Shipbrokers’ Commission in a Time Charterparty
Shipbrokers’ commission is a small percentage in the charterparty, but it has major commercial importance. In a time charterparty, the shipbroker is often the person who introduced the business, negotiated the fixture, circulated the recap, helped close the charter, and remained available during performance if questions later arose between shipowners and charterers. Because hire under a time charter may run for months or years, commission can become a continuing entitlement rather than a single payment made on the day the fixture is concluded.
The central issue is not merely the percentage written into the charterparty. The practical questions are who must pay the commission, when it becomes payable, whether it applies only to hire actually earned and paid, whether it continues during extensions, what happens after cancellation or early redelivery, and whether the shipbroker can enforce the commission clause directly. These questions should be answered clearly in the fixture recap and in the final charterparty wording.
Commission Clauses in the Time Charter Structure
Traditional time charter forms commonly separate ordinary brokerage commission from address commission. Under a brokerage commission clause, shipowners undertake to pay an agreed percentage to the named shipbroker or shipbrokers. The commission is usually calculated on hire earned and paid under the charterparty, and often also on hire earned and paid under any continuation or extension of the same charter.
Address commission works differently. Although the expression may look similar to brokerage commission, in commercial practice it often operates as a deduction from hire. The charterers may deduct the agreed percentage when paying hire and may either retain the amount as a rebate or pay it onward to a named person, depending on the wording. For that reason, address commission should not be treated automatically as a normal shipbroker’s commission unless the clause clearly identifies the recipient and payment mechanism.
The distinction matters because the two commissions serve different commercial purposes. Brokerage commission rewards the shipbroker for arranging or supporting the fixture. Address commission is often a negotiated commercial allowance to the charterers. If the clause is left incomplete, or if the blank line for the recipient is not properly completed, disputes can arise over whether a third party is entitled to payment or whether the provision is simply a reduction of the hire payable to shipowners.
Commission on Hire Earned and Paid
The most important words in many time charter commission clauses are “hire earned and paid”. They mean that the shipbroker’s entitlement is normally connected to actual hire income received under the charterparty. If no hire is earned, or if hire is never paid, the commission may not arise unless the contract uses wider wording.
This drafting reflects the commercial nature of a time charter. A shipbroker may introduce a long period business, but the shipowners’ income is usually received by instalments. Commission therefore follows the hire stream. The shipbroker earns commission as the charter continues to generate paid hire, not necessarily by reference to the maximum theoretical hire that might have been earned if the charter had run perfectly until the final date.
The same wording also affects off-hire periods. If the ship is validly off hire, hire is not earned for that period. Since commission is usually calculated on hire earned and paid, the shipbroker will normally have no commission on the suspended hire. This is different from a fixed lump sum brokerage fee payable on signing, where the shipbroker’s entitlement may not depend on later hire payments.
Continuations and Extensions
Commission clauses often state that commission is payable not only under the original charter period but also upon any continuation or extension of the charterparty. This protects the shipbroker from losing commission where the commercial deal continues in substance beyond the original period.
An extension may be formal, such as an exercised option period, or it may be agreed by a later addendum. A continuation may occur where the ship remains in the same service beyond the expected redelivery date and hire continues to be paid. If the clause is drafted broadly, the shipbroker may be entitled to commission on that continuing hire even if the later period is described by the parties as an amendment rather than a new fixture.
Problems arise when shipowners and charterers end one charter and immediately agree another arrangement covering the same ship and employment. The shipbroker may argue that the later arrangement is commercially a continuation. The parties may argue that it is a new contract outside the original commission clause. Clear wording should state whether commission applies to renewals, options, extensions, substitute charters, related fixtures, and direct follow-on business concluded between the same parties.
Who Is the Shipbroker Representing?
The shipbroker named in a commission clause may be the shipowners’ broker, the charterers’ broker, an intermediate broker, or more than one broker sharing a total percentage. Time charter negotiations frequently involve a chain of brokers. Each broker’s entitlement should be stated precisely, including the percentage, the paying party, and whether the percentage is inclusive or additional.
If several shipbrokers are involved, the charterparty should not merely state a total commission unless there is a separate clear agreement on division. A clause may provide, for example, that a total percentage is payable and then identify how it is to be split among named brokers. Without that detail, one broker may later claim a larger share, or shipowners may face competing demands.
Commission should also be distinguished from a separate service fee, management fee, consultancy fee, or success fee. A shipbroker’s commission in a charterparty normally follows the charterparty income. A separate agreement may create a different entitlement, but it should be documented outside ambiguous charter wording.
The Position Under Older English Law
Historically, a shipbroker named in a time charterparty commission clause faced a technical legal difficulty. The shipbroker was not a party to the charterparty. The promise to pay commission was made between shipowners and charterers, even though it was intended to benefit the shipbroker. Under older English law, a person who was not a party to a contract generally could not sue directly on it.
To overcome that problem, the law treated charterers as holding the shipowners’ promise on trust for the shipbroker in appropriate cases. The charterers could enforce the shipowners’ promise to pay the broker. If the charterers refused to act, the shipbroker might have to bring proceedings in a more complicated form involving both the shipowners and charterers. This was commercially awkward because the person entitled to the money did not have the simplest direct route to recover it.
The old approach reflected the law’s attempt to protect the commercial bargain while still respecting the doctrine of privity of contract. In practice, it meant that the drafting of the commission clause and the conduct of the charterers could affect the shipbroker’s recovery route.
The Contracts (Rights of Third Parties) Act 1999
The position under English law changed significantly after the Contracts (Rights of Third Parties) Act 1999. Where a contract term purports to confer a benefit on a third party, that third party may be able to enforce the term directly, unless the contract shows that the parties did not intend such enforcement.
For time charter commission clauses, this is important. A named shipbroker will often be able to say that the commission clause was intended to benefit that shipbroker directly. Unless the charterparty excludes third-party enforcement or makes a different arrangement, the shipbroker may have a direct claim against the party who promised to pay the commission.
The Act does not mean that the shipbroker obtains better rights than the contract provides. If commission is payable only on hire earned and paid, the shipbroker must still satisfy that condition. If shipowners would have had a contractual defence or set-off against the charterers that is relevant to the commission term, that defence may also be available against the shipbroker. The Act simplifies enforcement, but it does not rewrite the commercial bargain.
Arbitration of Commission Claims
Many time charterparties contain arbitration clauses. A shipbroker claiming commission may therefore need to consider not only whether the commission is due, but also where and how the claim must be brought. Under the English third-party rights regime, a third party who enforces a contractual term may also be bound by the contract’s dispute resolution machinery.
This means that a shipbroker relying on a commission clause may be required to proceed in arbitration even though the shipbroker did not sign the charterparty. The logic is that the shipbroker cannot enforce the benefit of the charterparty term while ignoring the procedural conditions attached to that term. If the charterparty provides for London arbitration, English law, or another specified mechanism, the shipbroker’s claim may have to follow that route.
This can be commercially important. A shipbroker may assume that a simple debt action is available, while shipowners may insist that the matter belongs in arbitration. The safest drafting is to say expressly whether the shipbroker’s commission claim is subject to the charterparty arbitration clause, and whether any third-party enforcement rights are preserved or excluded.
Variation, Cancellation, and the Shipbroker’s Consent
When a third party has an enforceable benefit under English law, shipowners and charterers may in some circumstances be prevented from varying or cancelling the contract in a way that removes that benefit without the third party’s consent. This principle can be relevant to a shipbroker’s commission, but it must be applied carefully.
A variation designed simply to remove the shipbroker’s commission on an ongoing charter is likely to face difficulty. If the shipbroker has relied on the clause or has assented to it, the parties may not be free to erase the benefit behind the shipbroker’s back. However, an ordinary commercial agreement to terminate the charter early for legitimate reasons does not necessarily amount to a variation of the commission clause itself.
If the charter ends, no further hire may be earned and paid. In that case, the shipbroker’s right to commission on future hire may not be extinguished by a variation; rather, the factual basis for earning further commission no longer exists. This distinction is subtle but important. The broker’s right is to commission on hire that falls within the clause, not an automatic guarantee that the charter will remain alive for the full possible period.
Early Termination and Lost Future Commission
A frequent dispute concerns whether the shipbroker can recover commission that would have been earned if the time charter had continued. For example, the ship may be sold, the charter may be cancelled by mutual agreement, the parties may settle a dispute, or the ship may be redelivered early. If the commission clause is limited to hire earned and paid, the broker’s claim for future unpaid hire faces a serious obstacle.
English authority has treated this type of clause strictly. Where commission is payable only on hire actually earned and paid, the shipbroker is not usually entitled to commission on hire that was never earned because the charter came to an end. The fact that the shipbroker expected a longer stream of commission is not enough. A term will not normally be implied to prevent shipowners and charterers from ending the charter for ordinary commercial reasons.
The position may be different if the termination or restructuring is carried out simply to avoid paying the shipbroker. In that situation, the broker may argue that the parties acted in bad faith or deliberately defeated the commission bargain. The threshold is high. It is not enough that the broker lost money because the charter ended early. There must be something more, such as a termination engineered for the purpose of depriving the broker of commission that would otherwise have been earned.
Distinction Between Charter Commission and Sale Commission
Commission on a ship sale is often treated differently from commission on time charter hire. In a sale, the broker may earn commission when a sale contract is concluded or completed. If the seller then breaks the sale contract and prevents completion, the broker may have a stronger argument that the principal should not be allowed to defeat the broker’s remuneration by its own breach.
A time charter commission based on hire earned and paid is different. The broker’s entitlement is usually tied to a continuing stream of hire. The contract may operate perfectly well without implying a promise that the charter will continue at all costs. The parties remain free, in ordinary circumstances, to manage their own commercial relationship, settle disputes, sell the ship, or agree early redelivery, unless the commission agreement expressly restricts them.
This distinction should be understood before brokers rely on cases from ship sale transactions. The legal and commercial logic is not always transferable. The wording of the actual commission agreement remains decisive.
Address Commission as a Hire Rebate
Address commission, commonly shortened to ADDCOM, is frequently misunderstood because the word “commission” suggests a payment to a broker. In many time charters, address commission is in substance a discount or rebate allowed to charterers on the hire. The charterers deduct the agreed percentage from the hire payable to shipowners.
If the clause names a third-party recipient, the charterers may be expected to pay the deducted amount to that person. If no recipient is identified, the deduction usually operates commercially as a reduction in hire. In that case, it is misleading to treat the amount as money held for an unidentified broker.
Address commission may be deductible from advance hire even though the clause refers to hire earned and paid. This is because time charter hire is commonly paid in advance, while the calculation and reconciliation may be adjusted later. The clause should say whether address commission is deducted from each hire instalment, from final statements, or only after hire has unquestionably been earned.
Commission and Settlement Payments
A settlement payment is not always the same thing as hire earned and paid. If charterers default on hire and later pay a compromise sum to settle litigation or arbitration, a shipbroker may argue that the payment represents unpaid hire and should therefore attract commission. Shipowners may argue that a settlement is a different payment and not hire within the commission clause.
The answer depends on the wording and the substance of the settlement. A payment clearly allocated to accrued hire is more likely to support commission than a global settlement covering damages, interest, costs, counterclaims, and commercial compromise. The settlement agreement should state how the payment is allocated. Otherwise, shipowners, charterers, and brokers may later dispute whether commission is due.
Shipbrokers should not assume that a shipowner’s recovery of an amount equivalent to hire automatically creates a commission entitlement. If the contract says commission is due only on hire earned and paid, the legal character of the payment matters.
Substitute Charters and Mitigation Fixtures
Where the original charter fails and a substitute charter is arranged, the original shipbroker may seek commission on the substitute earnings. This claim is difficult unless the commission agreement expressly covers replacement business, mitigation fixtures, substitute employment, or follow-on arrangements.
A substitute charter may reduce the shipowners’ or charterers’ loss from the failure of the original fixture, but it is not necessarily an extension or continuation of the brokered charter. A shipbroker’s entitlement normally comes from the contract negotiated by that broker, not from every later business opportunity involving the same ship or parties.
For this reason, brokers who expect protection against substitute or replacement arrangements should negotiate express wording. The clause should define the circumstances in which commission remains payable if the original charter is cancelled, replaced, novated, extended, renewed, or re-fixed on similar terms.
Minimum Commission and Protective Clauses
Some charter forms and negotiated clauses give shipbrokers stronger protection than a simple commission-on-hire clause. A broker may be entitled to a minimum amount covering expenses and a reasonable fee, compensation where full hire is not paid because one party breaches the charter, or compensation if shipowners and charterers agree to cancel the charter.
These protections are commercially sensible where the broker has invested substantial time, has relied on the fixture, or has acted as a continuing intermediary. They also reduce uncertainty. Instead of arguing about implied obligations or future lost commission, the parties have an agreed formula for what happens if the charter does not proceed as expected.
Shipbrokers should not assume that such protections exist unless they are written into the charterparty or a separate brokerage agreement. The difference between a protective clause and a standard commission clause can be decisive after cancellation, default, or early termination.
U.S. Law: Maritime Character of Brokerage Commission
Under U.S. law, claims for ordinary shipbrokerage commission have often been treated as non-maritime for jurisdictional purposes. The reasoning is that a broker’s service in arranging a charter may be preliminary to a maritime contract rather than itself a maritime service. As a result, the claim may not support admiralty jurisdiction in the ordinary case.
This has practical consequences. A shipbroker’s commission claim will not usually create a maritime lien against the ship. It may also fail to support a maritime attachment where the claim is not sufficiently maritime in nature. The shipbroker may have to pursue a conventional contract claim rather than use maritime security procedures.
There may be unusual cases where the broker’s obligations extend throughout the performance of long-term maritime arrangements, rather than ending with the conclusion of the fixture. In those circumstances, the brokerage relationship may appear more closely connected with the maritime performance itself. However, ordinary charter brokerage commission should not be assumed to have maritime status in the United States.
U.S. Law: The Shipbroker Is Usually Not a Party to the Charter
In U.S. practice, a shipbroker who is not a party to the charterparty may face difficulty enforcing the charterparty commission clause directly unless a separate contractual basis exists. Arbitrators have also rejected attempts by charterers to pursue broker commission claims in charterparty arbitration where the claim was not a dispute between the charterparty parties.
The practical lesson is that a broker should not rely solely on being mentioned in a charterparty if the governing law and forum may not recognise a direct enforcement right. A separate commission agreement, clear promise by the paying party, or explicit third-party beneficiary wording may be necessary to avoid procedural and jurisdictional objections.
Where the charterparty provides that commission is payable on monthly hire received, U.S. decisions have generally respected that wording. If no hire is paid because the ship is not delivered or because the charter never becomes operational, the broker may not recover commission unless the agreement provides for payment on execution or another independent trigger.
U.S. Law: Hire, Settlements, and Commission Triggers
U.S. law also illustrates the importance of the exact payment trigger. If commission is due only on monthly hire payments, it will ordinarily be earned only as those payments are received. A later settlement of a hire dispute is not automatically treated as hire for commission purposes. The court or tribunal will examine the contractual wording and the character of the money paid.
Similarly, earnings under a substitute charter do not normally generate commission for the broker of the failed original charter. The substitute earnings may reduce a damages claim, but they are not hire earned under the brokered charter unless the commission agreement says so.
By contrast, if the charterparty or separate commission agreement states that commission is payable upon execution, the broker’s entitlement may arise even if no hire is later earned. This is a fundamentally different structure. It shifts the broker’s risk away from later performance and makes the commission payable because the contract was concluded.
Drafting Points for Shipowners
Shipowners should identify every commission payable before fixing the ship. The recap and charterparty should state the full percentage, the broker or brokers entitled to payment, whether the figure is inclusive or additional, and whether address commission is separate from brokerage commission.
Shipowners should also consider whether commission is payable only on hire earned and paid, on hire due, on settlement payments, on extensions, on options, on continuation periods, or on replacement arrangements. If the intention is to limit commission strictly to hire actually received under the charter, the wording should say so clearly.
Where third-party enforcement rights are not desired, the charterparty should say so expressly. If direct enforcement by named shipbrokers is accepted, the dispute resolution clause should state whether broker claims must be arbitrated and under which seat and rules.
Drafting Points for Charterers
Charterers should ensure that address commission is described accurately. If it is intended as a rebate to charterers, the clause should not leave room for an unidentified third party to claim it. If it is intended to be paid to a named broker, the payment route and timing should be stated.
Charterers should also check whether any commission clause may affect extensions, optional periods, or direct follow-on business. A poorly drafted continuation provision may produce disagreement if the charterers later keep the same ship under amended terms.
Where charterers pay hire net of address commission, the hire statements should show the deduction clearly. Transparent accounting prevents later arguments over whether the deducted amount was a rebate, a broker payment, or an unpaid part of the hire.
Practical Points for Shipbrokers
Shipbrokers should not treat commission wording as a formality. The broker should check that the charterparty names the correct party, shows the correct percentage, identifies the paying party, covers extensions where intended, and states whether commission is payable on hire earned and paid, hire due, or execution of the charter.
Where a fixture may run for a long period, the broker should consider whether protection is needed for early cancellation, sale of the ship, mutual termination, default, substitute employment, or direct renewal. These protections are much easier to negotiate before the fixture is concluded than after the charter has failed.
Shipbrokers should also consider the governing law and dispute resolution clause. A commission right that is clear under one legal system may be more difficult to enforce under another. If the broker expects to enforce the clause directly, that right should be stated in plain words.
Accounting and Documentation
Commission disputes are often worsened by poor accounting. Hire statements should show gross hire, off-hire deductions, address commission, brokerage commission, net hire, payments received, and any unpaid balance. Where commission is split between brokers, the statement should show the basis of each broker’s share.
Supporting documents may include the fixture recap, final charterparty, addenda, hire invoices, bank payment records, off-hire calculations, extension notices, cancellation agreements, settlement agreements, and correspondence confirming the broker’s role. These records help determine whether hire was earned, whether it was paid, and whether the commission clause was triggered.
Where a charter is varied, extended, cancelled, or replaced, the parties should deal expressly with commission in the same document. Silence creates uncertainty. A short clause confirming whether commission is preserved, excluded, reduced, or paid in a lump sum may avoid later arbitration or litigation.
Commercial Importance of Clear Commission Wording
Shipbrokers are central to the working of the chartering market. They bring counterparties together, test market levels, negotiate terms, close fixtures, and often help maintain commercial communication during the charter. The commission clause is the mechanism by which that role is remunerated.
At the same time, commission should be predictable. Shipowners need to know the true cost of the charter. Charterers need to know whether address commission is a rebate or an onward payment. Shipbrokers need to know when commission is earned and how it can be enforced. Ambiguity serves no one.
The best drafting is direct. It names the broker, states the percentage, identifies the payer, defines the payment base, deals with extensions and early termination, distinguishes address commission, and aligns the clause with the chosen law and arbitration agreement.
Conclusion
Shipbrokers’ commission in a time charterparty depends primarily on the language of the contract. A standard clause may give a broker commission only on hire earned and paid under the charter and any agreed continuation or extension. If hire is suspended, never paid, compromised, or lost through early termination, the broker’s entitlement may be reduced or disappear unless stronger wording protects it.
Address commission must be handled separately because it may operate as a charterers’ rebate rather than a true third-party brokerage payment. English law may allow a named shipbroker to enforce the commission clause directly and may also bind the broker to arbitration. U.S. law is often more restrictive in treating ordinary brokerage claims as non-maritime and dependent on the precise commission agreement.
The practical answer is careful drafting and clean accounting. A commission clause should not be left as a half-completed formality at the end of the charterparty. It should be treated as a commercial payment clause with real consequences for shipowners, charterers, and the shipbrokers who brought the fixture into existence.