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.