Exclusive Shipbrokers

Types of Shipbrokers:

1. Exclusive Shipbrokers of Shipowners
2. Exclusive Shipbrokers of Charterers
3. Competitive Shipbrokers

1- Exclusive Shipbrokers to Shipowners

Exclusive Shipbrokers dedicated to Shipowners serve solely one or perhaps a few tramp Shipowners. Exclusive Shipbrokers of Shipowners’ role is to secure the most favorable cargo at the best Freight Rate for their Shipowners’ ships, ideally close to the ports where these ships are scheduled to offload their previous cargoes. They manage these ships under either a Voyage Charter or a Time Charter, based on what is most beneficial for the Shipowners, while accommodating the Charterers’ needs. Numerous Shipbrokers serve as Direct Shipbrokers for various Shipowners, applying their broking skills within their local geographical area and time zone to cater to the local market. It is common for Shipowners to employ several Direct Shipbrokers worldwide, each reporting directly to the Shipowner and covering different regions and markets.

2- Exclusive Shipbrokers to Charterers

Exclusive Shipbrokers for Charterers typically work solely for one Charterer, often a major trading house or an oil major, although they might not always carry the same name as their parent company. These Shipbrokers could be independent agents who specialize in serving several Charterers on an Exclusive Basis. Some Shipbrokers also handle all Post-Fixture tasks for their Charterers, earning both a retainer fee and the standard Shipbroker’s commission of 1.25% on the total Freight value. This exclusivity may be confined to the trading center where the Exclusive Shipbroker operates—for instance, exclusively within the United States—or it may be global. Such an Exclusive Shipbroker does not share their exclusivity/work with other Shipbrokers, whereas regional exclusivity might involve various Semi-Exclusive Shipbrokers helping to locate a suitable ship. Exclusive Shipbrokers to Charterers typically report directly to the Charterers rather than through Competitive Shipbrokers.

BEWARE: They are also known as Charterers’ Agents, which can be confusing as this term also refers to Port Agents appointed by Charterers.

 

3- Competitive Shipbrokers

Competitive Shipbrokers operate independently, matching various cargoes with ships from different tramp Shipowners’ fleets. Most Shipbrokers work in this autonomous manner, as it allows them not to be limited to just a few Principals. Historically known as Cabling Shipbrokers, a term that dates back to when Shipbrokers in London and New York communicated trades via cable at each center’s business day end. They compared Freight markets overnight, reporting on available cargoes and ships, along with fixtures completed that day. Modern Competitive Shipbrokers, no longer confined to the day’s final cable, often work remotely beyond regular business hours due to the highly competitive nature of their work.

 

Large Shipbroking Houses

Several Large Shipbroking Houses (Clarksons, BRS, SSY, New York Shipbrokers) in major chartering centers like London, New York, Hong Kong, Athens, and Singapore perform all three functions, having specialized departments for Exclusive or Semi-exclusive dealings with Shipowners or Charterers, and a competitive segment dealing with the broader market.

Other Large Shipbroking Houses have departments that focus on specific areas, ship types, or industries, such as the offshore oil industry, or that handle trade related only to a particular commodity. They believe this specialization distinguishes them from Shipbrokers who are tied to one Principal and that it reduces the need to compete as aggressively for business.

In today’s trading environment, few Shipbrokers can depend solely on one Principal, commodity, or ship type for their livelihood; hence, many spread their efforts across a few Semi-exclusive accounts, some specializations, and as much competitive work as possible. Shipbrokers rely entirely on the trade volume in their market, which is subject to the cyclical, political, and seasonal fluctuations of the industries they serve. In London, Baltic Exchange Shipbrokers no longer literally ‘walk the floor,’ as the traditional Trading Floor has been phased out.

International Shipbroking Markets are divided into three geographic areas:

(i) the Americas – represented by New York, with additional support from branch offices in Connecticut, Houston, and Vancouver;

(ii) Asia – Tokyo, Seoul, Shanghai, Hong Kong, Singapore, Sydney, and Melbourne;

(iii) Europe – Athens, Oslo, Hamburg, and Copenhagen for Shipowners, Paris and Geneva for Charterers, particularly those trading in soft commodities, and London, which remains the central hub of international shipbroking, handling about 45% of all global shipping trades, down from 75% until 1992 but still surpassing many smaller shipbroking centers combined.

There are three main types of Shipbroking Activities:

1. Dry Cargo
2. Tanker
3. Sale & Purchase (S&P)

Exclusive Shipbrokers enjoy a unique position, as they cannot be bypassed — in theory.

A Shipbroker must always include their own Commission before submitting any offers from Charterers or Shipowners and similarly subtract their Commission when relaying counter-offers back to the Charterers or Shipowners.

All ships must register with a Classification Society to be eligible for trade. The records maintained by these societies indicate how well a ship is kept up to the required survey cycles, and frequent problems are often evident. A history of frequently changing Classification Societies might suggest poor maintenance.

Inspecting the Class Records provides guidelines for specific areas that may require attention during a physical inspection of the ship, typically conducted by the buyers’ technical team or sometimes by Independent Surveyors.

It is crucial for a Shipbroker to establish a network with fellow Shipbrokers to garner support in client dealings. Shipbroking is very much a relationship-driven business, where strong connections can be more vital than knowledge.

Shipbrokers are encouraged to go beyond screen trading; making phone calls and meeting contacts in person can be crucial.

Duties of a Shipbroker

Despite some misconceptions, Shipbrokers play a critical role in negotiations, and their expertise extends beyond merely having the right contacts. While some may view Shipbrokers negatively, the majority are integral to the trading and legal sectors and should be respected. Shipbrokers should also scrutinize their Principals carefully.

A Shipbroker acts as the vital link between Shipowners/Charterers and the Chartering Market, keeping their Principals informed about market developments, which helps both parties to strategize effectively.

Large Shipbrokers often maintain a database to track the current position and status of ships, aiding Charterers in assessing available tonnage and ensuring favorable rates by showcasing interest from multiple Shipowners.

A Shipowner’s Shipbroker’s role is to make sure all potential Charterers know the availability and details of his ship, involving both Charterer’s and Competitive Shipbrokers. Conversely, the Charterer’s Shipbroker ensures all potential Shipowners are aware of the need for a ship, securing the best possible rate.

In addition to chartering, Shipbrokers also manage:

(a) Post-fixture Departments: These are staffed by experts who handle disputes between Shipowners and Charterers, aiming to avoid arbitration or court.
(b) Research Departments: These departments stay abreast of global trade developments, and their publications are highly regarded worldwide.

 

Shipbroking Ethics

The motto of both the Baltic Exchange and the Institute of Chartered Shipbrokers (ICS), “Our Word Our Bond,” represents a strong ethical code. The reliance on verbal agreements, confirmed in writing later, binds Principals through their Shipbrokers, emphasizing trust in negotiations. This practice, exclusive to approximately 5,500 Shipbrokers globally, underscores the importance of integrity in securing ship fixtures. BIMCO also advocates various chartering principles to its members,

We kindly suggest that you visit the web page of Baltic Exchange to learn more about www.balticexchange.com

We kindly suggest that you visit the web page of Institute of Chartered Shipbrokers (ICS) to learn more about www.ics.org.uk

 

Responsibilities of Shipbrokers Toward Their Principals

Shipbrokers must understand the essential aspects of basic Agency Law. Primarily, Shipbrokers should always operate within their ‘Warranty of Authority’ as outlined by their Principal Shipowner or Charterer. If Shipbrokers act as an ‘Agent of Necessity,‘ it’s crucial that their Principal promptly ratifies their actions. Failure to do so could inadvertently transform Shipbrokers into Principals, leading to severe consequences:

(i) Shipbrokers may not have the resources to fulfill the role of a Principal by providing a ship or cargo.

(ii) Shipbrokers could face accusations of misrepresentation.

(iii) Shipbrokers might struggle to defend their actions.

(iv) Shipbrokers could be subject to costly legal actions.

(v) The financial impact of such situations could be devastating for Shipbrokers.

(vi) Regardless of legal outcomes, the reputation of the Shipbrokers could suffer irreparable damage.

Understanding the Rights and Responsibilities of Shipbrokers:

A Principal’s actions, such as over-quoting his own ship or cargo, can negatively influence the market perception, showing desperation that harms both his and his Shipbroker’s reputations. ‘Back-trading’ or changing terms mid-negotiation also damages reputations. The line between giving advice and interfering is thin and requires a Shipbroker to balance expertise with the Principal’s trust and needs.

It’s advisable for both Shipbrokers and Principals to thoroughly vet each other well before they need to collaborate.

Under English law, Shipbroker commissions are safeguarded by the Contracts (Rights of Third Parties) Act 1999, which often governs Charter Parties.

Membership in professional bodies like the Baltic Exchange or the Institute of Chartered Shipbrokers (ICS) offers significant benefits.

Unlike the insurance sector where full disclosure is mandatory, Shipbrokers know that ethical conduct and maintaining a strong reputation are crucial. Disclosing too much too soon could be exploited by a Principal, potentially leading to ostracization by the broking community globally.

Function of Shipbrokers in the Transportation Chain

Agents and Shipbrokers serve three primary roles:

(i) Provide market information (current, emerging, and forecasted).

(ii) Act as effective intermediaries between two Principals.

(iii) Coordinate negotiations to finalize a Fixture.

SHIPBROKERS might represent one or both Principals, often without a formal contract, implied by their actions, whereas AGENTS typically serve one Principal under a formal agreement.

 

Shipbroker’s Role Under Agency Law

A Shipbroker or Agent must strictly adhere to the authority granted by the Principal, who may have strategic financial or market reasons for setting these boundaries. A Shipbroker can sometimes extend beyond the given authority if there is a well-established trust with the Principal, potentially under the Agency of Necessity rules.

A Shipbroker close enough to a Principal might be authorized to sign contracts (COA or Charter Party) on their behalf. However, to avoid legal entanglements, a cautious Shipbroker will sign ‘for and on behalf of [name of Principal Shipowner or Charterer] as Agent Only’ and ideally note ‘by Written Authority.’

Risks of Undisclosed Agency Include:

• Legal risks.
• Practical challenges.
• The potential for initiating lawsuits.
• The risk of substantial claims that could financially cripple a smaller broking firm.

 

Shipbrokers’ Compensation: Brokerage/Commission

Typically, each Shipbroking Company earns a commission or brokerage at the established rate of 1.25% of the value of the Freight (F), Dead Freight (DF), Demurrage (D), Damages for Detention (DFD), Hire (H), and Ballast Bonus (BB). (It is important to note that Commission on Demurrage is not always provided by Shipowners.) This standard rate can be adjusted by mutual agreement among the Shipowners, Charterers, and all involved Shipbrokers. Commission is payable to each Shipbroker involved. A Shipowner might choose to work with a single exclusive Shipbroker in exchange for a reduced commission rate (1%).

An exception often exists for Shipbrokers in coastal trades, who typically handle as much work as deep-sea Shipbrokers but deal with smaller Coaster Ships, leading to smaller Freight values. Consequently, these Shipbrokers usually earn a 2.5% Commission on the Freight.

Address Commission (ADDCOM) is compensated to the Time Charterer for managing the ship during charter. This commission is traditionally taken by the trader Charterers on a Voyage Charter to offset the costs of their shipping departments, which are frequently located separately from the trading offices. This fee is sometimes concealed within the Charter Party commission clause, such as ‘5% commission to Clarksons (Shipbrokers), for division with others’. Here, the division might be 1.25% to Clarksons (Shipbrokers), 1.25% to BRS (Shipbrokers), and 2.5% Address Commission (ADDCOM) to the Vale (Charterers). The Charterers often prefer to keep such commissions discreet, thus it is also termed a ‘Hidden Commission’.

In deep-sea Tanker Chartering, Address Commission (ADDCOM) varies and is not always sought. The rates can range from 1% to 4%, depending on trading conditions. This commission is typically deducted directly from the Freight (F) or Hire (H), preventing delays in payment that would occur if Shipowners were to remit the commission back to Charterers after receiving full payment.

Banks benefit from extended transactions due to the fees they accrue from handling the payments.

Sale and Purchase (S&P) Shipbrokers traditionally earn 1% of the sale price of the ship. While this percentage may seem high, it is meant to cover extensive broking activities, including telecommunications, legal fees, surveys, and travel expenses—costs incurred over many months and for many negotiations that might not result in a sale. In tough markets, Shipbrokers might reduce their commission to facilitate a deal.

Risk of Fraud in Shipbroking

Some Charterers prefer to keep their identity hidden from the Shipowner until negotiations are finalized, often to prevent competitors from learning about their cargo purchases. In such cases, the Shipbroker might refer to the Charterer as a First Class Charterer (FCC). The accuracy of this designation is crucial as it can impact the Shipbroker’s reputation if the Charterer is not ‘First Class’.

According to the Baltic Exchange’s code of ethics (‘The Baltic Code’), a Shipbroker must inform the Shipowner in writing if there is no specific or credible information about the Charterer. The Shipbroker should advise the Shipowner to fix the cargo “subject to Shipowners’ approval of Charterer” and insist on Freight payment Before Breaking Bulk (BBB), allowing the Shipowner to maintain a lien on the cargo if the Freight is unpaid. Additionally, a Letter of Indemnity (LOI) should be refused unless accompanied by a bank guarantee. BIMCO (Baltic and International Maritime Council) and the IMB (International Maritime Bureau) maintain registers that track the reputations of Charterers and Shipowners.

A potential sanction by the Baltic Exchange for those who breach the code of ethics includes being posted on the Baltic Exchange. This involves publicly displaying the name and the offense of the guilty party at the Baltic Exchange as a caution to other members.

 

Contracts (Rights of Third Parties) Act 1999

Before the introduction of the Contracts (Rights of Third Parties) Act 1999 on May 11, 2000, Shipbrokers were often vulnerable to non-payment from Shipowners, even if the Shipbroker was working for a Charterer. Traditionally mentioned in Charterparties, Shipbrokers were not actual parties to the Charter Party, allowing some unscrupulous Shipowners to avoid payment obligations. This act has significantly changed the privity of contract rules, a core component of English contract law. Historically, as outlined in “Chitty on Contracts, 26th Edition, § 1321,” a contract generally could not confer rights or impose obligations on anyone other than the parties involved. This principle was underscored in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915 AC 847] by Lord Haldane LC: “In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it.”

The Contracts (Rights of Third Parties) Act 1999 now protects third parties who previously had no legal recourse. For instance, if a Shipbroker acting as a Charterer’s Agent concluded a Fixture and a commission clause was included for the Shipbroker’s benefit, they previously could not enforce this if unpaid by the Shipowner due to not being a direct party to the contract. Before this act, Shipbrokers relied heavily on their reputations and word-of-mouth to secure payments, as spreading negative information could lead to accusations of slander or libel.

The Contracts (Rights of Third Parties) Act 1999, particularly under Section 1, allows a non-party to enforce contract terms if the contract explicitly states they may, or if the term appears to benefit them. This means Shipbrokers named directly or as part of a class in a Charter Party can now legally claim their due commission.

This legislation also addresses the complexity of Address Commissions (ADDCOM), often undisclosed and potentially problematic for Charterers who prefer not to publicize additional profits. The act supports transparency and ensures Shipbrokers can enforce their rights to commission without the former need for informal support from Charterers.

Despite this, the act allows for contractual parties to expressly exclude third-party rights, though it’s unlikely Shipbrokers drafting the contract would include such provisions. However, if both principals in a contract agree to exclude a Shipbroker from commission without their knowledge, the Shipbroker might have limited recourse. In such cases, a court may need to determine the parties’ intentions regarding third-party payments.

The Contracts (Rights of Third Parties) Act 1999 aims to reduce legitimate commission disputes, although imperfectly drafted Charter Party clauses by some Shipbrokers could still lead to conflicts.

Are Shipbrokers Necessary?

• Utility of Shipbrokers: They are essential for maintaining a fast and efficient database, facilitating negotiations, and preventing principals from appearing desperate in the market. For instance, a Shipowner directly making numerous calls can seem urgent, pushing Charterers to lower their offers. In contrast, a Shipbroker can tactfully manage market perceptions.
• Expertise and Prevention of Disputes: Shipbrokers’ specialized knowledge saves time and reduces the likelihood of disputes escalating to arbitration or court.
• Post-Fixture Service: Be cautious of ‘F&F Shipbrokers’ who aim to Fix and Forget, neglecting service after securing a contract.
• Qualifications: Choosing a Shipbroker who is a Member or Fellow of the Institute of Chartered Shipbrokers (ICS) is advisable, though not mandatory.
• Port Agents as Shipbrokers: Port Agents with Shipbroker qualifications can offer a more comprehensive service to their clients, enhancing overall service quality.