Introduction contracts: cutting out the middleman
Now and then a broker might get to hear of a ship sale or other shipping transaction which has gone through, and the details of which sound familiar. Wasn’t that the transaction he had introduced and worked on for that principal? – hadn’t he been asked to close his file on that one? If the deal has in fact gone through, why hasn’t he been paid his commission? Has he been cut out – and if so, what can he do about it? What will he have to prove to recover that commission? These problems have been examined in the English courts and this article examines the important propositions to be derived from the case law on the subject.
This might seem the most obvious of propositions, but it is important to bear in mind that unless an agent can show first of all who his principal is and secondly that he has an agreement with him sufficient to establish what his role is and his entitlement to commission, then there is no prospect of trying to claim any remuneration.
The identity of the principal may be a matter of some complexity in a chain of transactions and where competitive brokers are involved. However, if a shipbroker is going to claim a commission, he must know who he is looking to for payment and therefore should make sure that the person he regards as principal is aware and acquiescent.
In English law, the agreement does not have to be in writing, but it must be possible to ascertain in some way the terms of the agreement between the agent and his principal. For example, (In 1998, in a case called Peter Nahum v Royal Holloway and Bedford New College, the Court of Appeal upheld the judge’s finding that during the course of a telephone conversation an oral contract was agreed whereby Mr Nahum was instructed to contact potential buyers for some paintings owned by the Royal Holloway College. It was also held that the parties had agreed that any introduction made to the college by Mr Nahum would be subject to commission of 2.5% of the sale price of the paintings sold to the buyer he introduced.) As a practical matter, of course, it is far easier if there is a written contract or at the very least some documentary evidence of the agreement and its terms. If therefore a shipbroker is contacted by a shipowner looking for help to find a buyer for one of his ships, then whether the request came in a letter or during a drink in the pub or a call on the mobile phone, it is always best to send something in writing back to the principal confirming those instructions.
Again, whilst it is always possible to argue that the terms of the agreement with the shipowner were that the broker would earn commission at the usual market rate on the successful completion of the transaction, it is a great deal better if there is evidence of agreement of the level of commission payable. If the broker becomes involved in negotiations in relation to the transaction, then it may be possible in addition to argue that the principal has accepted/acquiesced in the level of commission being discussed. However, unless there has been agreement in advance, it may not be completely obvious where there are multiple brokers involved in a transaction and the principals are simply being told what total commission is going to be payable.
The other point to note about establishing that there is a contract between a broker and his principal is that it must be possible to determine what it was that the broker has to do to earn his commission – is mere introduction enough, or is further expertise or assistance required through the negotiations? However, if something more than a mere introduction is required, as Devlin J said in Allan v Leo Lines Ltd in 1957, “If a broker effects an introduction and is willing to go on with the usual business negotiation, it hardly lies in the mouth of an owner who takes it out of his hands to say that he has made no further contribution.”
Generally speaking, if the shipbroker can show that he had a contract with his principal which would result in the payment of a commission on conclusion of a transaction he had introduced, then he is going to have to be able to show that he was the “effective cause” of the transaction. Did he really bring about that transaction?
This question was examined most recently by the High Court in Seascope Capital Services v Anglo Atlantic Steamship & anr in 2002. This case concerned a ship finance intermediary (Seascope) which claimed that it had been cut out of a refinancing transaction by their principals, Anglo Atlantic. Seascope established that it had concluded a contract with those controlling Anglo Atlantic for the introduction of financing deals for two ships, the “Bolero” and “Barcarolle”. They would also assist as required with the documentation. If the financing went ahead, Seascope would be entitled to a success fee. Of a number of different financing possibilities introduced by Seascope, one was a sale and charter back transaction involving the Royal Bank of Scotland. However, after some discussions with the bank and their principals, Seascope were asked to close their file. Some months subsequently, it was reported that the Bolero and Barcarolle had been refinanced on a sale and charter back basis through the Royal Bank of Scotland. Seascope claimed their success fee. The question of “effective cause” was examined in some detail by the court because Anglo Atlantic sought to argue that the financing deal that was in fact concluded with the Royal Bank of Scotland was different from the one Seascope had introduced. Furthermore, because those controlling Anglo Atlantic had an existing relationship with the Royal Bank of Scotland, they argued that Seascope had not brought the transaction about. The judge concluded that although the deal eventually concluded differed in number of respects from the indication originally introduced by Seascope, it was essentially one and the same transaction. Furthermore, although those controlling Anglo Atlantic knew some of the people at the bank on a business/social level, the fact was that it was Seascope which had sourced the transaction and introduced their principals to the department and people in question. They had brought about the refinancing. Finally, and on the basis of Allan v Leo Lines, the fact that Seascope had closed their files and had not helped out with the documentation for the transaction did not prevent them earning their success fee, because that is what their principals had instructed them to do.
A shipbroker should, as a matter of practice, always try to ensure that there is a written record of any agreement concluded with a principal in relation to commission in order to reduce the scope for future argument. If that is done, then the question will in many situations boil down to whether or not the shipbroker can be said to have brought about a particular transaction. In the world of competitive broking, and in the small world that is shipping, that may not of itself be the easiest thing to show, but the English courts will take a commonsense approach to the evidence.
Partner, Bentleys Stokes & Lowless