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The limited fiduciary duties of intermediary brokers

Insights / 06-07-2020

CH Offshore Limited v. Internaves Consorcio Naviero SA, Maritima Altair Petromar SA, Lamat Offshore Marine Inc. (Amethyst and Turquoise) [2020] EWHC 1710 (Comm)

In this case, negotiations for the chartering of two vessels took place via a number of brokers. The main issue for the Court was whether the Defendant intermediate brokers were the Owners’ agents and, if so, whether they were in breach of their duties and so not entitled to be paid commission fees.

During the negotiations, the Defendant brokers had attempted to persuade the Owners to reduce the rate they were willing to accept, while the Charterers had agreed to pay a higher rate so that the Defendants could ‘keep the difference’. While this behaviour was characterised as “red in tooth and claw” by the arbitral Tribunal, both the Tribunal and Court on appeal nonetheless held that the Defendants were not dishonest or in breach of their duties. Intermediate brokers were not owners’ agents and owed only a very limited fiduciary duty of communicating messages honestly.

The background facts

In 2008, CH Offshore Limited (“CHO”), chartered two tug supply vessels to PDV Marina SA (“PDV Marina”), the chartering arm of the state-owned Venezuelan oil and gas company Petroleos de Venezuela SA (“PDVSA”). Negotiations were conducted via Seascope/Braemar as shipbrokers and the Defendant intermediate brokers, Internaves Consorcio Naviero SA (“Internaves”), Maritima Altair Petromar SA (“Maritima”) and Lamat Offshore Marine Inc (“Lamat”).

On 24 January 2008, CHO signed commission and consultancy agreements with the Defendants (the "Agreements").

Ultimately the charters to PDV Marina were assigned to another company, Astivenca, in March 2008 (although the hire rate payable was subsequently reduced). PDVSA acted as guarantor.

During the currency of the charters, the Charterers failed to make certain hire instalments and the vessels were redelivered to CHO in January 2013.

CHO commenced English court proceedings against PDV Marina and PDVSA, which were settled in 2015 (“the Settlement Agreement”) on the basis that PDV Marina paid CHO a lump sum of US$60 million.

In addition, London arbitration proceedings were brought by Internaves, Maritima and Lamat against CHO in relation to unpaid commission fees under the Agreements.

In defending the arbitration proceedings, CHO claimed: (1) that the terms of the Settlement Agreement captured or precluded the claims brought in these arbitrations; and (2) that the Agreements were unenforceable as the Defendants had acted in breach of their duties to CHO in not disclosing that they had an interest in keeping the "spread" between the rate of hire paid by PDVSA and the rate of hire received by CHO as wide as possible (to enable them to claim the maximum amount of commission).

The majority of the Tribunal found in favour of the Defendants. CHO appealed.

The Commercial Court Decision

The Court dismissed the appeal.

The Court agreed with the Tribunal that the Defendant brokers, as intermediaries, were not agents of either CHO or PDVSA. If they owed any fiduciary duties, these would be limited only to communicating messages honestly. They did not have the power to bind either party. They were not acting for CHO, which had its own broker, Seascope, who was being paid a commission. Furthermore, under Venezuelan law (which governed the relationship) the Defendants were not acting for PDVSA. They were merely transmitting communications along the line.

The Court added that the Defendants’ limited duty did not encompass a wider duty to disclose to CHO details of PDVSA’s commercial position. CHO was not entitled to know what the other side had agreed to pay as "pure hire". The Defendants’ interest in the transaction, namely their right to earn commission, had been sufficiently disclosed; it was enough that CHO knew how much PDVSA had agreed to pay and how much commission it, CHO, was paying.

The Court also dismissed the argument that the Agreements were unenforceable on the grounds of allegedly “secret” commissions. The Defendants had no duty to disclose the amount of their commission to PDVSA. It was enough that PDVSA was aware that the Defendants were being remunerated by the opposite party, even if they did not know the amounts. PDVSA was an experienced commercial entity aware of the market rates and would not have been interested in the precise amount of the commissions. In any event, the commissions were not “secret” as PDVSA was aware that commissions were payable by CHO but chose not to enquire as to the amount and CHO was aware of the full amount payable by PDVSA as well as the amount of the commissions. The only information that was “secret” was the fact that PDVSA was prepared to pay a higher rate of hire.

The Court added that the Defendants’ opportunism in seeking to maximise their commercial return did not elevate their conduct to a “quasi-criminal act”. The Tribunal had rightly characterised this behaviour as a classic case of commerce that was "red in tooth and claw" but that did not equate to illegality.

Finally, the Court held that a portion of the sum paid under the Settlement Agreement to compromise CHO’s claims retained the character of charter hire so as to trigger the Defendants’ entitlement to commission and consultancy fees under the Agreements.

Comment

This decision emphasizes that while intermediary brokers owe fiduciary duties to the parties, these duties are very limited in nature and do not encompass a duty to disclose the commercial position of one of the parties to the other.

The practical implication of this is that parties engaged in negotiations involving multiple brokers should remain vigilant. If it is important for them to understand what another party is prepared to pay, excluding commission, then they will have to expressly ask for such disclosure.

This article was co-authored by Trainee Solicitor, Ioanna Mitsaki.

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Maritime