A Look at Shipbroker Commission Collection in the United States
Typically shipbroker 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 paid(1). 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, shipbroker 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 forms(2). 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
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 shipbroker commission case involving fairly common facts(3). The disponent owner negotiated a twelve-month charter, with the aid of a broker, to a charterer who in turn sub-chartered the vessel for the exact same terms except that the hire rate was ten-percent more for the sub-charter. No broker was used to negotiate the sub-charter. 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 shipbrokerage 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 shipbrokering claims have long been characterized as being based on an agreement for services preliminary to or leading to a maritime contract. Therefore, a shipbroker suing for commission pursuant to a commission clause contained in a charter party nevertheless has a valid claim as a third-party 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.
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 third-party(4) ; (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.
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
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.