Who is the principal?

IT is perhaps a rather curious feature of advising shipbrokers and other intermediaries in the shipping world that the identity of an intermediary’s principal is not always entirely obvious. It is important to establish from the outset between which parties the relationship of principal and agent arises, as this will inevitably colour the advice given and tactics employed in the event of a dispute. The importance, and indeed the difficulties, of establishing this point can be illustrated with a number of examples which are by no means exhaustive.

Take for instance the position of a ship finance intermediary advising an owner about refinancing some of its fleet. In Seascope Capital Services Ltd v Anglo Atlantic Steamship [2002], the intermediary, Seascope, had been advising Mr Laurin, whose business card described him as a shipowner. The ships in question were owned by a company called Anglo Pacific Corporation and were part of a group controlled by Anglo Atlantic Steamship. Technical and commercial management was provided by the Laurin Maritime group of companies and Mr Laurin was a director of the UK company in that group. Ultimate control of this fleet lay with the Laurin family.

One of the issues the judge had to decide in this case was with whom Seascope, the intermediary, had contracted. The defendants sought to argue that Seascope’s principal was Anglo Pacific Corporation, which had not been joined as a party to the action. On the evidence before him, the judge was able to conclude that Mr Laurin had given instructions to Seascope on behalf of Laurin Maritime as agents for Anglo Atlantic Steamship, the controlling company. In the shipping world, the sort of shipowning structure described in this case would not be regarded as out of the ordinary, but identifying the principal was critical to naming the correct defendant in the claim form.

Then there is the position of the competitive sale and purchase broker who has brought parties together on a sale transaction. Unless clear instructions have been received from one party to the transaction, the question can sometimes arise as to whether the broker has in fact acted for two principals, or, if for one, whether it is the buyer or the seller. The fact that traditionally it is the seller who is paying the broker’s commission does not answer the question as to the party with whom the broker contracted and from whom commission is in fact earned. This can sometimes be of critical importance to a broker in negotiating the level of commission payable and further in some cases can pose a real risk of the broker breaching its duty to its principal by failing to recognise to whom a duty is owed.

In a chartering context, Staughton J looked at a number of the permutations in the Ocean Frost [1985], as follows:

“Such a situation commonly occurs in shipbroking circles, so that in a given transaction where there are two brokers, broker A is accurately described as the broker and agent of the shipowners, and broker B as the broker and agent of the charterers. Even where there is only one broker involved, it may happen that he is the agent of one of the parties only. But equally it happens that there is one independent intermediary between the parties. In such circumstances he is what I would describe as a true broker, authorised by each party in turn to do on its behalf what that party requires him to do. Thus he may be given an offer by the shipowner, and is the shipowner’s agent to transmit it; and then be given a counter-offer by the charterer to transmit on his behalf to the shipowner.”

What about the position where numerous brokers are involved in a transaction – does a broker look to the broker up the chain as a principal or as agent for the ultimate principal? The relevance of this is once more that a broker should know with whom it has contracted and from whom it is to receive its remuneration. Is it required to look to the ultimate principal for that or can it hold responsible the broker from whom it received instructions? The question may also be relevant to the nature of the duty owed by the broker to the other constituents of the chain. An English court is likely to approach each situation on its own particular facts when seeking to analyse the relationships within a chain. However, in the CMR context, in the case of Aqualon v Vallana [1994] 1 Lloyds Rep 669, Mance J attempted to point to a number of factors relevant to that consideration:

a) “the terms of the particular contract including the nature of the instructions given
b) any description used or adopted by the parties in relation to the [broker’s] role
c) the course of any dealings….so far as it throws light on the way in which the parties understood their relationship
d) the nature and basis of charging
e) the nature and terms of any [contractual document] issued.”

Another pitfall for unwary brokers is a situation where they find themselves brought into a transaction. Perhaps they have been brought in by a party with whom they have had previous dealings. That party is asking them to act on behalf of a principal with whom the broker is unfamiliar. If the broker finds it easier to deal with and take instructions from the party it knows, then it may be tempted to avoid or forget to involve the actual principal. The danger is that the broker must take great care to ensure that that party is authorised to give instructions on behalf of the principal.

There have even been cases where there has been an agenda on the part of ‘familiar’ parties to improve their position in a transaction at the expense of the principal. This can leave the broker in a very difficult position, with its principal denying that it had authorised the terms of the transaction, and facing a potential breach of warranty of authority claim from the other principal.

It might be said that the Contracts (Rights of Third Parties) Act 1999 - which gives statutory force in certain specified circumstances to the rights of someone who is not a party to but is a beneficiary under a contract - has made life easier for shipbrokers. There will now be more occasions where they have a direct claim for their remuneration from the party named in a contract as liable to pay it to them. However, this places the broker at the mercy of the principals’ contractual terms and does not avoid the consequences of a breach of duty towards the principal on the broker’s part. For those advising shipbrokers, the question “Who is the principal?” remains of primary importance.