General Forum: Monday 2nd October

09.50 - 11.20 Paul Herring - Ince & Co  

JUST WHO ARE YOU DEALING WITH?

Paul Herring — Ince & Co

Agency Principles

An agent (and in this seminar we shall be focusing primarily on shipbrokers) will bind to a contract his principal, provided that the agent, when concluding the contract, is acting within his actual or ostensible authority. In most cases the shipbroker will, and indeed should, clearly identify his principal and state his position as an agent. The clearest indication of his status is "as agents only". Not only is this the manner in which the formal contract (for example, the charterparty or sale and purchase contract) should be signed — (indeed it would be advisable for the broker to identify the nature of his authority — i.e. by Power of Attorney, telephone authority etc), but should also be used when signing off on telexes, faxes and emails since, as a matter of English law, a contract will very often come into existence, by way of the recap, before the formal contract is signed.

It might be thought that for the purposes of this seminar, one would be looking primarily at the broker’s position vis a vis his principal in view of the problems, examined below, of either a non existent principal or a principal who is to be nominated. However, it is also necessary to look "in the other direction" to see what problems a broker may face as a consequence of a breach of duty by a co-broker.

The Broker’s Principal

It may appear to be a statement of the obvious that the broker should know who his principal is. The consequences of acting for a non-existing company are not to be underestimated. To take an example, if a chartering broker fixes a vessel on behalf of a named charterer (i.e. a disclosed principal), the broker may become liable personally on the contract, as principal, if it is subsequently discovered that the named charterer did not exist. Thus, the broker could find himself exposed to a claim where his (non existent) principal does not exist and the contract in question is not performed. Although the broker has purported to contract on behalf of a charterer who did not exist, this will not make him automatically liable. It is permissible to bring evidence properly to identify the contracting party. In the Rhodian River and Rhodian Sailor [1981] 1LLR 373, the wrong owning company had been specified. In that case the court was willing to rectify the agreement as the intention of the parties had been to contract in the name of the correct owning company.

Where the broker has warranted that he has authority on behalf of a particular principal, the party who has suffered loss as a result of relying upon the warranty is entitled to claim damages for breach of warranty of authority. The normal measure of damages is to put the innocent party into the same position as he would have been in if the broker had had authority. In such a case, the broker’s argument is often that even if the non existent principal had existed, the likelihood is that he would have been insolvent and thus the position would have been no different. In this situation, however, it is possible that the broker himself is liable on the contract. In particular, Section 36C of the Companies Act 1985 provides that:

"A contract which purports to be made by or on behalf of a company at a time when the company has been formed, has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personallyliable on the contract accordingly."

This section now applies (it did not until 1994) to companies incorporated outside of Great Britain and the risks to shipbrokers are obvious. If the broker himself is liable on the contract, the damages will be assessed on the basis of normal contractual principles and the broker held liable as if he were the principal.

The other area where brokers face potential exposure on the basis that they are acting for a non existent principal is where contracts are entered into on behalf of a company to be nominated. In the sale and purchase business in particular, it is common for a single purpose company to be set up by the buyers to buy the vessel. If the company has not been properly formed at the time the contract is entered into, the shipbroker could be held liable on the MOA if the "buyer" defaults. The difficulties are exacerbated by the fact that, despite many people’s belief, overseas companies in certain jurisdictions have to go through various administrative procedures before the company can be said to be properly incorporated and be capable of concluding a binding contract. An example of this is the Aktion [1987] 1LLR 283 where the principals behind the company to be nominated were held personally liable on the contract because the Panamanian company who had been nominated had not been properly incorporated. The same dangers, however, exist for the shipbroker and the damages could be considerable. For example, the seller of the ship may be able to sue for the deposit under the Norwegian Sale Form in the event that the buyers do not provide the deposit within the period specified in the contract. In the Aktion, of course, the court held that those individuals who were to nominate the buying company were liable, but that will not necessarily be the case in all circumstances.

Where the buyers are described as a company or nominee (or a company to be nominated), the position is that the first company will be liable under the contract until a valid nomination is made. However, contracts are sometimes negotiated on behalf of a company to be nominated by ABC Limited (in which case it is strongly arguable that ABC Limited would not be liable on the contract, even without a nomination) and occasionally on behalf of a "client" of ABC Limited. Again, the dangers for the shipbroker are obvious.

In many cases a broker will be acting for a principal with whom he has done business for a number of years and is confident of his principal’s corporate existence. However, if there is any doubt, the shipbroker should take steps to ensure that the principal, on whose behalf he is purporting to contract, has been duly incorporated. This can be done in England over the telephone, but is more difficult in other registries. Nonetheless, given the risks for the broker, checks should be made in the event of any doubt.

Having looked at the position of the broker and his principal, in particular the position where the principal is non existent, it is necessary to look at the position of possible liabilities incurred by a broker as a consequence of breaches of duty by another broker. Although often there may be only two brokers between the two principals (e.g. one acting for the charterer and one for the owner), it is common to have a number of shipbrokers in a chain, not only in chartering, but also in sale and purchase. The sub-broker may have an allegiance to one side or the other, or may be a purely independent intermediary who represents neither of the two principals. Unless there is a direct relationship between the principal and the sub-broker, the contractual relationship is between the broker (who appointed the sub-broker) and his principal. The consequence of this is that the broker will be liable to his principal for any breach of duty by the sub-broker, regardless of fault on the part of the broker. Whilst the sub-broker is himself liable to indemnify the broker who appointed him, of course the value of that indemnity depends upon the financial worth of the sub-broker.

The sort of difficulties which can arise in a chain of brokers is amply illustrated by a case with which I was recently involved regarding the sale and purchase of a ship. The case also demonstrates the dangers of dealing with a party purporting to act on behalf of a certain company (with worth) and a nominee, of little or no worth. The sellers’ broker entered into negotiations with a sub-broker in London who was in turn liaising with a broker in China. The Chinese broker was dealing with the Chinese buyer. The buyers alleged that the authority given to the Chinese broker was to contract on behalf of a "nominee of ABC Limited", not on behalf of "ABC Limited or nominee". The significance of this is discussed above. A Memorandum of Agreement was eventually concluded with the buyer being shown as ABC Limited or their nominee. The buyers declined to complete the purchase and argued that the Chinese broker only had authority to contract on behalf of a nominee of ABC Limited. The sellers contended that an MOA had been concluded, but also commenced proceedings against the London sub-broker for breach of warranty of authority because that broker had signed the MOA on behalf of ABC Limited or nominee, thereby warranting that he had authority. The London sub-broker had little or no previous experience of the Chinese broker with whom he was working and paid the consequences. The London sub-broker was also threatened with proceedings by the Chinese buyers on the basis that he had exceeded his authority! The case highlights not only the dangers for brokers, but also reinforces the potential problems where the buyer (and it would apply equally to a charterer) is either a company to be nominated, or a stated company or a company to be nominated. This is becoming increasingly common in transactions involving Chinese principals, where the company of status will often argue that they were simply acting in an agency capacity on behalf of the nominee so that the brokers only authority was on behalf of that nominee. Care should be taken to ensure that the broker knows precisely on whose behalf he is contracting.

Finally, in terms of knowing who one is dealing with, it goes without saying that the broker should know the precise name of his principal. Otherwise difficulties can be encountered as is evident from the decision of Mr Justice Walker in the Riza/Sun [1997] 2LLR 314, where disputes arose as to whether or not the charterers of the ships concerned were Cronos Maritime Agency SA or Cronos Management. As a consequence of that dispute, the matter was heard in the Commercial Court over a period covering nine days, with the owners arguing that Mr Vatis, the principal behind Cronos, was personally liable under the two charterparties. Originally, at the commencement of negotiations, the charterer had been described by the brokers (and was understood to be) Cronos Maritime. However, when the first firm offer was made, the charterers were referred to as "account Cronos Management" leading, eventually, to an allegation that Mr Vatis was liable personally. The claim against Mr Vatis failed, but the case amply demonstrates the need for the brokers to ensure that they know precisely the name of the party on whose behalf they are purporting to contract. Thus in the Winner [1986] 1LLR 36, the issue was whether or not the charterers were Saudi-Line SA of Jeddah or Saudi-Europe Lines of Panama. This made a considerable difference to the owners of the ship (because the company in Jeddah had assets, whilst the company in Panama did not) and again demonstrates the need for precision when fixing the business.