Legal Perspective on Issues Facing Shipbrokers and Agents

Transcription

1 Legal Perspective on Issues Facing Shipbrokers and Agents Michael G. Chalos Copyright 2014 by K&L Gates LLP. All rights reserved.

2 ROADMAP Brief introduction to agency law Application of Agency law to you Fiduciary duties Identifying the proper principal Unique liability concerns to think about moving forward Communication Issues OFAC Issues Conclusion klgates.com 2

3 AGENCY LAW Two key concepts to keep in mind: Agents have fiduciary duties to the principals. When an agent makes a contract on behalf of a principal, the agent is not generally a party to the contract, provided the agent has authority to act for the principal and the agent properly discloses the principal to the third party. Why is this the rule? Agency law ensures that the principal cannot have the best of both worlds by enjoying the benefits if things go right but passing on the costs to the agent should something go wrong klgates.com 3

4 Application to You Two general scenarios when agency does not shield from liability Breach of fiduciary duty You remain responsible for acts, omissions, or mistakes that result in loss to the principal. Failure to identify proper principal If you fail to identify the proper principal, you are not acting as an actual agent and are not shielded by agency law klgates.com 4

5 HALL OF SHAME Fiduciary Duties Be sure to include all the details A ship broker fixed an extension of a charter in direct continuation, but forgot to include the charterer s subject to 24 hours reconfirmation in the negotiation. When a clean recap was received from the owner, the charterers replied that they had asked for 24 hours sub reconfirmation. The owners refused, as the subject was not part of the negotiations that they had seen and they considered themselves fully flexed. The charterers failed to perform the extension and redelivered the ship to the owners. The owners fixed the ship to a different charterer, but for a shorter period at a lower rate. The owners brought a damages claim against the charterer, who brought a claim against the shipbroker. The shipbroker s insurer paid $140,000 in settlement. klgates.com 5

6 HALL OF SHAME Fiduciary Duties Keep up to Date on Regulations A new regulation was issued by local maritime authorities in South America, stipulating the type and number of tugs to be used depending on the size of the vessel. A ship agent provided a pro forma invoice to a shipowner but incorrectly accounted for the number of tugs to be used. When the vessel arrived the error was noticed, but it could not be easily corrected because there was not an additional tug available. As a result, one had to be chartered from another port, resulting in extra expenses and idle time totaling over $70,000. The shipowner brought a claim against the ship agent, and because the ship agent was clearly at fault, his insurer settled the claim in full. klgates.com 6

7 HALL OF SHAME Fiduciary Duties Pay attention to temperatures A vessel agent issued a cargo manifest for seven containers of fruit that were being shipped from the Caribbean. The manifested included a specific temperature at which the fruit needed to be kept, but the system used did not allow for a zero figure to be put in front of the decimal point. This resulted in the temperature reading being written as -.5C (as opposed to -0.5C, which would have been clearer). The crew misread the manifest and set the temperature at -5C. The Master, recognizing that -5 degrees was an unusually cold temperature to keep fruit, checked with the agent to confirm the figure. The agent misread his own entry in the manifest and confirmed the incorrect number. As a result, the shipowner made a claim on the agent for $360,000 which was paid by the agent s insurance provider. klgates.com 7

8 HALL OF SHAME Identify Correct Principal A broker negotiated a fixture for a voyage from the Black Sea to Singapore. The recap showed the identity of both the registered owners and the disponent owners, although the negotiations had been concluded with the disponent owners only. The disponent owners requested the broker to order bunkers on their behalf at a cost exceeding $700,000. However, the shipbrokers mistakenly ordered the bunkers on behalf of the registered owners rather than the disponent owners. The bunkers were duly supplied and signed for, and the bunker supplier invoiced the registered owners c/o the brokers. The brokers sent the invoice to the disponent owners, but when payment was due they did not pay. When the bunker supplier sought payment from the disponent owner, it quickly became clear that the disponent owner was not financially able to pay. When lawyers for the bunker supplier approached the registered owners for payment, the registered owner advised that they never gave instructions for the purchase of the bunkers. The registered owner stated that the responsible party was the disponent owners and if a mistake was made, the party who made the mistake was responsible. The lawyers therefore turned their attention to the brokers saying they were responsible for breach of warranty of authority. There was no prospect of going after the disponent owner and the brokers therefore entered into a settlement with the bunker suppliers for their mistake. klgates.com 8

9 HALL OF SHAME Identify Correct Principal A disponent owner contacted a shipbroker regarding a bulk cargo vessel seeking cargo to transport. The shipbroker located a Chinese company wishing to charter the vessel for a large cargo shipment from Oman to Singapore. The shipbroker drafted a charter party agreement chartering the vessel to the Chinese company. A dispute arose between the disponent owner and the Chinese company, and the disponent owner tried to commence arbitration proceedings as provided in the charter party agreement. Following a hearing, however, the arbitration tribunal ruled that there was no agreement between the disponent owner and the Chinese company because the shipbroker had drafted the agreement such that it was between the Chinese company and the ship s registered owner. The disponent owner then filed suit against the shipbroker and obtained a judgment against the shipbroker. klgates.com 9

10 Additional Liability Facing Brokers and Agents Communication Issues Ship brokers and vessel agents do not need to observe the formalities of written contracts that other professionals usually do. In 1961, in a case called Kossick v. United Fruit Co., the US Supreme Court held that oral contracts are enforceable under maritime law. And why shouldn t they be: in this business, it has long been the tradition that our word is our bond. While this has obvious benefits, though, it also can produce some complications. OFAC Issues The Office of Foreign Asset Control, known as OFAC, is an office of the US Department of the Treasury that imposes economic sanctions against hostile targets to further US foreign policy and national security objectives. If that sounds vague, that s because OFAC wants it to be vague. They have used that general language to institute a whole host of rules and regulations that govern doing business with countries identified as enemies of the state. klgates.com 10

11 COMMUNICATION ISSUES Keep track of multiple forms of communication Principal and broker were communicating via electronic messaging system, while broker and third-party were communicating via . The principal communicated to the broker that a lumpsum should only be available if the ship was redelivered to the Far East, but the broker failed to include that information in his to the third party. When the broker ed the charter to the principal without any reference to the Far East requirements the principal failed to notice. When the principal recognized that the charter did not mention the requirement, he made a claim against the broker. Because both parties failed to keep track of the many forms of communication, a compromise was reached whereby the broker agreed to contribute to the extra costs in the event the vessel was not redelivered to the Far East. klgates.com 11

12 COMMUNICATION ISSUES Make Sure Information is Received A ship was fixed for a trip timecharter for two voyages, with an option for a third. In accordance with the recap, the option was to be declared by the charterers on completion of loading of the second voyage. The fixture had been negotiated via brokers in two different offices of the same broking company. The third trip was option was exercised by charterers on Friday afternoon, and the broker who received the message forwarded it to his colleague in the other office. Unfortunately, the colleague did not immediately pass it on to the owners. The ship completed the second voyage on Sunday, but it was not until Monday that the owners received the message declaring the second option. By Wednesday, the owners stated that because they did not receive timely notice the declaration was invalid and they expected redelivery of the ship. Example 1 Here s what was really at stake: The spot market at the time was extremely volatile but rising, so the owners wanted the ship redelivered and the charterers wanted to retain the ship to maximize profit from the final voyage. The market then changed again the following week, resulting in the owners confirming that they would allow the third voyage, with both parties reserving their position. The business available to the charterers was, at this point, less profitable than it would have been had they declared the option. The charterer claimed lost profits against the owners and the brokers, and a settlement was reached whereby the brokers contribution reflected their delay in passing on the message. klgates.com 12

13 COMMUNICATION ISSUES Make Sure Information is Received A shipbroker s failure to adequately pass on information to a charterer resulted in serious liability. The shipbroker found himself in the middle of a dispute between the owners and charterers involving a demurrage in excess of $400,000. When the charters failed to settle, the owners nominated an arbitrator, but the charterers did not participate in arbitration. The arbitrator awarded the owners the full cost of demurrage plus interest in costs, with total liability equaling $575,000. When the owners tried to collect the award against the charterer in US courts, the charterer claimed that the shipbroker had never notified them of the arbitration. While the broker claimed he had notified the charterer by telephone, he admitted that he had never confirmed that notice with any record. Without picking a side in the he said/she said dispute, the broker s sloppiness is to blame: as a result of either the broker s failure to notify the charterer or his failure to document that notice in written form, the broker faced liability for the full value of the award. The case was concluded in mediation, but the broker contributed $75,000 to the settlement and the legal costs of defending the broker exceeded $140,000--meaning that the broker (through its insurance) was forced to pay $215,000 as a result of failing to confirm a telephone confirmation via . Example 2 Don t rely on winning yelling matches or hesaid/she-said battles klgates.com 13

14 COMMUNICATION ISSUES Make Sure Information is Received A ship owner passed on a fully documented demurrage claim to a shipbroker in December 2007, subject 60 and 90 day time bars. In accordance with the charterers instructions, the shipbroker sent the claim to the charterer via on the same day. The shipbroker did not receive any failure notice or rejection, and on this basis believed that the claim had been sent successfully. However, the charterer s instructions stated that the sender would receive an automated confirmation within 48 hours, and the shipbroker received no such confirmation. After the 60 day time bar passed, the broker re-sent the claim to the same address. Again, there was no notice of system failure or rejection, but there was also no confirmation. The owners continued to chase for payment, but the charterers argued that they had never received the notice and that therefore it was time barred. Example 3 The brokers engaged legal counsel, who advised that the charterer was likely to be successful because the failure to receive an automated response should have alerted them to the fact that it was not received. However, because the broker actually sent the on time, it did not seem fair for the charterer to avoid liability completely. The owners commenced arbitration against the charterer, who ultimately agreed to contribute 25% towards the costs of the claim in exchange for the owners agreeing to forgo their entitlement to the legal costs which they had already incurred. These expenses to both the owner and the charterer could have been avoided had the shipbroker been more diligent about the specific communication rules governing the agreement. klgates.com 14

15 COMMUNICATION ISSUES Send to the Correct Party A ship had been sold but not yet delivered to the buyers. The seller s broker received a speed and performance claim from the charterers. The ship had been fixed with the same charterers in direct continuation once the buyers took possession of the vessel. The sellers broker mistakenly forwarded the claim to the buyers and not their clients, the sellers. The buyers immediately became concerned whether the performance of the vessel would match the figures they had been given. The buyers lawyer sent a strongly worded message reserving their rights against the sellers for misrepresentation. The sellers, of course, vehemently complained to their brokers. While a claim was not pursued, there was significant potential for the broker to incur liability for this mistake. Example 1 klgates.com 15

16 COMMUNICATION ISSUES Send to the Correct Party A broker received an offer with a time limit. He intended to forward the communication to the charterer but instead hit the reply button and sent the message back to the owner. The charterers therefore never received the offer, and when the time limit expired the owners fixed the ship to another charterer. Example 2 klgates.com 16

17 OFAC ISSUES What is OFAC? The Office of Foreign Asset Control, known as OFAC, is an office of the US Department of the Treasury that imposes economic sanctions against hostile targets to further US foreign policy and national security objectives. If that sounds vague, that s because OFAC wants it to be vague. They have used that general language to institute a whole host of rules and regulations that govern doing business with countries identified as enemies of the state OFAC Regulations Trading With the Enemy Act, 50 U.S.C. App ( TWEA ) applies to North Korea, Cuba, and Transaction Control Regulations. Provides for up to ten years imprisonment, a $1 million dollar fine for corporations and a $100K fine for individuals International Emergency Economic Powers Act 50 U.S.C ( IEEPA ) applies to diamond trading, Sudan, Iran, Zimbabwe, the Balkans, Terrorism, Narcotics, Nonproliferation, Syria and Burma. Provides for up to 20 years imprisonment, $500K fine for corporations and $250K for individuals Iraqi Sanctions Act, Pub.L , 104 Stat ( ISA ) applies to Iraq, provides for 12 years imprisonment and a $1 million dollar fine to corporations and individuals United Nations Participation Act, 22 U.S.C. 287c ( UNPA ) applies to Iraq and diamond trading. Provides for ten years imprisonment and a $10K fine for corporations and individuals klgates.com 17

18 OFAC ISSUES OFAC Regulations Continued The Cuban Democracy Act 22 U.S.C ( CDA ) applies to Cuba. Provides for up to ten years imprisonment, a $1 million dollar fine for corporations and a $100K fine for individuals The Cuban Liberty and Democratic Solidarity ( LIBERTAD ) Act, 22 U.S.C applies to Cuba. Provides for up to ten years imprisonment, a $1 million dollar fine for corporations and a $100K fine for individuals International Security and Development Cooperation Act, 22 U.S.C aa-9 ( ISDCA ) applies to Iran. Has no criminal penalties, but general Customs and other relevant penalty provisions may apply to particular circumstances. The Antiterrorism and Effective Death Penalty Act, (enacting 8 U.S.C. 219, 18 U.S.C. 2332d and 18 U.S.C. 2339b) applies to Cuba, North Korea, Iran, Iraq, Syria, and Sudan. Provides for ten years imprisonment and criminal penalties of $500K per count against corporations and $250K per count against individuals for willful violations.and continued The Foreign Narcotics Kingpin Designation Act, Pub L. No , tit. VIII, 113 Stat 1606, (1999) (to be codified at 21 U.S.C ) provides for thirty years imprisonment and/or criminal penalties of $10 million per count against corporations and $5 million per count against individuals for willful violations. 18 U.S.C provides for 5 years imprisonment and a $10K criminal fine for knowingly making false statements or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction. Civil penalties: OFAC also has authority to impose civil penalties for violations under IEEPA (US$250,000 or twice the amount of the underlying transaction), TWEA (US$65,000), the Iraqi Sanctions Act (US$325,000), and the Foreign Narcotics Kingpin Designation Act (US$1,075,000), as well as $55,000 for banking transactions under the Antiterrorism Act.. klgates.com 18

19 OFAC ISSUES How does OFAC impact you? This prohibition applies to American citizens and permanent resident aliens, regardless of where they are located. But it also applies to all individuals and entities located in the United States, which includes foreign corporations with a branch anywhere in the U.S., as well as foreign subsidiaries of U.S. corporations. OFAC regulations govern, among other things, financial transactions and brokerage transactions. This means that neither a U.S. based ship broker nor vessel agent (or any of its subsidiaries, including foreign subsidiaries) are permitted to engage in financial transactions or brokerage transactions with SDNs or in transactions that otherwise benefit a sanctioned country. Ship brokers and agents are prohibited from transacting with any SDNs. OFAC makes this relatively easy by publishing a list of all SDNs. What is an SDN? An SDN is any individual or entity which is owned or controlled by, or acting for or on behalf of, the governments of target countries. It also includes individuals and entities working on behalf of drug traffickers and terrorists. klgates.com 19

20 OFAC ISSUES Even innocent parties run into trouble A ship broker negotiated a charter between a vessel owner and charterer. The vessel was not on the SDN List at the time of the initial fixture. The vessel performed the voyage and the majority of the freight was paid, while a sum of demurrage remained outstanding. Nearly one year later, the charterer decided to make payment on the outstanding demurrage. In the interim, the vessel was added to the SDN List, unbeknownst to the broker. The funds were transferred via the broker s bank account with the vessel name included. The Bank stopped the funds and reported the transaction to OFAC. The broker was served with a subpoena seeking supporting documents and an explanation regarding their role in the transaction. While the broker was an innocent party to the transaction, it found itself in front of OFAC explaining its actions. klgates.com 20

21 OFAC ISSUES Advice for dealing with OFAC Don t deal with SDNs! Implement a policy to screen all transactions against the published list. Ensure that you are keeping all of records regarding financial transactions and fixtures, just in case you are served with an OFAC subpoena If you are in fact served with a subpoena, be truthful in all representations made to OFAC or any government authority Advice for dealing with OFAC Seek legal advice sooner rather than later klgates.com 21

22 CONCLUSION AND TAKEAWAYS Remember your duty to act with utmost care to ensure that your mistakes don t result in liability. Be sure to clearly and accurately name the correct parties to the contract, so that the principal is properly disclosed and you are shielded from later liability. Do not simply cut and paste. The best practice is to include the full style of both the charterer and the owner (or disponent owner, as appropriate). Be wary of OFAC by taking the steps outlined in the previous slide Now that you recognize the various liabilities that you do and do not face, obtain appropriate insurance to cover the costs of potential liability! klgates.com 22