Shipbrokers Commissions under Rights of Third Parties Contracts Act 1999

Until this recent Act came into force on 11 May 2000, shipbrokers were at the mercy of the party who usually pays all shipbrokers, i.e. the shipowner. This is so even if the broker is a charterer’s broker. Prior to this Act, a broker was a party  mentioned in Charterparties but was not a party to the charterparty. This subtle distinction gave unscrupulous owners an excuse not to pay shipbrokers, who were hitherto unable to sue under the contract (the C/P) under which they had no rights. 1999 Act has created important changes to the rules regarding privity of contract,  one  of  the  most  fundamental  areas  of  English  contract  law. The doctrine of privity of contract has been described [in Chitty on Contracts, 26th Edition, § 1321] thus: “a contract cannot (as a general rule) confer rights or impose obligations arising under it on any person except the parties to it.” This was emphasised in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915 AC 847] in which Lord Haldane LC said: “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 basic premise of this rule has not changed, save as regards the rights of a third party who would previously not have been protected. Thus, a typical problem for a shipbroker could occur when he or she acted as a charterer’s agent when negotiating a fixture with a shipbroker who represented the shipowner. If the fixture were concluded, a clause would be included which would provide that a certain amount of commission (usually 1.25%, as described earlier) would be paid to each broker involved in the creation of the contract. Previously, if the owner then did not pay one or more of these shipbrokers, they were unable to sue under the contract, since they were not a party to it, despite the inclusion of a clause specifically for the shipbrokers’ benefit. Shipbrokers had therefore to resort to other methods of ensuring their remuneration would be settled, such as using the only effective asset in a broker’s armoury: word of mouth. It does not take very long for rumours to be fuelled – especially powerful if such rumours serve to diminish the reputation of shipowners who depend on those same broking communities for their vessels’ income. However, great care had to be taken by the shipbroker not to spread false rumours for fear of being accused by the owners of slander (or of libel if the shipbrokers told anyone in writing about those owners). Under the 1999 Act, Section 1 states that “(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if –

(a) the contract expressly provides that he may, or (b) subject to subsection

(2), the term purports to confer a benefit on him.”

The strength of this Act for shipbrokers is that they are now entitled to sue for their earned commission provided – per Section (3) – if they are expressly defined in the contract by name, as a member of a class or as answering a particular description.

There is currently some discussion among shipbrokers and their legal advisers that broker ABC who, for reasons of confidentiality, for example, is included in a general bracket description of 5% commission to be paid to broker XYZ, for division with others is still covered under the new Act by being a ‘member of a class’ or description, i.e. is a broker similar to broker XYZ, who is specifically named in the contract. This will have wider implications for undeclared or unspecified address commissions for the charterers, who frequently shun any publicity which might alert their clients (the receivers of the goods, for example) to this additional hidden profit. There is much to commend this Act and shipbrokers would be well advised to ensure that they are included in charterparties by name or, failing that, by description if linked to other named shipbrokers. The Act does allow these rights for shipbrokers to be nullified by an express contractual provision to the contrary, but since the contract has been negotiated and will be physically created by those same shipbrokers, the inclusion of such a clause would be most unlikely. However, the Act does give the contractual parties the right not to pay commissions to shipbrokers who created it, if it appears that the parties to the contract did not intend the term to be enforceable by a third party. So if both principals agree, without the broker’s knowledge, that they do not intend to reward the shipbroker for bringing them together under the terms of that contract, then the broker has little, if any, right to sue successfully for earned commission. It may then become necessary for a court to decide what was the intention of the parties and whether they were entitled to agree not to pay commission to their shipbroker. This Act should do much to obviate the need for charterers to come to the unofficial aid of their shipbrokers, as hitherto. The Act should also considerably reduce the number of legitimate commission claims, although these may not be completely eradicated because of the regrettably haphazard manner in which some shipbrokers construct charterparty clauses, which will ultimately bind all parties, including themselves.