Law of Ship Agency
The fundamental principles of the law relating to the Ship Agency are quite important in the shipping business. Many duties performed by those in the shipping business involve the relationship between the Agent and the Principal. Thus, the rights, responsibilities, and liabilities that are a result of this Agency Relationship should be thoroughly comprehended.
Legal Vs Non-Legal uses of the term Agent
In legal usage, an Agent is a person who does not act on his account but only as a Legal Representative of another person.
In non-legal usage, the phrase Agent may loosely be used to define a person who buys and sells goods or services on his account; such a person is a Principal regardless of the phrase used to define the situation.
Agency is the legal device by which one individual (Agent) may act on behalf of another individual (Principal).
An Agent brings his Principal into contractual relationships with Third Parties. The contractual parties to the contract as arranged by the Agent are the Principal and the Third Party. The Agent is not a party to the Contract (Charterparty). Therefore, the Agent has no contractual liability to the Third Party under the Contract (Charterparty).
Here, the terms Shipbroker and Agent will be used as having the same meaning. In the shipping business, the trend is to use the term Shipbroker when considering chartering negotiations, whereas the term Agent is generally used when a function such as a Port Agency is concerned.
Ship Agency Relationship
Generally, Ship Agency is based on an agreement between the Principal and Agent. Nevertheless, a contract is not a crucial requirement of this Agency Relationship.
The existence or non-existence of an agreement between the Agent and the Principal does not affect the relationship between the Principal and the Third Party.
The existence or non-existence of an agreement between the Agent and the Principal does affect the relationship between the Principal and the Agent.
The Ship Agent is under no obligation to act for the Principal in the absence of Valuable Consideration. Similarly, the Principal is under no obligation to remunerate the Ship Agent where remuneration is not a contractual term of the relationship. Nevertheless, if the Ship Agent does act, and incurs losses or expenses in the operation, the Ship Agent is entitled to recover the expenses from the Principal since the right to an indemnity in this way arises independently of the existence of any agreement between parties.
Ship Agency may be formed by:
1- Express Agreement (Written Agreement or Oral Agreement)
2- Implication or Conduct
1- Ship Agency by Express Agreement
The Agency Relationship between the Principal and the Ship Agent is expressly agreed upon. The Principal expressly agrees and approves the Ship Agent agent on the scope of the authority upon which the Ship Agent may act on the Principal’s behalf. The scope of the authority given to the Ship Agent depends upon the construction of the Agency Agreement.
If Agency Relationship is formed by Written Agreement or Oral Agreement, the standard rules of construction of the Law of Contract apply. The courts must establish the scope of authority by considering the terms used and the circumstances.
If the Principal has not expressed himself clearly in the Written Agreement or Oral Agreement, the Principal must accept the consequences of any acts of the Ship Agent which are consistent with a reasonable interpretation of the authority given.
2- Ship Agency by Implication or Conduct
If one individual by words or conduct holds out another person as having authority to make arrangements on his behalf, that individual will be bound by such contracts as if that individual had expressly authorized that person.
Whether or not a Ship Agent has Implied Authority depends upon a consideration of all the circumstances. There may be an Implied Authority where Express Authority has been given for a certain purpose and the court finds that there is an Implied Authority to do everything necessary to accomplish that goal.
3- Ship Agency by Necessity
Agency of Necessity arises when an individual is entrusted with another individual’s property and it becomes necessary to do something to preserve that property. In such a case, although the individual who is entrusted with the property has no Express Authority to do the actions necessary to preserve the property, because of the necessity, such authority is an Implied Authority.
Three prerequisites must be fulfilled for Ship Agency by Necessity:
1- There must be a real and unquestionable commercial necessity for the creation of the Ship Agency by Necessity. This condition will not be fulfilled unless there is a real emergency. For instance, out of the possession of perishable cargoes or of livestock requiring to be fed.
2- It must be impossible to get the Principal’s instructions. In some cases, the Ship Agent has communicated with the Principal but has failed to receive instructions. Therefore, it does not mean that it must be impossible to communicate with the Principal but it does mean that it must be impossible to get the Principal’s instructions in time.
3- The Ship Agent of necessity must act in Good Faith (Bona Fide) in the interests of all parties concerned. An Agency of Necessity will be implied more easily where there is already an existing relationship of agency between the Principal and the Ship Agent which requires extending to provide for unanticipated events, than where there is no such actual Agency Relationship.
When an Agent signs an agreement on behalf of a Named Principal, without the express or implied authority of that Principal, the agreement may thereafter be ratified by the Principal. The Principal approves and adopts the agreement made on his behalf and the Principal is now bound by the agreement. Therefore, the effect of Agency Ratification is to render the agreement binding upon the Principal as if the Agent had been appropriately authorized at the time of signing the agreement.
Agency Ratification Prerequisites
1- The agreement can only be ratified by the Principal who was named or ascertainable when the agreement was made.
2- The Agent must expressly have contracted as an agent. If the Agent does not declare his intention to act as an Agent to the third party ratification may be unattainable.
3- The Principal must have contractual capacity at the date of the agreement. Furthermore, the Principal must have contractual capacity at the date of ratification.
4- The Agent must have a real Principal who was in actual existence at the time of the agreement.
Agent’s Ostensible (Apparent) Authority
An Agent’s Ostensible (Apparent) Authority is the authority of the Agent as it appears to others. A third party who is dealing with the Agent reasonably believes the Agent has that authority.
The Doctrine of Ostensible (Apparent) Authority
The question is who will be liable when the Agent exceeds his authority. What is critical here is that in addition to being liable for those agreements placed by the Agent in the practice of his actual authority, the Principal is also bound by the agreements managed by the Agent in the exercise of his Ostensible (Apparent) Authority. For instance, assume the BOD (Board of Directors) of a company designates a Manager but expressly limits his authority by stating Manager is not to buy goods worth more than $100,000 without the approval of the BOD (Board of Directors). The Manager’s actual authority is subject to the $100,000 limitation but to reasonable third parties out of the company, the Manager’s Ostensible (Apparent) Authority includes all the standard authority of a Manager. The company is bound by the Manager’s Ostensible (Apparent) Authority in his dealings with those who do not know of the financial limitation. For instance, assume a Ship Chandler agrees with the Ship Master on what supplies should be arranged on board and at what price. Thereafter, the Ship Chandler’s account is contested by the Shipowner who had published an instruction to all Ship Masters that no prices for food may be agreed upon without first consulting the procurement manager. The Ship Chandler could successfully claim that the prices must remain as billed because the Ship Chandler had a right to assume the Ship Master’s Ostensible (Apparent) Authority to settle with the Ship Chandler.
The Elements of Ostensible (Apparent) Authority
2- Reliance on the Representation
3- Alternation of the Third Party’s Position
The Representation must be by Express Authority or Implied Authority (by conduct or previous transactions). The Representation must be made by the Principal himself or somebody acting by the law of agency. The Representation cannot be made by the Agent himself.
2- Reliance on the Representation:
The Representation must be made purposefully. It must be established that the third party relied on the Representation. In other words, the Principal will not be liable if the third party knew that the Agent had no authority to bind the Principal.
3- Alternation of the Third Party’s Position:
There must be an alteration in the position of the Third Party resulting from reliance on the representation. Even in the absence of the prerequisites of Ostensible (Apparent) Authority, one individual may bind another by agreement if the latter was precluded by his subsequent conduct from repudiating that the agreement was made on his behalf.
Duties of the Agent
1- The Agent must not become a Principal as against or in competition with his Principal
2- The Agent must not make secret profits as against his Principal
3- The Agent must apply any skills which he declares to have
4- The Agent must exercise due diligence in the performance of his duties (The Agent’s Fiduciary Duty)
4- The Agent must render an account to the Principal
Duties of the Principal
1- The Principal must remunerate the Agent
2- The Principal must indemnify the Agent for any liabilities incurred in the execution of the Principal’s authority
Agent Breach of Implied Warranty of Authority
When the Agent contracts on behalf of the Principal, the Agent is by implication warranting to the Third Party that the Agent has such designated authority. When the Agent exceeds Actual Authority or Ostensible Authority or indeed when the Agent has no such Principal, then the Agent is breaching the implied warranty. In this case, it is the Agent who is making the representation of authority, who will be liable to the Third Party. The action is based on the implied warranty made in the representation by the Agent, and not for breach of the purported agreement.
Main Points in Breach of Implied Warranty of Authority
1- The Agent is liable for the breach of implied warranty of authority whether the Agent has acted negligently, innocently, or fraudulently. For instance, when the Agent’s authority has been terminated without his knowledge such as by the death of the Principal, even though the Agent will most probably have been of a rational belief that he had his professed authority, the Agent will still be liable.
2- The action for Breach of Implied Warranty of Authority can only be brought by the Third Party. The action for Breach of Implied Warranty of Authority can not be brought by the Principal. If the purported Principal suffers a loss, in this case, the Principal must take action against the Agent either for breach of the Agency Agreement or if there is no Agency Agreement then in Tort of Negligence.
3- The estimation of damages for Breach of Warranty of Authority is the Actual Loss sustained.
Breach of Warranty of Authority with Negligence and without Negligence Example
In ship chartering, a classic example of a Breach of Warranty of Authority could materialize when a Shipbroker communicates his Principal’s firm offer incorrectly to the other party. If this is the Shipbroker’s own mistake then the Shipbroker will be liable for Breach of Warranty of Authority with Negligence.
On the other hand, the incorrect firm offer may have been passed to the Shipbroker by another intermediate Shipbroker. In this case, the Shipbroker passing this to the other party will have been acting in all good faith. However, the Shipbroker will be liable. The Shipbroker will be liable for Breach of Warranty of Authority without Negligence.
Effect of a Contract (Charterparty) Made by an Agent
1- Named Principal
The effect of a contract (charterparty) made by an Agent (Shipbroker) differs according to the circumstances under which the Agent is contracted. If the Agent contracts as an agent for a Named Principal, the Agent (Shipbroker) will incur neither rights nor liabilities under the contract (charterparty). The Third Party (Contracted Party) must be thoroughly aware of the Agent’s (Shipbroker’s) position. The Agent (Shipbroker) must make it clear who the Principal is as well as insert the expression As Agents Only after the signature.
2- Un-Named Principal
If the Agent (Shipbroker) expressly contracts as an Agent for an Un-Named Principal, the Agent (Shipbroker) cannot be personally liable on the contract (charterparty). Nevertheless, the Agent (Shipbroker) will be held personally liable if the Agent (Shipbroker) does not quite clearly show on the face of the contract that he is only an agent. In this situation, the Third Party (Contracted Party) may elect to sue either the Agent (Shipbroker) or the Agent’s (Shipbroker’s) principal. Therefore, the Agent (Shipbroker) must ensure that his position as an Agent is obvious. Explanatory phrases such as broker or manager are not adequate to protect the Agent (Shipbroker) from personal liability. Ultimately, the Agent (Shipbroker) has to name the Principal within a practical time if the Agent (Shipbroker) does not want to be held personally liable.
3- Undisclosed Principal
If the Agent (Shipbroker) contracts as an Agent for an Undisclosed Principal, the case is entirely different, because the Third Party (Contracted Party) is not aware when entering into the contract (charterparty) that the individual with whom Third Party (Contracted Party) deals is, in fact, an Agent. The Third Party (Contracted Party) is contracting with the Agent (Shipbroker) as if the Agent (Shipbroker) were the Principal. Nevertheless, there are two options:
A- The Undisclosed Principal has the right to intervene and claim the contract (charterparty). Therefore, if necessary the Principal is entitled to sue the Third Party (Contracted Party) on the contract (charterparty). However, If the Principal does make use of this right, the Principal renders himself personally liable to the Third Party (Contracted Party).
B- The Third Party (Contracted Party), once having realized that there is a Principal, now has the option of suing either the Principal or the Agent (Shipbroker). Once the Third Party (Contracted Party) has unequivocally decided to hold either the Principal or the Agent (Shipbroker) liable, the Third Party (Contracted Party) cannot subsequently change his mind and sue the other.
The options open to the Undisclosed Principal and the Third Party (Contracted Party) as specified above in points A and B are not available:
1- If the Agent (Shipbroker) had exceeded both the Actual Authority and his Ostensible Authority in drafting the contract (charterparty).
2- If the exercise of such options would violate any Express Terms or Implied Terms in the contract (charterparty) which was drafted between the Third Party (Contracted Party) and the Agent (Shipbroker).
Nevertheless, there are circumstances where the position adopted by the Agent (Shipbroker) is not inconsistent with the intervention of an Undisclosed Principal. Customarily, Charterers should be able to contract as Agents for Undisclosed Principals who may come in and take the benefit of the shipping contract (charterparty). In some unusual cases, the Undisclosed Principal’s intervention will be held inconsistent with the terms of the contract (charterparty) and conceivably only in cases where the agent can be construed to have contracted as owners of the property.
Unless the contract is a personal contract the Principal can only be prevented from intervening if the Agent (Shipbroker) has expressly renounced that the Agent (Shipbroker) is acting on his behalf.
The Undisclosed Principal can sue and be sued on a contract (charterparty) made with his authority by an Agent (Shipbroker) who intended, when contracting, to act on the Principal’s behalf.
There are cases where the Principal cannot intervene, where the contract (charterparty) is such that intervention on it should not be permitted. These cases are infrequent in commercial cases. If the Principal was inconsistent with the description presented in a shipping contract (charterparty), the Principal could not intervene. The Principal’s rights and liabilities were assessed additional to and not instead of those of the Agent (Shipbroker). Therefore, there is the restriction that a Principal cannot intervene or be sued where the contract (charterparty) includes an Express Term, or in exceptional cases Implied Term, that the Agent (Shipbroker) is the only party to the contract (charterparty).
Termination of the Ship Agency Relationship
A- The Ship Agency Relationship between the Principal and the Agent is terminated by Operation of Law. For example, the Principal has died, the Principal becomes bankrupt, the Principal becomes mentally disordered, or the Principal becomes an enemy of the Agent’s country.
B- The Ship Agency Relationship between the Principal and the Agent is terminated by the Act of the Parties. In this case, the Ship Agency Relationship is terminated by either Mutual Agreement or by the Authority of the Agent being revoked by the Principal. If the Principal breaches the Agency Agreement and revokes the authority of the Agent, the Principal will be liable to pay damages to the Agent for the loss of any commission or other compensation.
Shipbrokers’ Commission (Brokerage)
Under English Law, the doctrine of Privity of Contract expresses that one cannot sue under a contract unless one is a party to that contract. Therefore, the Agent (Shipbroker) has negotiated the contract (charterparty) on behalf of the Principal, the Agent (Shipbroker) is not an actual part of that contract;
In the ship chartering business, if the Principal was hesitant to disburse the Shipbrokers’ Commission (Brokerage) even though the commission had presumably been inserted into the shipping contract (charterparty), this caused Agents (Shipbrokers) difficulties. The best way was an uneasy approach of persuading the Charterer to sue the Shipowner on the Agent’s (Shipbroker’s) behalf.
Unpaid Shipbrokers’ Commission (Brokerage) was finally overcome by the passing of the Contracts (Rights of Third Parties) Act 1999.
Contracts (Rights of Third Parties) Act 1999 expressly authorizes a Third Party, such as a Shipbroker, to enforce rights granted to him under a contract (charterparty) to which the Shipbroker is not a contracting party. The Third Party can enforce the term of the contract (charterparty) where the contract (charterparty) expressly provides that the Shipbroker may.
Contracts (Rights of Third Parties) Act 1999 states “a person who is not a party to the contract, a Third Party (Shipbroker), may in his own right enforce a term of the contract if the term purports to confer a benefit on him”.
Contracts (Rights of Third Parties) Act 1999 conditions that the Third Party (Shipbroker) must be identified in the contract (charterparty).
Contracts (Rights of Third Parties) Act 1999 makes it straightforward that to exercise the Third Party (Shipbroker) right to enforce a term of the contract (charterparty), there shall be available to the Third Party any remedy that would have been available to the Third Party in an action for breach of contract (charterparty), if the Third Party (Shipbroker) had been party to the contract.
Vistafjord’s (1988) Case
In Vistafjord’s (1988) Case, a Shipbroker deducted the commission when remitting the freight to the Shipowner. The Shipowner (Plaintiff) claimed the return of the deducted amount stating there was no entitlement to it. Vistafjord’s (1988) Case went to the Court of Appeal which decided in favor of the Shipbroker. The Court of Appeal found that, although the Shipbroker (Defendant) could not have sued for the commission in their own name under the law as it stood at the time, it would be unreasonable to deny them the Shipbroker’s remuneration. Today, the Contracts (Rights of Third Parties) Act 1999 is in place and expressly authorizes a Third Party, such as a Shipbroker, to enforce rights granted to him under a contract (charterparty).
Although the Contracts (Rights of Third Parties) Act 1999 sends Vistafjord’s (1988) Case to history, it is an outstanding illustration of Equitable Remedy. As with all Equitable Remedies, availability depends upon the facts and circumstances of the particular case and in particular whether the court regards it as fair for the defendants to invoke the remedy of estoppel as a shield against the Plaintiff’s strict legal rights. More specifically, to establish this particular Equitable Estoppel, two conditions must be fulfilled:
1- A common assumption acted upon by both Plaintiff and Defendant.
In Vistafjord’s (1988) Case, it was apparent that the Defendant and the Plaintiff’s intermediary, who had signed the contract (charterparty) on behalf of the Plaintiff (Shipowner), had both assumed that the Defendant (Shipbroker) would obtain a commission (brokerage) on the fixture.
2- It is unconscionable for Plaintiff to insist upon their strict legal rights.
In Vistafjord’s (1988) Case, there had been no attempt to deceive the Plaintiff (Shipowner) and the charter and sub-charter had been arranged for the financial advantage of the Plaintiff (Shipowner). Undoubtedly, as the Court of Appeal indicated, the Plaintiff (Shipowner) had done very well out of this transaction and in all the circumstances it would not be fair to allow them to repudiate the assumption that commission would be paid, since it was that assumption which had enabled them to obtain the chartering business in the first place.
In Vistafjord’s (1988) Case, Equitable Estoppel prevented the Plaintiff (Shipowner) from relying upon their strict legal right to reclaim the funds.
Some comfort may be found in this decision by the Shipbroker when in a similar position to that of the defendants here, i.e. of actually holding the funds. Nevertheless, it should be noted that nowhere in the judgment is there any suggestion that the Court of Appeal thought that there was a legal right to retain the commission in such circumstances, nor are there any grounds for saying that this decision gives the Defendant (Shipbroker) the automatic legal right and, as was the case here, the Equitable Remedy of Estoppel, which may be used as a shield if the circumstances are right, against a Plaintiff’s (Shipowner’s) claim.