Fixture on behalf of non-existent or fictitious principal

Chartering brokers fixed a vessel on behalf of charterers in Panama.  The vessel was time chartered for a voyage from Far Eastern ports to Arabian Gulf and Red Sea ports.

Soon after loading had been completed it became clear that the charterers were in serious financial difficulties and had not paid the owners' hire and other ancillary expenses.  Furthermore, the owners were obliged to utilise their own funds to complete the contracted voyage and discharge at Red Sea ports.

Subsequently the brokers were advised by the ship's managers that their enquiries revealed that the charterers were not registered in Panama.  Thereupon the Club made enquiries in Panama and Taiwan to establish the true status of the charterers were identical.

In due course lawyers acting for the managers of the vessel served a writ for US$ 365,237 on the brokers alleging negligence in the negotiation of the charterparty and claiming that the charterers did not, in fact, legally exist.

A defence to the claim was mounted and the case was set down for hearing before the Court.  By this time interest and costs added to the original claim meant that an adverse judgement would result in a claim on the brokers in excess of US$ 500,000.  As there was a real risk of judgement being given in favour of owners, negotiations were commenced which ultimately resulted in a settlement of the claim for US$ 170,000.

Finally, it should be noted that a not uncommon case is where a company is in the course of formation and the broker enters into a contract on behalf of the proposed company before it has in fact been incorporated.

In such a case the broker is personally bound even if he expressly stipulates that he is only representing the company and qualifies his signature, e.g. signs adding the words "as agent only".  The contract is then one between the broker as principal and the other party.

When the company comes into existence it cannot ratify the contract purporting to have been entered into on its behalf before the date of its incorporation.