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Intermediary September 2005
A LOOK AT SHIP BROKER COMMISSION COLLECTION IN THE UNITED STATES
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Typically ship broker commission collection cases center around the language found in the commission clause of a charter party. These clauses generally provide that a broker acting for a principal in negotiating a charter is entitled to commission on freight or hire paid1. Problems arise, however, when a charter is cancelled or a vessel is redelivered early. In these instances, absent specific language in a commission clause, courts usually will not grant a broker its commission on amounts obtained by its principal through litigation, settlement or a newly negotiated charter agreement. There are, however, causes of action and remedies which brokers may employ even when a charter party is cancelled.
WHEN ARE COMMISSIONS EARNED?
In the United States, ship broker collection cases are not governed by maritime common law. As such, which claims and remedies are available to a broker are dictated by state law. Although there obviously are differences among the various state laws, certain principles are applied to these cases with a fair degree of uniformity. For example, under New York law, it is axiomatic that a broker is generally entitled to receive commissions when he brings a principal and a third-party together and there is a meeting of the minds on the essential terms of an agreement. Many jurisdictions in the United States have the same or a similar standard in some form or another. In shipping terms, the requisite threshold showing is that a charter party negotiation resulted in a fixture through the efforts of the broker.
As mentioned, the broker's claim for commission is based primarily on the commission clause contained in the relevant charter party.The express terms of these clauses are strictly interpreted and generally speaking there is little opportunity to find implied meanings in the commonly used charter party forms2.This principle is particularly meaningful to brokers who are denied a commission when one or both parties to the charter cancel, as it is commonly accepted that, absent a commission clause that allows a broker to collect some compensation upon a cancellation or breach, the broker is without remedy in such cases.There are circumstances, however, where the broker can seek relief other than by claiming for collection based on the terms of the commission clause.These alternative causes of action and remedies will usually be applicable when there is bad faith conduct by the principal or a third party or when other strong equitable considerations favor the broker's collection efforts.
ALTERNATIVE LEGAL THEORIES AND CIRCUMSTANCES
Equivalent performance
New York law recognizes a doctrine of
"equivalent performance" that may aid
brokers when a contract providing for a
broker's commission is breached but the
principal owing the commission is in the
same or a better position than if the
contract had been performed.This doctrine
was articulated by a New York State
appellate court deciding a ship broker
commission case involving fairly common
facts3.The disponent owner negotiated a
twelve-month charter, with the aid of a broker, to a charterer who in turn subchartered
the vessel for the exact same
terms except that the hire rate was tenpercent
more for the sub-charter. No
broker was used to negotiate the subcharter.
After several months, the charterer
was unable to pay hire to the disponent
owner but, in order to mitigate, the
charterer arranged for the sub-charterer to
perform its obligations directly to the
disponent owner.The charterer also
continued to be responsible for its original
obligation to the owner.The disponent
owner argued that because the sub-charter
was negotiated without a broker, no
commissions were due. However the court
found for the broker reasoning that the
original charter party had been effectively
performed since the substituted charter
party gave the owner its full benefits.
Covenant of Good Faith
Brokers faced with cancellations of charters
and who receive no solace from the plain
language of the applicable commission
clause may nevertheless have a remedy if
there has been a breach of the implied
covenant of good faith and fair dealing
implicit in all contracts. Simply stated, the
covenant prohibits either party to a
contract from doing anything which will
destroy or injure the other party's right to
receive the benefit of the contract. It
should be noted that the burden of
proving that this covenant has been
violated is difficult since the covenant does
not add any rights or act to undermine a
party's right to protect its own interest. For
example, an owner acting in good faith
who negotiates a settlement with a canceling
charterer is not in violation of the covenant
even though incidentally a broker is deprived
of a commission by that act. If, however, the
cancellation or subsequent mitigating
conduct is intentionally done in order to
deprive the broker of its commission, then
the cause of action is supportable.
Third Party Beneficiary
Although it is commonly accepted that a
broker may sustain a claim against a
principal (usually the vessel owner)
pursuant to a commission clause, there is
some question as to the direct contractual
nature of such a claim due to the fact that
a ship brokerage commission clause is
usually contained in a contract (charter) to
which the broker is not a party. Many
decades of maritime decisional law imply,
however, that the brokerage commission
agreement is separate and severable from
the charter insofar as ship brokering claims
have long been characterized as being
based on an agreement for services
preliminary to or leading to a maritime contract.Therefore, a ship broker suing for
commission pursuant to a commission
clause contained in a charter party
nevertheless has a valid claim as a thirdparty
beneficiary to the charter party. Under
this theory, a broker need only show that
the contract intended that the third-party
broker receive a benefit (albeit incidental)
from the performance of the charter.
Tortious Interference
Another theory of recovery that should be
considered in a brokerage commission
context, particularly in situations where it is
anticipated that a charter party will be
cancelled is a claim for tortious interference
with contract.The elements of this cause of
action are: (1) the existence of a valid
contract between the claimant and a thirdparty4;
(2) the interfering party's knowledge
of the contract; (3) the intentional
procurement of the third-party's breach
without justification and, finally; (4) a breach
and damages. It is critical in assessing the
merits of this type of claim to determine
whether the tortious conduct occurred
before the charter party was actually
terminated because the broker's contractual
claim for commission would terminate then
as well. As set forth above, one of the
critical elements of the tort (the existence
of a contract) would be missing. Practically
speaking, a broker should be cognizant of
interference, say by another broker, of a
charter which may imminently be cancelled
but has not yet formally been terminated.
Quantum Meruit
Finally, brokerage claims may be recoverable
under the theory of quantum meruit.
Quantum meruit is a quasi-contractual
claim created by law in the absence of a
specific agreement in order to prevent
unjust enrichment of one party at the
expense of another. It is usually pleaded in
the alternative, to apply in the event that a
plaintiff is unable to establish a contract
claim against its principal. In essence, the
broker is claming that through its efforts
and expenditures the principal obtained a
commercial opportunity and should thus
compensate the broker for its efforts.
The above short review of claims and remedies available, but not always asserted by brokers, in certain types of commission cases is hopefully useful to brokers who feel they have been short-changed in collecting their commissions.
Our thanks for this article go to Stephan Skoufalos Skoufalos Llorca & Ziccardi LLP
1 Under the commonly used NYPE form for time charters, commissions are due only on hire earned and paid. A number of charter party forms such as GENCON and BALTIME, however, contain specific clauses which provide for the broker to receive compensation in the event that the agreement is cancelled.
2 If the commission clause in the charter party is ambiguous, a court may look to extrinsic evidence such as the custom and usage in the industry to determine if the brokerage commission should be paid.
3 Kane v Neptune Shipping, Ltda 79 NYS 2d 396 (1st Dept.1948)
4 The broker as discussed above is at a minimum usually a third-party beneficiary of the charter party.