https://www.itic-insure.com/our-publications/intermediary/collecting-commission-2908/
COLLECTING COMMISSION
Major changes to English Law
A provision of English law which for 150 years has restricted the ability of ship brokers to collect
their commission will be removed on 11th May, 2000. This change comes as a result of the
Contracts (Rights of Third Parties) Act 1999 (‘The Act’) coming into force. The Act will also to a
lesser extent have ramifications for ship managers and ship agents as is set out below.
The Act reforms the Doctrine of Privity of Contract a rule of English law which provides that only
parties to a contract, such as the owners and charterers under a charterparty, can have rights
and obligations under the contract which they can enforce. According to the Doctrine of Privity
a person such as a ship broker who is not a party to the contract (‘a third party’) cannot enforce
a term of the contract even if it names him and states that he should receive a benefit, such as
the payment of a commission. The Act will amend this restrictive rule by providing that third
parties such as ship brokers may obtain enforceable rights under a contract. The ship broker will
be given a right to take action to enforce the commission clause in his own name. The Act will
automatically apply to contracts entered into after 11th May, 2000. It is important to note that
the relevant date is the date upon which the contract is made. The pre-Act position will
therefore continue to be relevant while contracts entered into before the application of the Act
continue to run. In relation to long term time charters this could be for a number of years.
Although the doctrine of Privity prevented ship brokers bringing action in their own name, they
were not wholly without a remedy before the Act. The courts held that the charterers had
entered into the charterparty commission clause as a trustee for the broker. The broker was
therefore entitled to demand that the charterer take action to enforce the commission clause.
This was often not a commercially attractive option. The law further provided that should the
charterer be unwilling to take action, the broker’s remedy was to sue the charterer as a second
defendant to formally enforce the trust. The need for this artificial device is swept away by the
Act.
In order to make use of the Act the broker must fall within its provisions. Section 1 of the Act
provides that a third party shall have the right to enforce a term of the contract if either the
contract expressly provides that he may enforce it or, under Section 1(1)(b) ‘the term purports
to confer a benefit upon him’. Commission clauses in existing standard form charterparties do
not expressly state that the ship broker can sue, but the clauses clearly ‘purport to confer a
benefit upon’ the ship broker in the form of a commission. The Act therefore grants them the
right to take action to sue in their own name. It is a requirement of the Act that there is a term
of the contract which benefits the third party. This means that for brokers in some markets the
Act will have no effect. The MOAs commonly used in sale and purchase transactions do not, as a
matter of practice, have commission clauses inserted in the contract. The act will therefore not
affect the position of sale and purchase brokers. A number of charterparties used in tanker
trades also do not contain commission clauses. If these are not added as an additional clause,
then again the Act will not assist brokers in these markets. In the majority of other
circumstances ship brokers do find their commission is recorded within the charterparty and the
Act will clearly apply to them.
It is also necessary that the broker is identifiable in the charterparty. This does not mean that he
has to be expressly named, although many charterparty commission clauses are completed by
inserting the name of the broker. It is possible that the broker could be identified as a member
of a class or answering a particular description. This would mean that a charterparty clause
‘1.25% to each Broker’ would probably be sufficient to identify them.
There is, however, a problem with the common practice of making out the commission clause
with words like ‘x% to ABC Shipbroker Ltd for division’. This will create problems for the brokers
with whom the commission is to be divided as the contract does not appear to confer a benefit
directly on them. Section 1(2) of the Act provides that no rights are granted if on the proper
construction of the contract it appears that the parties to the contract did not intend the term
to be enforceable by the third party. It would appear correct to conclude that a clause providing
that commission would be paid to one broker for division with others does not intend to give
the ‘others’ an enforceable right. The clear advice to Members is therefore to attempt to ensure
that they are named in commission clauses together with the percentage of commission that
they individually will receive.
The right granted is the right to enforce the charterparty term. The brokers’ rights will therefore
vary according to what charterparty form is used. Some commission clauses are merely simple
statements of the amount of commission to be paid and to whom it is to be paid. Others, such
as the Baltime and Gencon charterparties have extensive terms dealing with the situation where
the charterparty is cancelled. This is an area which may cause problems.
Section 2(1) is intended to prevent parties from cancelling agreements under which third parties
have acquired rights. It would be unfair if the third party had relied upon a contract term in his
favour only for the parties to cancel the contract or vary it to alter or end his rights. The section
prevents the cancellation or alteration of a contract or term in certain circumstances. These are
where the third party has agreed to the term, or the party concerned is aware that the third
party has relied upon it, or that it would be reasonable to expect the third party to rely on the
clause and he has actually relied upon it. It is likely that this section will give rise to litigation in
the common situation where brokers do considerable work only for the fixture to be cancelled.
Where the charterparty contains express provisions for the broker such as in the Gencon and
Baltime forms, those terms will govern the situation. In the absence of such provisions it is
unclear whether the broker has in fact gained protection from the charterparty being cancelled
without him being compensated. It is clear that the owners and charterers could not continue
the fixture but simply decide they would not pay the broker. Charterparty commission is,
however, paid only when freight or hire is earned and/or paid. If that does not occur because
the charterparty is cancelled, then there is nothing for the broker to be paid commission on. It is
not clear how the courts will look at this situation.
The Act removes the problems faced by brokers when bringing an action to secure commission.
In doing so it does, however, produce some fundamental changes in the way that the Club will
be able to assist Members to collect their commissions. It appears that ship brokers may now be
able to arrest a ship to obtain security for a commission claim. The court would have to find that
the claim came within Section 20(2)(h) of the Supreme Court Act 1981 which provides that the
claim must be arising out of, or relating to, the use or hire of a ship. A charterparty of course
relates to the hire of a ship and accordingly the shipbroker appears to have the right to arrest
the ship.
Another major development may be that ship brokers will be able to pursue their claims by
arbitration. The position will depend upon the charterparty arbitration clause. If like the NYPE
1946, clause 17 (which is often altered from New York to London arbitration), it refers to any
dispute ‘between owners and charterers’ the clause will not be capable of governing third party
rights. Other clauses are, however, more widely drafted. The BIMCO/LMAA Arbitration Clause
provides that ‘... any dispute arising out of or in connection with this contract shall be referred
to arbitration ...’. This would appear wide enough to cover the ship broker’s claim for
commission. The submission of commission claims to arbitration will be of considerable benefit
to brokers. The BIMCO/LMAA clause provides for the small claims procedure to apply to claims
below a certain level. This would catch most commission claims and would accordingly provide a
cheaper and more efficient method of arbitrating the broker’s case.
Other benefits include the ease with which proceedings can be started and the fact that
arbitration is a private procedure. In conclusion, ship brokers should be aware of the changes
brought about by the Act. To ensure that they are capable of benefiting, they should attempt to
secure commission clauses both naming them and setting out the percentages that they should
receive. They should, if possible, also try to ensure that the charterparty contains a commission
clause, such as the BIMCO/LMAA Arbitration Clause which is wide enough to give them the
benefits of arbitration, and especially that of the small claims procedure.
Ship Managers, Ship Agents and the Act
In addition to assisting third parties such as ship brokers who are promised payment in a
contract, the Act specifically refers to the ability of a third party to rely upon a clause limiting or
excluding their liability. This was deliberately drafted to assist parties who are mentioned in
Himalaya clauses.
Himalaya clauses were designed to prevent cargo owners from avoiding the effect of
contractual defences available to the carrier, such as the limitations in the Hague Visby rules, by
suing persons, such as ship agents or stevedores who perform contractual services on the
carrier’s behalf. The clauses tend to provide that no action should be started against the agents
and sub-contractors of the carrier and that in any event they shall have the same defences and
limits of liability as the carrier. The use of these clauses is not, however, limited to bills of lading.
Many contracts incorporate these clauses. One example is clause 11.4 of the BIMCO ÒShipman
98Ó Standard Ship Management Agreement. The ability of the third party to rely upon the
protection given by some of these clauses was in doubt until the passing of the Act. It is now
clear that third parties can use the clause as a defence to any action brought by one of the
parties to the contract. This will provide an additional protection to ship managers, ship agents
and others who act on behalf of the carrier or owner. Ship brokers should be aware of the
changes brought about by the Act. To ensure that they are capable of benefiting, they should
attempt to secure commission clauses both naming them and setting out the percentages that
they should receive.