Brokerage Clause in a Voyage Charterparty

Brokerage Clause in a Voyage Charterparty

A brokerage clause in a voyage charterparty records the commercial reward payable to the shipbroker whose work has helped bring the fixture into existence. In the Gencon form, the broker’s name and the rate of commission are normally inserted in Box 20, while clause 14 provides that commission is calculated on the freight earned. The clause also gives the broker a limited protection where the charter is not performed, by requiring payment of at least one-third of the brokerage on the estimated freight and deadfreight as indemnity for the broker’s expenses and work.

The clause is short, but its legal and commercial consequences can be significant. Brokerage may become disputed where freight is paid net of commission, where the charter is cancelled, where the owner and charterer amend or rescind the charter, where a broker is not named clearly, or where the charter has been performed only in part. The practical question is usually simple: who must pay the broker, when does the right to commission arise, and can that right be enforced directly?

The Commercial Role of Brokerage

Shipbroking is not merely an introductory service. A broker may identify cargo, locate suitable tonnage, bring the parties into negotiation, assist with recap terms, help settle the charterparty wording, and remain involved after fixture to support performance. Brokerage is therefore often treated as the commercial price of procuring the charter, even though the broker is not normally a contracting party to the charterparty itself.

In ordinary practice, the broker’s entitlement arises from his effective involvement in bringing about the fixture. If the charter is concluded because of the broker’s intervention, the commission clause normally gives effect to the parties’ understanding that the broker should be paid when the relevant freight is earned. Where the broker’s role is remote, marginal, or merely incidental, the entitlement may be harder to establish unless the charter wording expressly protects him.

Payment Under the Gencon Brokerage Clause

The Gencon wording does not expressly say in the first paragraph whether the owner or the charterer must pay the brokerage. Nevertheless, the structure of the form points strongly toward payment by the owner. Freight is payable without discount under the freight clause, and the second paragraph of clause 14 expressly places the non-execution indemnity on the owner. On that basis, the normal commercial reading is that the charterer pays freight gross, without deducting brokerage, and the owner accounts to the broker.

This distinction matters because brokerage is often treated in daily fixture negotiations as a percentage adjustment to the owner’s net freight return. That commercial calculation does not necessarily change the legal payment obligation. Unless the charter permits deduction or the parties make a binding later arrangement, the owner should assume that the broker’s commission is payable by the owner once the contractual trigger for payment is satisfied.

Brokerage Is Not the Same as Being a Party to the Charter

Naming the broker in a charterparty does not, by itself, make the broker a party to the charterparty. Traditionally, this created a difficulty under the common law doctrine of privity of contract. A broker could benefit from the clause, but because he was not one of the contracting parties, he could not simply sue as a party to the charter. Older English law solved this problem through a trust analysis, under which the charterer could enforce the brokerage clause for the broker’s benefit.

That older route was commercially artificial but useful. It enabled a broker to obtain payment even where the owner and charterer were the only formal contracting parties. If the charterer refused to sue, the broker could bring proceedings himself, joining the charterer so that all necessary parties were before the tribunal or court. This trust mechanism was important in cases such as Les Affréteurs Réunis v. Walford and later brokerage disputes involving charterparty commission clauses.

Direct Enforcement by Brokers Under the 1999 Act

The Contracts (Rights of Third Parties) Act 1999 changed the practical position in many modern English-law charters. The Act came into force on 11 November 1999 and generally applies to contracts made on or after 11 May 2000, unless the relevant contract is outside its scope or the parties have excluded its operation. Under the Act, a third party may enforce a contractual term where the contract expressly allows enforcement by that third party, or where the term purports to confer a benefit on him and the contract does not show a contrary intention.

A brokerage clause commonly purports to confer a benefit on the named or identifiable broker. It is not always necessary for the broker to be named with perfect precision, provided he can be reasonably identified from the charter and the surrounding commercial setting. A clause stating a brokerage percentage may therefore be enough, depending on its wording and context, to bring the broker within the protection of the Act.

The decision in Nisshin Shipping v. Cleaves illustrates the modern commercial approach. The court treated brokerage wording as intended to achieve its practical business purpose: the broker was to receive the commission allocated to him. Where a commission was stated to be for division between brokers, the wording was not read narrowly so as to deprive one broker of direct enforcement unless the charter clearly required that result.

Why the 1999 Act Matters in Brokerage Claims

Direct enforcement gives the broker a clearer and stronger procedural position. A broker who can rely on the 1999 Act does not need to force the charterer to sue as trustee or join the charterer merely to overcome privity. He can proceed directly against the party who promised payment, subject to the terms of the charter and any applicable arbitration or jurisdiction clause.

The Act can also protect the broker against later contractual changes that would extinguish or reduce his entitlement. Once the broker’s protected right has crystallised under the Act, owner and charterer may be unable to vary or rescind the charter in a way that damages that right without the broker’s consent. This protection is particularly important where freight, cargo quantity, fixture structure, or performance arrangements are later changed after the broker has completed the work that produced the fixture.

Arbitration and the Broker’s Route to Recovery

Where a broker enforces a brokerage clause under the 1999 Act, the enforcement right may be linked to the charterparty’s dispute resolution clause. Section 8 of the Act treats the third party as bound by the arbitration mechanism for the purpose of enforcing the relevant term, provided the arbitration clause is wide enough to cover the brokerage dispute. In practical terms, a broker cannot usually take the benefit of the payment clause while ignoring the agreed method for resolving disputes under that charter.

This approach was also recognised in Nisshin Shipping v. Cleaves. The broker was not an original party to the arbitration agreement in the ordinary sense, but for the limited purpose of enforcing the commission term he had to stand in the position created by the charter. Therefore, where the charter requires London arbitration and the brokerage claim falls within the scope of the arbitration clause, the broker’s claim may properly proceed in arbitration.

Defences and Set-Off Against Brokerage

The owner is not deprived of all defences merely because the broker sues directly. Section 3 of the 1999 Act allows the promisor to rely on defences or set-offs that arise from or in connection with the charter and are relevant to the term being enforced. The word “relevant” is important. A defence connected with the brokerage obligation may be available; an unrelated debt owed by the charterer to the owner will usually not be enough to defeat the broker’s claim.

For example, if the brokerage clause states that commission is payable on freight earned, the owner cannot usually avoid payment merely because the charterer has failed to pay other sums. If the clause makes commission payable only on freight actually paid, the position may be different to the extent that non-payment of freight affects the contractual basis of the broker’s calculation. The exact wording therefore controls both the broker’s entitlement and the owner’s available response.

Older Charters Outside the 1999 Act

Where the 1999 Act does not apply, the older common law and equitable principles remain important. A broker may need to rely on the charterer enforcing the clause as trustee for him. If the charterer will not assist, the broker may have to sue and join the charterer as a party so that the claim can be framed through the charterer’s contractual right.

This older method is less direct and less convenient, but it may still preserve the broker’s commercial entitlement. The broker’s position will depend on the wording of the charter, the identity of the party responsible for commission, the procedural rules governing the claim, and whether any later variation has lawfully affected the broker’s equitable rights.

Freight Paid Net of Brokerage

A frequent practical problem arises when the charterer pays freight after deducting the brokerage commission. Such deduction may be perfectly valid if the charter expressly permits it. However, where no express deduction right exists, the legal effect depends on the facts and the parties’ conduct.

If the charterer deducts brokerage without the owner’s consent, the deduction does not normally affect the broker’s right against the owner. The owner remains liable to the broker and may claim the unpaid balance of freight from the charterer. The charterer cannot unilaterally convert a gross freight obligation into a net payment arrangement at the broker’s expense.

Even where the owner accepts payment net of brokerage, the arrangement may be no more than an informal mechanism under which the charterer pays the broker on the owner’s behalf. In that case, if the charterer keeps the deduction and fails to pay the broker, the owner may remain liable to the broker while retaining a claim against the charterer for the deducted amount.

Express Deduction Clauses

The position changes where the charter expressly gives the charterer the option to deduct brokerage from freight or hire. In that situation, once the option is exercised, the charter may be read as shifting the immediate payment responsibility for the deducted commission to the charterer. The owner will not necessarily remain liable for commission which the charterer was expressly authorised to deduct and pay onward.

The Panaghia P is the leading example of this issue. The charter contained a typewritten provision allowing charterers to deduct the broker’s commission from hire. When the charterers deducted the commission but failed to pay it to the brokers, the court treated the charter wording as meaning that the charterers, not the owners, were responsible for the commission so deducted. The result depended on the construction of the charter and would be equally relevant where a broker enforces under the 1999 Act.

No Express Deduction Right

Where the charter contains no express right of deduction, it is necessary to decide whether the owner and charterer merely adopted a payment convenience or whether they legally varied the charter. A convenience arrangement does not normally prejudice the broker. A true variation that transfers responsibility to the charterer may affect the broker only if the broker is bound by it.

Where the 1999 Act applies, the broker is generally protected against a variation that extinguishes or alters his enforceable right without his consent, once the statutory requirements are satisfied. Where the Act does not apply, the position is more technical, but there is a strong argument that an owner who knows of the broker’s equitable entitlement cannot defeat it by making a private variation with the charterer without the broker’s agreement.

Claims Against Charterers for Deducted Brokerage

Where the broker must seek payment from the charterer because the charter authorises deduction, the legal route may depend on the structure of the clause. There may be an implied term that the charterer, having deducted brokerage, must pay it to the broker. Under the 1999 Act, the broker may enforce that term directly if it purports to confer a benefit on him. Outside the Act, the owner may hold the benefit of that promise on trust for the broker.

In some cases, the facts may also support a separate agreement between the charterer and the broker, especially where the charterer has communicated that it will pay the deducted amount. There may also be a restitutionary route where the charterer has retained money that was deducted for the broker’s benefit. However, these alternatives depend heavily on evidence and should not be assumed unless the payment arrangement is clear.

Commission on Freight Earned

Under the Gencon wording, brokerage is calculated on freight earned. This is important. The broker’s first-paragraph entitlement is not stated to arise on estimated freight, nor merely because the charter was fixed. It is tied to freight that has been earned under the charter. The broker’s position is therefore more secure than under clauses that depend on freight actually received by the owner, but less secure than under forms giving commission on the anticipated freight whether the voyage is performed or not.

Because the Gencon clause refers to freight, commission is not automatically payable on every other sum connected with the voyage. In particular, demurrage is conceptually distinct from freight. Unless the charter wording extends brokerage to demurrage or other charges, the safer view is that the broker’s commission is confined to the freight basis stated in the clause.

If no freight is earned because the charter is not carried out, the broker may not be able to claim ordinary commission under the first paragraph. His protection then depends on the non-execution indemnity in the second paragraph, or on any separate agreement or implied duty that may apply outside the Gencon wording.

Variation or Rescission Before Freight Is Earned

Owner and charterer may later agree to reduce the cargo quantity, change the freight basis, substitute a different commercial arrangement, or terminate the charter by mutual agreement. Such changes can reduce or eliminate the freight on which brokerage would have been calculated. English courts have historically been cautious about implying a broad term that owner and charterer must never vary or rescind the charter if the effect is to reduce the broker’s commission.

French v. Leeston Shipping demonstrates that caution. Where the parties mutually ended a charter, the broker could not simply say there was an implied term preventing the owner from agreeing to termination merely because the broker’s future commission would be lost. A narrower implied restriction may exist where the owner acts for the sole purpose of depriving the broker of his commission, but ordinary commercial variation or termination is not automatically forbidden under the older law.

The 1999 Act may alter this practical balance. Where the broker has acquired a protected right to enforce the brokerage term, section 2 can prevent owner and charterer from rescinding or varying the charter in a way that extinguishes or alters that right without the broker’s consent. The exact effect is not always simple, because some variations merely change the commercial figures by reference to which commission is calculated, while others may destroy the broker’s entitlement altogether.

Exercise of Contractual Options

A distinction should be drawn between a later variation and the exercise of an option already contained in the original charter. If the charter itself contains a cancelling clause and the charterer lawfully cancels, the broker’s ordinary commission may fail because the charter has not generated earned freight. That result is not usually a variation of the broker’s right; it is part of the original bargain on which the broker’s entitlement was always conditional.

The same reasoning may apply to other contractual options affecting performance. A broker’s commission clause should therefore be read together with the whole charterparty. Brokerage is not isolated from the commercial mechanisms by which the charter may be cancelled, altered, performed in stages, or brought to an end.

Breach Preventing the Earning of Freight

A different question arises where freight is not earned because one party breaches the charter. Courts have been more willing to protect brokers where a broker’s commission is lost because the broker’s principal wrongfully prevents performance. In George Moundreas v. Navimpex, an implied term protected the broker against a breach that deprived him of commission in the relevant commercial setting.

The principle is not unlimited. Brokerage is rooted in agency. An implied duty of this kind usually binds the broker’s own principal, not necessarily the other party. If a charterer’s broker loses commission because of the owner’s breach, the broker may not have a direct claim against the owner unless the charter, the 1999 Act, or some separate legal basis gives him one. Conversely, if the charter contains an express non-execution provision, there may be no need and no room to imply an additional protection.

The Gencon Non-Execution Indemnity

The second paragraph of the Gencon brokerage clause provides a specific remedy in case of non-execution. It requires the owner to pay at least one-third of the brokerage on the estimated freight and deadfreight as an indemnity for the broker’s expenses and work. Where more voyages are involved, the indemnity is to be mutually agreed.

The expression “non-execution” is broad. It can cover failure of performance caused by frustration, accepted repudiation, mutual rescission, or cancellation under a cancelling clause. The commercial purpose is to avoid leaving the broker entirely unpaid after having performed substantial fixture work simply because the charter never produces earned freight.

The minimum of one-third is significant. The broker need not prove every item of expenditure or every hour of work merely to recover that minimum amount. Evidence becomes more important where the broker claims more than the minimum, because the clause describes the payment as an indemnity for expenses and work. The concept extends beyond out-of-pocket disbursements and may include the commercial value of staff time and overhead involved in producing the fixture.

Partial Non-Execution

Partial performance creates a more difficult problem. A ship may load only part of the intended cargo, a full cargo may be replaced by a part cargo, or performance may stop after some freight has been earned but before the full voyage bargain has been executed. If the non-execution paragraph applied only to total failure, a broker might be worse off in a partial performance case than in a complete non-performance case. That would be commercially unattractive.

On the other hand, the broker should not receive both full commission on freight actually earned and the full non-execution indemnity if that would put him in a better position than complete performance. A balanced reading is that the non-execution paragraph provides a minimum protection in cases of total or partial failure, with any commission already earned taken into account. This interpretation better reflects the commercial purpose of compensating the broker fairly without overpaying him.

Brokerage Clauses and the True Brokerage Agreement

The brokerage agreement is usually formed before the charterparty is fully drawn up. The broker may have been engaged by the charterer, by the owner, or by another broker in a chain of negotiations. Yet once the charterparty is issued, the brokerage clause often becomes the main written evidence of the payment arrangement. If a later dispute arises, courts generally start from the assumption that the formal charterparty clause records the legally binding arrangement regarding brokerage.

A party who says that the charter does not reflect the true brokerage agreement faces an evidential and legal burden. He may need to prove a separate collateral agreement, rectification, or another recognised basis for departing from the written charter wording. A trade custom cannot override clear express wording, and an alleged oral arrangement will not normally displace the charter clause unless the evidence is strong and the law permits it.

Les Affréteurs Réunis v. Walford remains important on this point. The House of Lords treated the brokerage clause inserted for the broker’s benefit as governing the commission payable. An alleged custom that commission was payable only on hire actually earned could not prevail against wording that gave commission on estimated freight, ship lost or not lost. The case demonstrates the importance of precise charter wording and the difficulty of escaping from the written clause after fixture.

Commercial Drafting Points

Brokerage disputes can often be avoided by drafting the clause with more precision. The charterparty should identify each broker, state the percentage due to each, specify whether commission is calculated on freight earned, freight paid, estimated freight, deadfreight, demurrage, or other sums, and confirm whether the owner or charterer is responsible for payment. Where commission is to be deducted from freight, the clause should say so expressly and should identify who bears the risk if the deduction is not paid onward.

Where the parties do not want the 1999 Act to apply, that exclusion should be expressed clearly. Where they do want brokers to enforce the clause directly, the clause can say so. The arbitration clause should also be checked to ensure it is broad enough to cover brokerage disputes. Ambiguity on these points creates avoidable procedural arguments before the real payment issue is even reached.

Particular care is needed where there are several brokers or where commission is stated “for division.” The charter should identify whether payment is to be made separately to each broker, to one broker for onward division, or jointly. Without clear wording, a court or tribunal is likely to construe the clause according to its commercial purpose, but parties and brokers should not rely on litigation to supply precision that could have been written into the charter from the outset.

Practical Guidance for Owners

Owners should treat brokerage as a direct commercial cost of the fixture unless the charter clearly provides otherwise. They should not assume that a charterer’s deduction of commission from freight automatically discharges the owner’s liability to the broker. They should also be cautious before agreeing to amend, reduce, or rescind a charter where brokerage rights have already arisen or may be protected under the 1999 Act.

Where a dispute exists, the owner should review the exact commission wording, the freight clause, any deduction language, the arbitration provision, any third-party rights exclusion, and all recap messages concerning brokerage. These documents will usually determine whether the broker’s claim lies against the owner, the charterer, or both in different capacities.

Practical Guidance for Charterers and Brokers

Charterers should not deduct brokerage unless the charter or a clearly documented agreement permits deduction. A charterer who deducts without authority risks leaving the owner still liable to the broker while remaining liable to the owner for the unpaid balance of freight. Where the charterer is to pay the broker directly, the charter should make that responsibility explicit.

Brokers should ensure that the recap and charterparty clearly record their names, percentage shares, payment trigger, paying party, and position in case of non-execution. Where the fixture involves several voyages, the non-execution indemnity should not be left for later uncertainty. The clause should also make clear whether commission survives cancellation, mutual termination, partial performance, short loading, substituted voyages, or reduction in cargo quantity.

Conclusion

The brokerage clause in a voyage charterparty is small in wording but large in consequence. It determines when a shipbroker is paid, who bears the payment obligation, how commission is calculated, and what protection exists when the charter is not fully performed. Under the Gencon form, brokerage is normally linked to freight earned, while the non-execution provision gives the broker a minimum indemnity where performance fails before commission is earned.

Modern English law gives brokers stronger direct enforcement rights through the Contracts (Rights of Third Parties) Act 1999, but the outcome still depends on careful construction of the charter. Clear drafting remains the best protection. Owners, charterers, and brokers should state the payment structure plainly at fixture stage, because uncertainty over brokerage after performance breaks down can quickly become a separate dispute alongside the main charterparty claim.