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Fiduciary Duty in the Transportation Industry

Author: M Jagannath
Date: November 29, 2014

This article discusses on the Fiduciary Duty of participants in the Transportation Industry at large

  1. We recently attended a mediation talk (mediation is gaining traction in Singapore and which could result in great savings to the disputants) and one of the comments made by a lawyer were that lawyers may be reluctant to suggest mediation to their clients as this may result in loss of earnings. Obviously, this led to  discussions on the fiduciary duties of lawyers by the attendees given that they were generally from the legal fraternity. It also led us to consider this aspect in the Transportation industry at large and write this article.

  1. What is a fiduciary duty?

    It is basically an obligation to act in the best interests of another party and exists whenever one person/party places special trust and confidence and relies on another, the fiduciary, who must exercise his discretion or expertise according to the best interests of the person/party engaging him (by subordinating his self-interests to that of his principals).

  2. In the transportation Industry, fiduciary duties will arise in the following relationships (by no means is this list exhaustive and there will be more such relationships, the list below is merely indicative).

    1. Principal and Agent

      1. Vessel Owner / Operator and Chartering Broker
      2. Vessel Owner / Operator and Insurance Broker
      3. Vessel Owner / Operator and Booking Agent
      4. Vessel Owner / Operator and Operational Agent
      5. Freight forwarder and client

    2. Company and Solicitor

    3. Employer and Employee

  3. We will consider these relationships to show how there may be a breach of fiduciary duties.

    1. Principal and Agent:

      1. Vessel Owner / Operator and Chartering Broker: A Broker would receive commissions on the charter hire and therefore even though he may receive an offer which is most beneficial to his principal (his principal wishes to dry dock immediately after the voyage and would prefer his vessel to be fixed to the place where he intends to dry dock), he may gravitate to a higher paying charter which would in turn give him a higher commission but is not in the best interests of his principal.
      2. Vessel Owner / Operator and Insurance Broker: A Insurance Broker may select/ recommend an Insurer to his clients with a higher premium instead of another Insurer who is able to provide the same cover with no discernible difference but at a lower premium.
      3. Vessel Owner / Operator and Booking Agent: The Vessel Owner / Operator may require bookings to various ports to balance out the space available in his vessel. However, his booking agent would prefer to book for “high freighted” areas only to maximise his earning potential instead of loading cargoes to areas where the Vessel Owner / Operator may seek.
      4. Vessel Owner / Operator and Operational Agent: The Operational agent may receive incentive / rebates / volume discount fors the volumes performed by the Vessel Owner / Operator from the port / terminal and does not pass this benefit to the Vessel Owner/Operator.
      5. Freight forwarder and client: If a Freight Forwarder acts as a contractual carrier (issues their own Bills of Lading), then the freight forwarder becomes a principal. However, if the Freight Forwarder acts purely as an agent and selects Carriers (who issue their Bills of Lading) on the basis of commissions / rebates which he may receive from the Carriers instead of considering the requirements of their principals.

    2. Company and Solicitor: A solicitor owes a duty to his client to act in their best interests. In this regard, solicitors are under a duty to advice their clients on how issues could be resolved with minimum costs instead of allowing issues to “grow” and leading to higher “fee’s”.

    3. Employer and Employee: All employees are "agents" of their employers and as agents, employees have a fiduciary duty to their employer. An employee will be in breach of his fiduciary duty if he were to enter into a contract on behalf of his employer with a party who provides him "gifts" or "incentive".

  4. A breach of fiduciary duty is a civil claim and therefore is often easier to prove than fraud (for fraud, claimant needs to prove criminal intent). The claimant needs to show that the defendant was in a position of trust or fiduciary relationship and that the defendant breached this duty to benefit personally. If the claimant succeeds, he is not only entitled to the extra costs / charges incurred but may also be entitled to the profits earned by the fiduciary.

  5. In some fiduciary relationships, it is an established practice that the fiduciary does make “secret” profits out of his relationship and therefore there would be a breach of fiduciary duties. For example, a Freight Forwarder, acting as agent, would not generally advise their clients the actual costs / freight and instead add a mark-up (to include their service charges) and quote an "all inclusive rate" to their clients. While this may be generally a custom of the trade, most of the freight forwarders incorporate their Standard Trading Conditions into their contracts and which deals with this issue. In this regard, we refer to the relevant clauses in the Standard Trading Conditions of:

    1. Singapore Logistics Association: Clause 4(a) states "Without prejudice to the generality of Clause 3, the charging by the Company of an inclusive price for any Services shall not in itself determine that the Company is acting as an agent or a principal in respect of such Service”;

    2. British International Freight Association: Clause 4(a) states "Subject to clauses 11 and 12 below, the Company shall be entitled to procure any or all of the services as an agent or, to provide those services as a principal”.

      Clause 4(B) states “The Company reserves to itself full liberty as to the means, route and procedure to be followed in the performance of any service provided in the course of business undertaken subject to these conditions”.

      As you will note, the above STC’s allow their members leeway to charge an “all inclusive” freight for services provided as an agents and in this way, tries to ensure that their members are entitled to defend any claim raised for “secret profits”.

  6. To conclude, any claim for breach of fiduciary duties, whether successful or not, would result in costs in defending the claim together with potential loss of reputation and other transactional costs. Parties in the transportation industry must be aware of the standards expected of them and in order to avoid any claim for breach of fiduciary duties, must advise their principals of any potential conflict of interest either expressly or by properly incorporating Standard Trading Conditions which deal with this aspect and seek consent prior to providing their services.

 

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