The law of agency is well established, however, it is an area of law which continues to create many issues in the shipping world for ship owners, charterers and insurers, along with their agents, such as brokers and technical managers. It is not always obvious to the parties when a relationship of agency occurs and the potentially serious consequences of the relationship of agency are not always fully understood.
What is agency?
A company can appoint any “legal person” to act on their behalf. Agency is the relationship which arises when one person or company is authorised to act (the “agent”) as the representative of another (the “principal”). An agent does not act on his own account and acts only as a representative of his principal.
How does agency arise?
The creation of agency arises by way of the principal giving authority to the agent. The relationship of principal and agent is usually established by consent and agreement. The agreement can be express or implied from the conduct of the parties.
An agent acts with actual express or implied authority where the principal consents in advance to the agent’s actions and gives the agent authority to act and bind the principal. Express authority is where the principal expressly invests in the agent the extent to which the agent may act on the principal’s behalf. For example, express authority may be provided in the charterparty for the Master, as agent of the ship owners, to be responsible for supervising the discharge of the cargo.
Implied authority is where the principal holds out another as having authority to make contracts on his behalf. For example, it is implied that the Master of a vessel is authorised to carry out tasks on behalf of the ship owners, such as signing Bills of Lading.
An agent acts with apparent authority where circumstances make it appear to others that a person has authority to act as agent of another person (i.e. where a person allows a person who is not their agent to appear as their agent, or where a true agent appears to have far greater authority than they actually do). For example, where a broker has authority purely to negotiate a contract on behalf of the ship owner but appears to have authority to enter into the contract on behalf of the ship owner.
When the agent commits an act in the purported name of the principal and is subsequently ratified by the principal, the act is valid as though it had been carried out with authority in the first place. This is the case even is the agent exceeded his authority or had no authority at all.
Agency can arise out of necessity. For example, in an emergency, a person may become an agent by virtue of the urgent circumstances.
Consequences of the Agency relationship
The relationship of agency can have serious consequences.
In short, an agent has the power to bind his principal and may create rights and responsibilities upon his principal which may be enforceable by third parties. For example, a chartering broker, with actual or apparent authority, may enter into a charterparty with a charterer on behalf of his ship owner principal. The broker has the ability to bind the ship owner under the charterparty. The broker himself will have no contractual liability to the charterer under the charterparty and the only contractual parties to the contract will be the ship owner and the charterer. Clearly, this can have far-reaching and potentially severe consequences for the ship owner.
The ship owner will also be liable for torts, such as misrepresentations and negligence, committed within the broker’s apparent authority. As a result of the broker’s actions, the ship owner may be required to compensate the charterer. The ship owner would then be able to then seek an indemnity from the broker in respect of the losses incurred. It is important, therefore, that principals check the credit-worthiness of their agents.
With the requisite authority, the agent (for example a sale and purchase broker) may acquire property on the principal’s behalf or make binding dispositions of the principal’s property. An agent’s actions may even make the principal criminally liable.
An agent warrants to a third party that he has his principal’s authority to do so when he acts on behalf of the principal. It is a breach of warranty of authority where an impression of agency is created where no such relationship exists and the representation is relied upon. In the event that an agent acts outside his authority, the third party may be able to sue the agent for breach of warranty of authority.
Types of Agents in Shipping
In shipping, there are many forms of agency which can arise and the parties should be careful to consider whether a relationship of agency exists. Agents fulfil the role of an intermediary and are often used for their expertise and knowledge, to market or buy goods, find customers and negotiate contracts.
A general agent is authorised to act for the principal in all matters in relation to a particular business. Examples of general agents are liner agents and tramp agents. A special agent is appointed to carry out some particular duties. For example, a Master of a vessel is considered as a special agent.
One of the most obvious example of a relationship of agency is the relationship between ship owners or charterers and their brokers. For example, in the chartering of vessels, brokers often act as intermediaries between owners and charterers and are often responsible for drafting and signing the charterparty on behalf of their principal.
In the sale and purchase of a vessel, a broker may act for owners wishing to sell a vessel and find potential buyers or he may act for charterers wishing to buy a vessel, in which case he will find potential vessels for sale.
An insurance broker will often act on behalf of owners and recommend cover which best suits the class of the vessel and the trading patterns.
It may be obvious that a lawyer acting for owners or charterers in a dispute, acts as the respective party’s agent. For example, the lawyer will have authority to act as agent in negotiating a settlement agreement where there is a dispute.
Agency Agreements in Practice - Ship Management
Ship Managers act as agents of ship owners. Ship Managers often carry out a wide range of services in relation to various optional management servicing, such as sale or purchase, chartering, operations, insurance and technical management. As such, it is particularly important that the parameters of the relationship are expressly set out.
The SHIPMAN 2009 agreement (and earlier forms) is an example of an agency agreement which attempts to set out the parameters of the relationship between the parties. SHIPMAN 2009 reflects (at clause 3) that the Managers carry out services “as agents for and on behalf of the Owners”. As a result, the Managers are offered some protection from claims brought by third parties and are often able to defend a claim brought against them on the basis that they were simply acting as agents for and on behalf of the owners.
Under SHIPMAN 2009, the Manager is only liable if the loss is caused by his or his agent’s negligence, gross negligence or wilful default. In this situation, the Managers are able to limit their liability to ten times the annual management fee, provided that the loss has not resulted from the Managers’ personal act or omission committed with the intent to cause such loss and with knowledge that such loss would occur.
Given that the Managers carry out many of the task of the owners, clause 10 of SHIPMAN 2009 provides for the Managers to be named as joint assured with full cover on the owners’ insurances.
The relationship of agency is a commercially important one but it can have serious implications. As can be seen above, the principal is liable for contractual commitments arranged by the agent in the event that the agent has authority to enter into the contract. The principal will also be liable in the first instance for torts, such as misrepresentation and negligence, which are committed within the agent’s apparent authority. The agent will also have liabilities where he acts outside the scope of his authority.
The principal should always ensure that clear instructions are given to the agent as to the extent of the agent’s authority. Similarly, if the agent has any doubt as to what authority he possesses in a specific situation, he should confirm the position with his principal. It is important that the principal and agent are aware of the parameters of their relationship.
In situations where a broker is involved, such as chartering, it is extremely important that everyone understands which party the broker is acting for. The broker cannot and should not be acting for both parties.