages the amount of indemnity to be mutually agreed."
Clause 15 "A brokerage commission at the rate stated in Box 24 on gross freight, deadfreight and demurrage earned is due to the party mentioned in Box 24. In case of non-execution 1/3 of the brokerage on the estimated amount of freight to be paid by the party responsible for such non-execution to the brokers as indemnity for the latter’s expenses and work. In case of more voyages the amount of indemnity to be agreed.
Clause 34: "… per cent of brokerage is due upon shipment of cargo, to …."
Clause 50 "A brokerage of … per cent on the gross amount of freight, deadfreight and demurrage earned, is due to …"
Clause 43 "A brokerage commission of … per cent on the gross freight, deadfreight and demurrage is payable by owners to … at the time of receiving freight payment and/or demurrage payments, vessel lost or not lost"
Clause 25 "The brokerage at the rate stated in Box 37 upon the freight, deadfreight and demurrage is due by the owners to the brokers named in Box 37 upon shipment of the cargo. In case of non-performance at least one third of the brokerage on the estimated amount of freight and deadfreight to be paid by the owners to the brokers as indemnity for the latter’s expense and work. In case of more voyages the amount of indemnity to be mutually agreed".
Clause 22 "A brokerage commission at the rate stated in Box 12 on the freight, deadfreight and demurrage is due to the brokers mentioned in Box 14 by owners"
Time Charterparties
Clause 25 "The owners to pay a commission at the rate stated in Box 25 to the party mentioned in Box 25 on any hire paid under the charter, but in no case less than is necessary to cover the actual expenses of the brokers and a reasonable fee for their work. If the full hire is not paid owing to breach of charter by either of the parties the party liable therefor to indemnify the brokers against their loss of commission. Should the parties agree to cancel the charter the owners to indemnify the brokers against any loss of commission but in such case the commission not to exceed the brokerage on one year’s hire."
Clause 21 "The owners shall pay a commission at the rate stated in Box 35 to the party mentioned in Box 35 on any hire paid under this charterparty but in no case less than is necessary to cover the actual expenses of the brokers. If the full hire is not paid owing to breach of charterparty by either of the parties the party liable therefor shall indemnify the brokers against their loss of commission. Should the parties agree to cancel this charterparty, the owners shall indemnify the brokers against any loss of commission but in such case the commission shall not exceed the brokerage on one year’s hire."
Clause 43 "A commission of … per cent is payable by the vessel and the owners to … on hire earned and paid under this charter, and also upon any continuation or extension of this charter."
Clause 23 "The owners shall pay a commission at the rate stated in Box 36 to the brokers stated in Box 36 on any hire paid under this charterparty or on any continuation or extension thereof. If the full hire is not paid owing to breach of charterparty be either of the parties the party liable therefor shall indemnify the brokers against their loss of commission. Should the parties agree to cancel this charterparty, the owners shall indemnify the brokers against any loss of commission but in such case the commission shall not exceed the brokerage on one year’s hire. In signing the charterparty the owners acknowledge their agreement with the brokers to pay the commissions described in this clause."
Very few contain any clause recording commission obligations. There are a couple of exceptions.
Part I J "Commission of … per cent is payable by owner to … on the actual amount of freight, when and as freight is paid."
Part I H "Commission of … per cent is payable by owner to … on the actual amount of freight and deadfreight only when and as freight and deadfreight is (are) paid." |