Whose agent am I?
Shipbrokers and ship agents can be placed in a position where it is not clear who they are acting for. The classic position where each party has its own shipbroker, or where there is an agency agreement, makes the agent/principal relationship easy to identify. But what happens when there is one agent and two principals, or two agents and one principal (or no agency agreement)? Agents, whether shipbrokers or port agents, are sometimes in a position where identifying their true principal is not an easy task.
The intermediate broker
Shipbroking is unusual in that it is normal practice for the owner to pay commissions to all the brokers involved in the charter of a ship, including the charterer’s broker. However, the charterer’s broker remains just that, even though his commission is paid by the owner. In sale and purchase deals, the seller pays the brokerage to both his own broker and the buyer’s broker. The old adage “he who pays the piper calls the tune“ does not, therefore, apply to shipbroking. The reality is often that there are three or more brokers in a chain. Whose agents are the intermediate brokers? There is no easy answer to this. Considering that it is such a common situation, it has not been the subject of much judicial consideration.
A shipbroker acting for an owner (broker A) may approach another broker (broker B), who in turn approaches the broker for a charterer. Broker B can be an independent intermediary who does not have a contractual relationship with either the owner or the charterer. His role is to act as a conduit for the negotiations, but he is not representing the interests of one principal over and above the interests of the other. An intermediate broker is not, however, without duties or potential liabilities.
The charterer nominates and the owner pays
Some voyage charters contain clauses which give the charterer the right to nominate the port agent, who is then employed by the owner. In such a case, the charterer may receive a fee or commission from the agent for this act of patronage. Some charterers are known to make a substantial amount of money from the ‘commission’ that they receive from the agent, and are therefore quite keen on this arrangement. Why do charterers feel they have the right to not only nominate the owner’s agent, but also to take a commission from him? It is understood that the practice of charterers nominating port agents has its roots in the 1960s when major oil companies changed from their previous practice of exclusively using their own tonnage to carry their own cargoes and started to spot charter tonnage. The oil companies still wanted their own port agents, who were familiar with their business, to continue to act even when the ships were chartered. The reasons were obvious – the oil company’s normal port agent would be in a position to ensure smooth loading and discharge operations. Major oil companies have to a large extent moved out of ship owning, but the practice of nominating the owner’s port agent has continued, and over the years has spilled over into the dry trades.
This practice, and particularly the payment of a commission to the charterer by the port agent, is not popular with owners. It has been alleged by some owners that it is similar to an agent making a secret profit (for example by taking a secret commission from a ship’s chandler for placing the owner’s business with him). However, careful consideration reveals that the two situations are completely different. First of all, the arrangement is not secret. The owner is well aware of the fact that when a charterer nominates the port agent he will do so in exchange for a commission. Secondly the agent does not gain from the arrangement; indeed it can result in his paying over 50% of his agency fee to the charterer. This type of arrangement is merely the workings of the free market as, when negotiating the charterparty, the owner is not compelled to accept a clause which allows the charterer to nominate his port agent. In cases where the charterer has the right to nominate, the owner may manage to include a “competitive agency“ clause in the charterparty that provides that the agent’s fees are to be competitive with those otherwise available at the port. This can result in a situation where the owner then attempts to use the “competitive agency“ provision to protect himself from having to pay agency fees which are inflated by the charterer’s commission. Faced with an owner who wants a 40% reduction in agency fee, and a charterer who wants a 40% commission, the agent may well be unwilling to do the business at such levels.
Under these circumstances, where do the agent’s loyalties lie? It is important that ship agents do not confuse a nomination with an appointment. In simple terms, if a charterer nominates an agent, and the owner pays, it is the owner who is the agent’s principal. The owner is paying the agency fee and legally the agent’s duty and loyalty should be to the owner. However, where the agent depends on the charterer for his livelihood, some interesting conflicts of interest occur. What if the charterer instructs the agent to release cargo against a letter of indemnity, but the owner refuses to authorise the delivery? The agent could find himself with a charterer who is threatening to take his business elsewhere if he does not comply with a practice which obviously prejudices the owner’s position. In such circumstances the agent’s duty is to the owner.
An agent can act for more than one principal with the consent of both. In shipping the owner and the charterer are not two opposing parties, but partners in a venture the aim of which is to make money for both of them. However, if a dispute between these two partners arises, the dual agent will be in a very difficult position. The courts will not be sympathetic to an agent who has allowed himself to be put into a position where he has a clear conflict of interest, particularly when the conflict has not been previously disclosed to the two principals concerned.
The position of a sole broker can be difficult to analyse. If one party has clearly made the first approach to a broker and requests that the broker goes out on the market to find a ship or cargo as the case may be, then the broker will almost certainly be that party’s agent. If, however, the reason the party made contact with the broker was that the broker frequently acted for a certain owner, then that contact obviously would not mean the broker’s allegiance had changed. In addition it would not normally mean that the broker had authority to act for the owners in that particular matter unless subsequently authorised to do so. The idea of looking to see who made the first approach can be a useful test of a broker’s allegiance but it is certainly not a conclusive indicator. It is very much a question of looking to see what happened and drawing the appropriate conclusions. The situation is further complicated by the fact that the broker may start as the agent solely for one party but, with consent, can subsequently act for both parties. In a dispute between owners and charterers the sole broker will be placed in a very difficult and embarrassing position as, unless the dual agency has been fully disclosed, both principals can be under the impression that the broker is solely representing them. This is compounded in the not uncommon situation where a different individual within a broking concern will deal with each principal who regard as “their“client. In legal terms, however, the broking company being a legal entity (such as a limited company) will be deemed to be the agent and not its individual brokers. It is clear that the proper solution, however commercially unwelcome, is for the broker to keep strict checks to identify conflict situations and, if one arises, disclose the position to both principals. If both principals are content for the dual agency to continue, then they can have no subsequent complaint.
Even when the sole shipbroker has the consent of both parties to act, he can still face conflicts in fulfilling his duties. What if a regular charterer principal asks him to fix a particular ship, when the owner of that ship is also a regular client? What if the broker knows that the charterer has a history of late payment? The sole shipbroker in this situation has a clear duty to the charterer of confidentiality and an equally clear duty to the owner to inform him of material facts (eg. that the charterer may not pay him on time).
Charterers’ agents and owners’ protective agents
Under time charter parties, the charterer appoints the port agent and it is open to the owner to also appoint his own protective agent to represent his interests. However, it appears that few owners choose to incur this expense and the selected agent is therefore considered as being the ship’s agent in a general sense, and is therefore also the owner’s agent. These two separate duties can give rise to a conflict of interest. What if the charterer has failed to pay for tugs and pilots within a reasonable time, thereby putting the owner at risk of having his ship arrested? Would the agent release this information in order to fulfil his duty to disclose material information to the owner?
We have tried in this article to give an overview of a very complicated subject. Sometimes the task of identifying an agent’s true principal is so difficult that only a court can make the final determination. We have not touched on the area of the legal position of sub-brokers and sub-agents, which will be dealt with in a future edition of the “Intermediary”.
An agent in the USA for a shipping line operating a service to South America using charterered tonnage was found at arbitration in New York to have failed in his duty to the owner (for whom he had accepted a protective agency) by paying freights to the charterer. The charterer, subsequent to receiving the freights, went into bankruptcy, leaving the charter hire for the ship unpaid.