Shipbrokers’ Commissions under Rights of Third Parties Contracts Act 1999

Shipbrokers’ Commissions under Rights of Third Parties Contracts Act 1999

Until the Rights of Third Parties Contracts Act 1999 came into force on 11 May 2000, shipbrokers were at the mercy of the party who usually pays all shipbrokers, usually the shipowners. This is so even if the shipbroker is a charterer’s shipbroker.

Prior to Rights of Third Parties Contracts Act 1999, a Shipbroker was a party mentioned in Charterparty but was not a party to the Charterparty.

This subtle distinction gave unscrupulous Shipowners an excuse not to pay shipbrokers, who were hitherto unable to sue under the Charterparty under which they had no rights.

Privity of Contract

Rights of Third Parties Contracts Act 1999 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 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 emphasized 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 would be paid to each shipbroker involved in the creation of the contract.

Previously, if the shipowner then did not pay one or more of these shipbrokers, shipbrokers were unable to sue under the charterparty, since shipbrokers 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 shipbroker’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 ships’ income.

On the other hand, great care had to be taken by the shipbroker not to spread false rumours for fear of being accused by the shipowners of slander or of libel if the shipbrokers told anyone in writing about those shipowners.

Under the Rights of Third Parties Contracts Act 1999, 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 Rights of Third Parties Contracts Act 1999 for shipbrokers is that shipbrokers 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.

Currently, there are some discussions among shipbrokers and their legal advisers that Shipbroker A who, for reasons of confidentiality, for example, is included in a general bracket description of 5% commission to be paid to Shipbroker X, for division with others is still covered under the Rights of Third Parties Contracts Act 1999 by being a member of a class or description such as a shipbroker similar to Shipbroker X, 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 to this additional hidden profit.

Rights of Third Parties Contracts Act 1999

There is much to commend this Rights of Third Parties Contracts Act 1999 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.

Rights of Third Parties Contracts Act 1999 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.

Rights of Third Parties Contracts Act 1999 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 shipbroker’s knowledge, that they do not intend to reward the shipbroker for bringing them together under the terms of that contract, then the shipbroker 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.

Rights of Third Parties Contracts Act 1999 should do much to obviate the need for charterers to come to the unofficial aid of their shipbrokers.

Rights of Third Parties Contracts Act 1999 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.

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Shipbrokers’ Commissions under Rights of Third Parties Contracts Act 1999

The Rights of Third Parties Act 1999 is a key piece of legislation in the UK that essentially allows a person who is not a party to a contract to enforce a term of the contract, provided that either the contract expressly permits them to do so, or the term of the contract purports to confer a benefit on them. Prior to this act, only those directly involved in a contract (i.e., the contracting parties) could enforce the terms of the contract.

In the context of shipbrokers, it means that a third party, like a shipbroker, could potentially enforce a term of the contract, like the payment of a commission, even though they’re not a direct party to the contract. Here’s how it might work:

Let’s say a ship owner (Party A) and a charterer (Party B) enter into a contract to charter a vessel. The shipbroker (Party C) arranges this contract. The contract includes a term stating that the ship owner will pay a commission to the shipbroker upon the successful completion of the charter.

Under the Rights of Third Parties Act 1999, the shipbroker could enforce this term even though they are not a direct party to the contract, since the contract includes a term that purports to confer a benefit on them (the commission). This is significant because, before the enactment of this legislation, if the ship owner refused to pay the commission, the shipbroker would not have been able to take legal action to enforce the contract term because they were not a party to the contract.

Of course, every case would depend on the specifics of the contract and the circumstances. The Rights of Third Parties Act 1999 includes exceptions and specific requirements that must be met for a third party to enforce a contract term. It’s also worth noting that the contracting parties can specifically exclude the application of the Rights of Third Parties Act 1999 in their contract if they wish to do so.

Given these complexities, those involved in these kinds of transactions should consult with a legal professional to fully understand their rights and obligations under the contract and under the law.

While the Rights of Third Parties Act 1999 provides a general framework, there are also complexities and exceptions that need to be understood.

One important point is that the third party (in this case, the shipbroker) must be identified in the contract by name, as a member of a class, or as answering a particular description. They don’t necessarily need to be in existence when the contract is entered into.

Further, the act does not give the third party rights in respect of every aspect of the contract. They only have the rights specifically granted to them. The shipbroker, for instance, would be able to enforce the commission term of the contract, but may not be able to enforce other aspects of the agreement between the ship owner and the charterer, unless those rights have been expressly granted.

Another key point is that, if the contract expressly allows it or if the third party gives their consent, the contracting parties can rescind or vary the contract without the third party’s agreement. The consent conditions can be very specific and may include stipulations about how and when consent must be given. However, if the third party has relied on the term (for instance, if the shipbroker has undertaken work on the basis of the promised commission), the term cannot be rescigned or varied without their agreement.

Also, it’s important to note that a third party’s ability to enforce a contract under the Act doesn’t affect any other rights they might have outside the Act. In other words, if the shipbroker had some other basis for claiming their commission (for example, if they had a separate agreement with the ship owner), they could still pursue that, independent of the Rights of Third Parties Act 1999.

Finally, it should be pointed out that the Act only applies in England, Wales, and Northern Ireland. Scotland has its own legal system, and does not recognize the Act. Different rules might apply to shipbroking contracts that fall under other jurisdictions.

 

Shipbrokers’ Commissions and Charter Party 

Shipbrokers must bear in mind that the way the contract is written is very important. For example, the charter party (contract) may contain a clause expressly excluding the application of the Rights of Third Parties Act 1999, which would prevent the shipbroker from enforcing any term of the contract, even if it confers a benefit on them.

In addition, the contract may specify the extent to which a third party, such as a shipbroker, can enforce its terms. The contract could limit the amount of commission that the shipbroker could claim, or it could specify circumstances under which the shipbroker could not claim a commission.

If disputes arise related to the enforcement of terms by third parties, it’s important to remember that these disputes would typically be resolved by the courts in accordance with the rules of contract law. Therefore, even with the Rights of Third Parties Act 1999, litigation can be a lengthy and costly process, which is why it’s so crucial to get the contract right in the first place.

Furthermore, not all contracts in the shipping industry are subject to UK law. International shipping involves multiple jurisdictions, and the contract could be governed by a different legal system with different rules regarding the rights of third parties. Therefore, understanding the choice of law clause in the contract is also crucial.

The Rights of Third Parties Act 1999 has certainly expanded the potential parties who can enforce contract terms, but its application in each case will depend on the specifics of the contract and the circumstances. If you’re a shipbroker or involved in any kind of transaction where third party rights might be an issue, it’s essential to get legal advice to understand your position and protect your interests.

While the Rights of Third Parties Act 1999 can provide shipbrokers a way to enforce commission terms in contracts to which they are not a direct party, this is a complex area of law and it’s always advisable to seek legal counsel to understand how it applies to any specific situation.

 

Separate Commission Agreement for Shipbrokers

It may be useful to understand how the Rights of Third Parties Act 1999 interacts with other areas of law and commercial practice.

While the Act has given shipbrokers the ability to enforce contractual provisions made for their benefit, it doesn’t prevent parties from using other legal mechanisms to secure their interests. For example, the shipbroker could still enter into a separate commission agreement with the ship owner or charterer. This agreement could provide additional protection and potentially simplify enforcement by directly binding the shipbroker and the other party.

On the flip side, it’s crucial to understand that the Act only allows a third party to enforce a contract term if the contract provides a benefit to them. The shipbroker wouldn’t be able to enforce other terms of the contract, such as the ship owner’s obligations to the charterer or vice versa, unless they are expressly granted these rights in the contract. This emphasizes the importance of clear, comprehensive contract drafting.

Another aspect to bear in mind is the dispute resolution process. If the shipbroker had to enforce a contract term under the Rights of Third Parties Act 1999, this could potentially lead to a legal dispute. It’s common for contracts in the shipping industry to include dispute resolution clauses, which set out how any disputes should be resolved. This might involve negotiation, mediation, arbitration, or litigation. These processes can be time-consuming and expensive, and the outcome can be uncertain.

With these complexities in mind, it’s clear that while the Rights of Third Parties Act 1999 provides valuable protections for third parties like shipbrokers, it’s not a panacea. Contracting parties should carefully consider their legal and commercial positions, and seek expert advice to ensure their interests are fully protected. It’s always best to try and prevent disputes from arising in the first place, through clear communication, careful contract drafting, and robust commercial relationships.

 

Shipbrokers’ Right to Enforce a Contract Term

When considering the Rights of Third Parties Act 1999, it is also worth noting the implications of the Act on other aspects of business operations and practices, particularly for shipbrokers.

For instance, the application of the Act can impact negotiations between ship owners, charterers, and shipbrokers. Knowing that a shipbroker has the right to enforce a contract term can give them more leverage in these negotiations. This can help ensure that commission terms are fair and appropriate, and that shipbrokers are adequately compensated for their services.

It is also important to remember that the rights conferred by the Act are not automatic. If the shipbroker wants to enforce a term of the contract under the Act, they may need to take legal action. This will usually involve instructing a solicitor, potentially issuing court proceedings, and dealing with all the associated costs and stresses.

The Act can also have a significant impact on risk management strategies within the shipping industry. The possibility of third-party enforcement could lead to additional considerations in drafting contracts, managing relationships, and setting aside provisions for potential liabilities.

In the wider context, the Rights of Third Parties Act 1999 could influence industry standards and norms over time. It might encourage more transparent and equitable practices, or lead to changes in how contracts are drafted and enforced.

Finally, although we’ve been discussing the Act in the context of the shipping industry, it’s worth noting that the principles apply across many sectors. Any contract could potentially be affected, so it’s essential for businesses in all sectors to understand the Act and its implications.

However, as we’ve reiterated, the complexities surrounding the enforcement of contract terms by third parties, particularly in sectors like shipbroking, make it critical to seek professional legal advice. With the right advice, businesses can navigate the potential challenges and opportunities presented by the Rights of Third Parties Act 1999, ensuring their interests are protected and their operations are compliant with the law.

Further expanding on this topic, we can also discuss some practical tips for managing the implications of the Rights of Third Parties Act 1999, particularly for those in the shipping industry:

  1. Contract Clarity: Always ensure that the terms of the contract are clear. Any provisions that are intended to benefit or be enforceable by a third party should be clearly stated. It’s also important to state whether the third party’s consent is required for any changes to these provisions.
  2. Exclude the Act if Necessary: If for any reason, the contracting parties do not want to extend the right of enforcement to a third party, they should explicitly exclude the application of the Act in the contract.
  3. Separate Agreements: In some situations, it might be beneficial for the contracting parties to enter into separate agreements with the third party. For example, a ship owner might enter into a separate brokerage agreement with the shipbroker. This can provide an added level of protection and clarity for all parties involved.
  4. Dispute Resolution Clause: Contracts should include a dispute resolution clause that sets out the agreed method for resolving any disputes, including those involving third parties. This can provide a clear pathway for resolving issues without immediately resorting to litigation.
  5. Legal Advice: Seek legal advice when drafting and reviewing contracts. This can help ensure that the rights and responsibilities of all parties are accurately reflected and that the contract is in compliance with relevant laws, including the Rights of Third Parties Act 1999.

Remember, the shipping industry is international and multifaceted, so it’s crucial to consider all relevant laws and regulations, not just those in your home jurisdiction.

Even though the Rights of Third Parties Act 1999 offers additional avenues for third parties to enforce contract terms, it’s just one aspect of the broader legal and commercial landscape. A holistic approach that considers all relevant factors is key to successfully navigating the shipping industry and ensuring the best outcomes for all parties involved.

 

FONASBA International Brokers Commission Contract

We kindly suggest that you visit the web page of FONASBA (The Federation of National Associations of Ship Brokers and Agents) to obtain the original FONASBA International Brokers Commission Contract forms and documents. www.fonasba.org 

 

Shipbrokers’ Commissions and FONASBA International Brokers Commission Contract

  1. Shipbrokers’ Commission:

A shipbroker is a company or individual who is involved in the business of chartering, buying, and selling ships for clients. The shipbroker’s commission is the fee or payment that they receive for their services. The amount of this commission varies depending on several factors including the size of the ship, the length of the charter, the complexity of the deal, and the current state of the shipping market. Typically, the commission is a percentage of the total value of the deal.

  1. FONASBA International Brokers Commission Contract:

The Federation of National Associations of Ship Brokers and Agents (FONASBA) is an organization that represents the interests of shipbrokers and agents around the world. The FONASBA International Brokers Commission Contract is a standard contract form that sets out the terms and conditions for the payment of commission to brokers involved in international ship chartering, buying, and selling.

This contract is designed to be fair and balanced, protecting the rights of both the brokers and their clients. It provides clear terms for things like the calculation and payment of commission, the obligations of the parties, and dispute resolution processes. The contract is recognized and used globally, providing consistency and legal certainty in the shipping industry.

3. Components of the FONASBA Contract:

The FONASBA contract consists of several key sections, including:

  • The Agreement: This is the main body of the contract, where the parties involved are identified, and the principal terms of the agreement, including the commission rate and the obligations of each party, are set out.
  • The Annexes: These are additional sections that can be added to the main contract to cover specific circumstances. For example, there might be an annex that sets out the terms for the sale of a ship, another for the chartering of a ship, and so on.
  • The Dispute Resolution Clause: This part of the contract sets out the process for resolving any disagreements that might arise between the parties. It usually provides for arbitration, which is a form of dispute resolution that is private, quicker, and often less formal than court proceedings.

4. Role of Shipbrokers:

Shipbrokers are vital in the shipping industry. They have comprehensive knowledge of the market, the availability of ships, and shipping prices. A good shipbroker can help their clients make the best decisions, whether they are looking to buy, sell, or charter a ship.

5. FONASBA’s Role:

FONASBA’s aim is to promote fair and equitable practices among shipbrokers and agents, ensuring a standard of professionalism and ethical conduct within the industry. This helps to create a transparent, effective, and efficient marketplace for all participants.

6. Importance of the FONASBA Contract:

The FONASBA contract is widely recognized and respected in the shipping industry. It brings a degree of certainty and standardization to the often complex world of ship brokerage. By setting out clear terms for the payment of commission, the contract helps to avoid disputes and ensures that brokers are fairly compensated for their work.

To conclude, while shipbrokers’ commissions and the FONASBA contract may seem complex at first glance, they are vital components of the international shipping industry. The FONASBA contract, in particular, plays a crucial role in establishing clear, fair, and consistent practices for the payment of shipbrokers’ commissions worldwide.

7. Commissions and Disbursements:

The commission that a shipbroker receives is often based on a percentage of the gross freight or charter hire. This is usually agreed upon before the deal is finalized. Sometimes, it may also include a certain amount of disbursements, which are expenses incurred by the shipbroker in connection with the charter or sale and purchase transaction. The FONASBA contract specifies the methods of payment and the responsibility for these disbursements.

8. Professional Expertise:

When a client engages a shipbroker, they are not just paying for the broker’s services, but also their expertise, contacts, and knowledge of the market. A shipbroker’s insights can be invaluable, especially in a volatile market where prices can fluctuate rapidly.

9. Agency Fees:

In addition to commission, shipbrokers may also earn agency fees for providing agency services to the ships that they have brokered. These services could include arranging for the loading and unloading of cargo, facilitating customs and immigration procedures, and coordinating with local authorities and service providers.

10. Brokers as Intermediaries:

As intermediaries, shipbrokers play a critical role in maintaining smooth communication between all parties involved in a transaction. They must ensure that the terms agreed in the contract are adhered to, and can also assist in resolving any misunderstandings or disputes that may arise. The FONASBA contract provides a robust framework for these interactions, ensuring that each party’s interests are protected.

11. Brokers and the Future of Shipping:

The shipping industry is continually evolving, with new technologies and regulations changing the way business is done. As these changes take place, the role of shipbrokers may also evolve. For instance, digital platforms are increasingly being used for ship transactions, which could change the traditional role of the shipbroker. However, the knowledge, expertise, and networks that shipbrokers bring to the table will remain invaluable. And so will the role of FONASBA in providing a standard contractual framework that is accepted worldwide.

12. The Shipping Market:

The shipping market can be volatile, influenced by factors such as global economic conditions, trade policies, and changes in supply and demand for various types of cargo. This volatility can impact the commission rates and the overall income of shipbrokers. Therefore, understanding the dynamics of the market is a key skill for a shipbroker.

13. Specialized Knowledge:

Given the wide variety of vessels and cargoes involved in shipping, shipbrokers often specialize in specific segments of the market. For example, a broker may specialize in the tanker market, the dry bulk market, or the container market. Specialization allows a broker to develop a deep understanding of their segment of the market, enhancing their value to clients.

14. Evolving Regulatory Environment:

The shipping industry operates within a complex global regulatory environment. Laws and regulations at the international, national, and local levels can all impact shipping operations. A good shipbroker stays up-to-date with this changing regulatory environment and can advise clients accordingly. The FONASBA, as a global organization, also plays a role in helping brokers navigate this complexity by advocating for standardized practices and providing education and resources to its members.

15. The Role of Technology:

As in many other industries, technology is having a significant impact on shipping. Digital platforms are becoming increasingly important for shipbroking, providing new ways to connect buyers and sellers, and streamlining transactions. Technology is also enabling greater transparency and efficiency in the shipping market. The FONASBA is likely to adapt to these technological changes, ensuring its contract remains relevant and useful in the digital age.

16. The Importance of Relationships:

Despite the growing role of technology, relationships remain at the heart of shipbroking. Building and maintaining strong relationships with clients, fellow brokers, shipowners, charterers, and other stakeholders in the industry is crucial for a shipbroker’s success. This aspect of the broker’s role is less tangible but no less important than their knowledge of the market or their negotiation skills.

17. The Impact of Global Events:

The global nature of the shipping industry means that events around the world can have a significant impact on the market. This could include geopolitical developments, changes in trade policies, natural disasters, and global health crises, among others. Shipbrokers, as experts in the shipping market, must stay abreast of these events and understand their potential impact on the market. Their insights can help clients make informed decisions in the face of uncertainty.

18. Training and Education:

Becoming a successful shipbroker requires a mix of skills and knowledge, some of which can be gained through formal education and training. Many shipbrokers have a background in maritime studies, business, or law. In addition, organizations like FONASBA provide training and resources to help brokers develop their skills and stay up to date with changes in the industry.

19. Ethical Standards:

Maintaining high ethical standards is essential for shipbrokers. This includes treating clients fairly, acting with integrity, and maintaining confidentiality. FONASBA has a Code of Conduct that sets out the ethical standards expected of its members. Adhering to these standards can enhance a broker’s reputation and build trust with clients.

20. Brokerage Firms:

Many shipbrokers work for brokerage firms. These firms may be small, with a handful of brokers, or large international companies with hundreds of brokers and offices around the world. Large firms often have brokers specializing in different areas, providing clients with a wide range of services. The structure of these firms and their commission distribution can vary widely.

21. The Broker’s Role in Dispute Resolution:

Disputes can sometimes arise in shipping transactions. In these situations, the shipbroker can play a vital role in facilitating discussions between the parties and helping to find a resolution. The FONASBA contract provides a framework for resolving disputes, typically through arbitration. The broker’s understanding of this process and their relationship with the parties can be key in resolving disputes efficiently and fairly.

22. Risk Management:

Risk management is a crucial aspect of the shipping industry, and by extension, shipbroking. Brokers can provide valuable advice to their clients on how to manage risks, which could include currency risks, default risks, and market volatility. Furthermore, their knowledge of the FONASBA contract can help ensure that risks related to payment of commission and other contractual obligations are adequately addressed.

23. Understanding Maritime Law:

Maritime law, also known as admiralty law, is a specialized area of law that governs maritime activities. A good shipbroker has a solid understanding of maritime law, as it affects all aspects of shipping transactions. This understanding allows them to guide their clients through the legal complexities of the shipping industry, and to ensure that the terms of the FONASBA contract are legally sound and enforceable.

24. Negotiation Skills:

Negotiation is at the heart of what shipbrokers do. They negotiate with shipowners, charterers, and other brokers to get the best deal for their clients. This involves not only negotiating the price, but also other terms of the contract such as the delivery and redelivery points, the duration of the charter, and any special conditions. A broker’s negotiation skills can be a decisive factor in the success of a shipping transaction.

25. Market Forecasting:

Part of the shipbroker’s role involves monitoring market trends and forecasting future movements. This can involve analyzing a variety of data, including freight rates, ship supply and demand, commodity prices, and macroeconomic indicators. A broker’s ability to accurately predict market trends can help their clients to make timely and informed decisions.

26. The Future of Shipbroking:

The shipbroking profession is likely to evolve in response to changes in the shipping industry and broader society. For instance, sustainability is becoming an increasingly important concern in the shipping industry. In the future, brokers may need to provide advice on issues such as carbon emissions and environmental regulations. Technology will also continue to shape the profession, with digital platforms and data analytics playing an increasingly important role.

27. Impact of Climate Change:

The effects of climate change are being felt globally and the shipping industry is not exempt from this. Sea levels, weather patterns, and the availability of certain shipping routes may be affected by climate change in the coming years. This might introduce a new level of uncertainty and risk in the industry. Shipbrokers, with their deep knowledge and understanding of the industry, will be tasked with helping clients navigate these changes and challenges.

28. Sustainability and Green Shipping:

As mentioned earlier, sustainability is becoming increasingly important in the shipping industry. This is driving the development of “green” ships that emit less greenhouse gas and are more fuel efficient. There is also growing interest in alternative fuels such as hydrogen and ammonia. Shipbrokers may need to gain expertise in these new technologies in order to provide the best advice to their clients.

29. Digital Transformation:

The shipping industry, including shipbroking, is undergoing a digital transformation. New platforms and tools are being developed that leverage big data, artificial intelligence, and blockchain technology to streamline and enhance shipping operations. As these technologies become more prevalent, they will change the way brokers work, making transactions more efficient but also requiring brokers to acquire new skills.

30. Impact of Global Trade Policies:

Trade policies can significantly affect the shipping industry. For example, tariffs, sanctions, and trade agreements can alter trade flows and affect the demand for shipping. Shipbrokers need to stay informed about these policies and understand their implications for the shipping market.

31. Role of Insurance in Shipping:

Insurance is a critical aspect of the shipping industry, covering risks such as damage to the ship, loss of cargo, and liability for accidents. Shipbrokers may work closely with insurance companies and underwriters to ensure their clients have appropriate coverage. Knowledge of insurance and risk management can add significant value to a broker’s services.

32. Ship Finance:

Shipping is a capital-intensive industry, and ship finance is a specialized field that deals with the sourcing of capital for ship acquisitions. Brokers may play a role in arranging finance for their clients, working with banks, leasing companies, and other financial institutions.

 

Shipbroking is a complex and dynamic field that requires a broad range of skills and knowledge. The FONASBA International Brokers Commission Contract is a key tool for brokers, providing a clear and standardized framework for their work. As the industry evolves, brokers will need to stay up-to-date with changes and continue to provide valuable, expert services to their clients.

Shipbrokers play a vital role in the complex world of shipping transactions, bringing together buyers and sellers, negotiating contracts, and providing expert advice. The FONASBA contract, with its clear and balanced terms, provides a solid foundation for their work. As the shipping industry evolves, both shipbrokers and FONASBA will need to adapt to meet new challenges and opportunities.

The role of shipbrokers and the importance of the FONASBA International Brokers Commission Contract in the shipping industry is multifaceted. It involves not just knowledge of the market and negotiation skills, but also understanding of global events, adherence to ethical standards, and the ability to manage relationships and resolve disputes. With all these in mind, it becomes clear why this profession is integral to the functioning of the global shipping industry.

While the FONASBA International Brokers Commission Contract is a cornerstone in defining the terms of the relationship between shipbrokers and their clients, the role of shipbrokers extends far beyond the contract. They are key players in the shipping industry, with a deep understanding of the market, a wide network of contacts, and the skills to navigate a constantly changing landscape.

Understanding the shipbroking process and the important role that the FONASBA contract plays can help participants in the shipping industry to navigate transactions more effectively and efficiently. It provides a degree of assurance and clarity that contributes to the overall stability and success of the shipping industry.

It’s important to remember that each deal can be unique, and parties should carefully review the terms of the contract and potentially seek legal advice before signing. The purpose of such contracts is to ensure that all parties involved have a clear understanding of their responsibilities, the payment structures, and any potential issues that might arise during the process of buying, selling, or chartering a ship.

 

How does Shipbrokers’ Commission work?

A shipbroker is a company or individual that acts as an intermediary between the owners of ships and those who want to either buy, sell, or rent them. Shipbrokers work much like a real estate agent, providing a service of connecting interested parties and assisting in the negotiation of terms.

The primary income for shipbrokers comes from commissions, which are typically a percentage of the transaction value. The exact amount can vary depending on the specifics of the deal and the customary practices in the market, but rates typically range from 1.25 % to 2.5%.

There are three main types of shipbrokers, each earning commissions in slightly different ways:

  1. Sale and Purchase Shipbrokers: These shipbrokers specialize in the buying and selling of ships. Shipbrokers earn their commission once the deal is completed. For instance, if a ship is sold for $10 million and the broker’s commission rate is 1%, the broker would earn $100,000 from the transaction.
  2. Chartering Shipbrokers: These shipbrokers  arrange for the charter (rental) of ships. They typically earn a commission on the value of the charter. For example, if a ship is chartered for a year at a daily rate of $10,000 (meaning a total value of approximately $3.65 million), and the broker’s commission is 1.25%, the broker would earn a commission of about $45,625.
  3. Shipbroking Brokers: These brokers are involved in a range of activities including arranging for ships to be built, arranging for second-hand ships to be sold, and arranging for ships to be chartered. They can earn a commission on any of these activities.

It’s important to note that these commission rates are typically standard and non-negotiable. This is because the shipbroking industry is highly competitive, and brokers rely on the volume of their transactions to earn a living.

Lastly, brokers may be involved on both sides of a transaction (representing both buyer and seller, or charterer and shipowner), in which case they may earn a commission from both parties. This, however, is subject to conflict of interest rules and the specific arrangements made in each deal.

 

Shipbrokers’ Commission and Charter Party Negotiations

Once the shipbroker has successfully negotiated a deal between two parties, whether it be a sale, purchase, or charter, the details of the agreement are put into a contract. This contract is often known as a fixture note in chartering, or a Memorandum of Agreement (MOA) in Sale and Purchase. The agreed commission percentage is also documented in this contract.

When the transaction is completed, the shipbroker issues an invoice for their services, which calculates the commission based on the agreed percentage and the total value of the transaction. This invoice is then paid by the relevant party or parties.

In chartering, payment of the broker’s commission may be split into several instalments, corresponding to the payment schedule of the charter hire itself. In the case of voyage charters, the commission is often paid once the voyage is completed. For time charters, the commission is typically paid in installments along with the charter hire.

For Sale and Purchase brokers, the commission is generally paid once the sale is completed and the vessel is delivered to the new owners.

In addition, shipbrokers may also earn a commission from providing other related services. These could include providing market intelligence and advice, vessel valuation, arranging vessel inspections and surveys, or helping with the negotiation and management of contracts.

The shipbroker’s role is to add value through their specialist knowledge and networks, to facilitate transactions and to ensure everything goes as smoothly as possible. Despite their commissions, using a shipbroker can often save money for both parties by ensuring a fair price is agreed and any potential issues are identified and dealt with early.

As the shipping industry is a global one, shipbrokers may operate across different countries and time zones, providing a crucial role in the worldwide shipping network.

 

Advantages of using Shipbrokers’ Services

Shipbrokers not only play an important role in the maritime industry through the buying, selling, and chartering of vessels, but they also often offer a range of additional services. These services may include:

  1. Negotiation: Shipbrokers use their expert knowledge of the maritime industry and current market conditions to negotiate the best possible deals for their clients. This could involve anything from agreeing on the price and terms of a vessel sale or charter, to negotiating the terms of a new shipbuilding contract.
  2. Market Analysis: The shipping market is a complex and volatile industry, with rates that can fluctuate wildly based on a variety of factors. Shipbrokers provide their clients with valuable market insights, helping them to understand the current market conditions and make informed decisions.
  3. Documentation: From drawing up contracts to handling bills of lading and other necessary paperwork, shipbrokers help to ensure that all the legal and regulatory requirements of a transaction are met.
  4. Risk Management: Shipbrokers can help their clients to assess and manage the potential risks involved in a transaction, such as changes in market conditions, technical issues with a vessel, or regulatory changes.

For these additional services, shipbrokers may charge a separate fee or increase their commission rate. The details of these charges would be agreed upon by the client and the shipbroker at the start of their professional relationship.

In terms of payment, the commission is usually paid in the currency agreed upon in the fixture note or contract, often in US dollars due to its status as the primary currency of international trade.

To give a clearer picture of how this works in real terms: if a shipbroker successfully brokers a deal for a one-year time charter at a rate of $15,000 per day, the total charter hire would come to approximately $5.475 million. If the broker’s commission rate is 1.25%, they would be entitled to a commission of approximately $68,437.5. If the commission is to be paid in instalments, the payment schedule would be agreed upon in advance and written into the contract.

While the commission might seem like a significant amount, it’s important to remember that a successful shipbroker adds value by providing expert advice and assistance, reducing the likelihood of costly mistakes and potentially saving their client a significant amount of money in the long term. This is why shipbrokers continue to play a crucial role in the global maritime industry.

 

Shipbrokers and Specialized Shipping Segments

Certain segments of the shipping industry, such as tankers, dry bulk carriers, or container ships, may have their own nuances that affect how shipbrokers operate. For example:

  1. Tanker Shipbrokers: Tankers carry bulk liquid cargoes such as oil or chemicals. The freight rates for tankers can be highly volatile, influenced by factors such as changes in oil prices, geopolitical events, and global economic conditions. Tanker brokers must keep a close eye on these factors to negotiate effectively and provide accurate advice to their clients.
  2. Dry Bulk Shipbrokers: Dry bulk carriers transport commodities like coal, grain, and iron ore. The freight rates for these vessels are heavily influenced by global demand for these commodities. For example, increased construction activity can drive up demand for iron ore and raise freight rates for bulk carriers.
  3. Container Shipbrokers: Container ships carry a wide variety of cargo in standardized containers. The freight rates for container ships are influenced by factors like global trade volumes and the supply and demand of shipping capacity. Container ship brokers often have to deal with complex freight rate structures and contract terms.

In each of these segments, the shipbroker’s commission is calculated in the same way, as a percentage of the transaction value. However, their success and income can vary greatly depending on the current market conditions and their ability to navigate these conditions effectively.

Shipbrokers and Impact of Market Conditions 

Market conditions can have a significant impact on a shipbroker’s work. In a booming market, with high freight rates and plenty of business to go around, shipbrokers can earn substantial commissions. However, in a downturn, when freight rates are low and transactions may be fewer and far between, earning a living as a shipbroker can be challenging.

During such periods, shipbrokers may need to rely more heavily on providing value-added services such as market analysis, risk management, and negotiation to earn their commission. They may also need to be more proactive in seeking out new business and finding creative solutions for their clients.

In addition to earning a commission on each transaction, shipbrokers can also earn retainer fees for providing ongoing services to their clients. This can provide a more stable income during challenging market conditions.

In summary, the work of a shipbroker and the commission they earn can be complex and multifaceted, involving not only a deep understanding of the shipping industry and market conditions but also strong negotiation skills and an ability to provide valuable services to their clients.

 

Who pays shipbroker commission?

In most cases, the shipbroker’s commission is paid by the ship owner or the party who employs the broker’s services. This is because the shipbroker is acting on behalf of the ship owner to charter a ship, sell a ship, or procure goods or services.

The commission rate is typically a percentage of the gross freight or the purchase price of the ship, and is agreed upon before the broker begins their work.

However, the specific details can vary depending on the terms of the agreement between the shipbroker and the parties involved. Some arrangements might have the charterer, for instance, contribute to or even pay the entirety of the broker’s commission.

It’s also worth noting that in some cases, there might be more than one broker involved in a transaction, such as a broker representing the ship owner and another representing the charterer. In these cases, the commission could be split between the two brokers in a manner agreed upon beforehand.

 

How do you calculate Shipbroker Commission rate?

Shipbroker commissions typically follow industry standards and vary based on the type and scale of the transaction. Here’s a general guideline to how you might calculate shipbroker commission:

  1. Determine the type of service. There are different types of shipbrokers – sale and purchase brokers, chartering brokers, etc. Each has their own typical commission rates.
  2. Determine the value of the transaction. The commission is typically a percentage of the total value of the transaction. For example, the total value could be the purchase price of a vessel, or the total hire for a period of charter.
  3. Apply the standard industry commission rate. For chartering, the industry standard is typically 1.25% to 2.5% of the total charter hire. For the sale and purchase of a vessel, the industry standard is generally about 1% of the purchase price. Note, these percentages can vary based on various factors, such as the complexity of the transaction, geography, market conditions, or the reputation and experience of the broker.
  4. Calculate the commission. You can do this by multiplying the total transaction value by the commission rate.

For example, if a ship sale transaction is worth $10 million and the agreed commission is 1%, the shipbroker’s commission would be $100,000.

Please note: These are general guidelines and can vary from deal to deal. The actual commission rate should be clearly agreed upon in a written agreement between the shipowner and the broker to avoid misunderstandings. It’s also advisable to consult with a professional or legal advisor when dealing with such transactions.

Firstly, it’s important to remember that the actual commission rate may vary depending on factors such as the specifics of the deal, the type of ship, the type of broker service, and the relationship between the broker and the client. It’s crucial to confirm the rate before starting a calculation.

As an example, let’s say we have a dry bulk carrier that has been chartered for a time charter trip with a total freight cost of $2,000,000. The agreed commission for the shipbroker is 1.25%:

  1. Convert the commission rate from a percentage to a decimal: 1.25% = 0.0125
  2. Multiply the total freight cost by the commission rate: $2,000,000 * 0.0125 = $25,000

So, in this case, the shipbroker’s commission would be $25,000.

In cases where there are multiple brokers involved, the commission is typically split between them. This is another factor that should be clearly outlined in the brokerage agreement.

In any case, it’s always best to consult with a professional or legal advisor when dealing with such transactions. These calculations and examples are general in nature and may not apply to all situations or jurisdictions. The actual terms of any shipbroking agreement should be specifically tailored to the needs and expectations of the parties involved.

 

Address Commission (ADCOM) and Brokerage Commission

Shipbroker’s commission for arranging a voyage charter usually includes an address commission and a brokerage commission. The address commission is a type of commission paid to the charterer, usually as a reward for providing the business. The brokerage commission is the fee paid to the shipbroker for arranging the charter. Each of these is typically calculated as a percentage of the total freight or hire.

Let’s delve a bit deeper with another example. Let’s say a shipbroker arranges a voyage charter, and the agreed freight for the voyage is $500,000. The broker and charterer have agreed on a 2.5% brokerage commission and a 1.5% address commission.

To calculate each commission:

  1. Convert the commission rates from percentages to decimals. So, 2.5% becomes 0.025, and 1.5% becomes 0.015.
  2. Multiply the total freight by each commission rate:
    • Brokerage commission: $500,000 * 0.025 = $12,500
    • Address commission: $500,000 * 0.015 = $7,500

So, in this case, the shipbroker would receive a commission of $12,500, and the charterer would receive an address commission of $7,500.

Please remember that actual commission rates can vary widely depending on many factors, and these are just general examples. Always confirm the agreed rates and terms in your brokerage agreement and consult with a legal professional or industry expert when needed.