Commission on renegotiated Charterparties

The current market conditions have led to a number of charterparties being renegotiated. The new business that emerges may simply be at a different hire rate or for a different period. Another common situation is that a new contracting party takes over the fixture because the original party is unable to continue.

In most renegotiations, the brokers to the original contract will be actively involved in finding a solution and will be paid commission on the resultant fixture. This may be based on a reduced hire rate but their role is recognised and rewarded. However, this is not always the case. Some principals will arrange the new contract directly. They will subsequently state that the original contract has been cancelled and the new business is a completely different fixture.

English law has long held that, unless there is a specific provision in the agreement, brokers will not be entitled to compensation if the fixture is cancelled. There are some forms that do provide such compensation. The Barecon 2001 commission clause, for example, provides that should the parties agree to cancel the charter the owners shall indemnify the brokers for the lost commission. The compensation is however limited to the brokerage on one year’s hire. In the majority of cases, however, the broker will get nothing if the fixture is simply cancelled.

The Courts have stressed that this general rule only applies if the contract truly is cancelled. The situation is different if the same business is continued but in a revised manner. In these cases, the owners may find that the brokers retain a right to commission based on their original work. This applies even if the principals negotiated directly excluding the brokers from the replacement transaction.

ITIC funded a case that was heard by a London arbitration tribunal. The charterer under the original timecharter was unable to continue to pay hire. The owners and the cargo interests both faced significant losses. They decided to continue with the business and agreed that the cargo interests would charter the ship. This type of arrangement is likely if market pressures mean the original charterers are unable to meet their obligations.

The agreement reached between the owners and cargo interests almost entirely reproduced the terms of the original fixture. There was one notable exception - the commission clause was blank and no provision was made for the brokers. The brokers claimed that they should receive commission. When the owners refused to pay, the brokers, with the help of the ITIC, commenced proceedings.

At the hearing the owners argued that the original fixture had ended. They were under no obligation to the brokers in relation to the new contract which they had fixed directly.

The tribunal found in favour of the brokers. The parties had done nothing more than substitute the cargo interests for the original charterers. Any other changes were inconsequential.

In the case heard by the arbitrators the terms of the new charterparty were almost identical to the business put together by the brokers. Many renegotiations will not be so clear cut. The difficulty is deciding how similar a fixture has to be for the brokers’ rights to be maintained. There is no reported case from the English Courts providing clear legal authority. However, it is likely the English courts would ask whether the agreements were substantially the same business.

In weighing up the similarity between the old and new agreements, simply recording the renegotiation in a new document as opposed to an addendum to the original would be unlikely to influence the court at all. Alterations in the hire rate dictate the amount of commission payable but not the obligation to pay it. A period when the vessel is off hire between the original and the new arrangement is unlikely to be relevant unless it significantly separates the transactions.

In conclusion, brokers earn commission if their efforts are the effective cause of a charterparty being concluded. A commission claim on the renegotiation of that charterparty should succeed unless the effect of the broker’s introduction is considered too remote from the new agreement.