Shipbrokers’ liability in S&P transactions – reflections from recent case law in Norway

In a judgment of the Frostating Court of Appeal on 22 February 2024, the seller of a vessel was awarded NOK 24 million in damages, of which the shipbroker was held jointly personally liable for NOK 5 million of the amount due to grossly negligent performance of brokerage services. 

Facts

The case related to the fishing ­vessel “Stormfuglen” which was owned by Stormfuglen AS, a subsidiary of Stormfuglen Holding AS. The vessel had the benefit of a catch quota of 317,5 basis tons per year attached to it. 

The owners wanted a discrete sales process and contacted an ­experienced broker to assist with the sale of the vessel, fishing equipment and the quota. The broker was engaged on agreed commission terms, but no other written agreement was entered into nor was a confirmation of engagement issued.  
The broker made contact with a potential buyer group, and followed up with an email offering the vessel and quotas for a fixed price. The email had not been presented to the seller prior to being sent, and the seller and the broker disagreed whether the content had been agreed before the email was sent. The broker did not contact other potential buyers, as he had also offered exclusivity to the potential buyers.

The seller and the buyers entered into a MoA for sale of the vessel and quotas at a purchase price of NOK 320 million. In an appendix to the MoA, the parties agreed the possibility of an alternative sale of shares in Stormfuglen AS. A share sale was made conditional upon agreement by both parties. This appendix was drafted by the broker.

The parties subsequently decided to structure the transaction as a sale of shares for a price of about NOK 270,5 million, resulting in a discount of more than NOK 50 million on the purchase price of NOK 320 million agreed for the vessel with quotas.

After closing the transaction the seller only paid part of the agreed commission to the broker, ­resulting in a claim for payment of the r­emaining balance from the brokerage firm. The seller responded to the claim by filing a counter claim for damages due to grossly negligent performance of brokerage services.

The decision

The Court of Appeal held that a claim for damages could lawfully be brought by the seller against both the broker and his employer, the brokerage firm. A claim against the employer was founded on the agreed commission terms, under which the broker was obliged to ­perform the brokerage assignment as an employee of the brokerage firm. The Court further established that a personal claim against the broker could be founded on the ­basis of section 2-1 of the Norwegian Damage Compensation Act. In both circumstances, liability required the seller to establish negligence in performance of the services.

The Court emphasised that a strict duty of care applies for ­professional practitioners such as shipbrokers. When establishing the basis against which the conduct and services of the broker was to be measured, the Court referred to the ethical rules and service descriptions provided by the Norwegian Shipbrokers’ Association. According to these rules and guidelines, a shipbroker shall inter alia:

• Contribute to optimal profit for his client;
• Ensure that the client receives the best terms and conditions;
• Avoid conflicts of interest; and 
• Convey information to and from the client.

The Court concluded that, in breach of the duty of care, the broker had not acted in the seller’s best ­interests when offering a fixed price and exclusivity to the potential buyer group, without the sellers’ prior approval to do so. The Court also found that the broker had acted negligently in failing to ensure that the seller had understood the value of the item for sale and the most optimal way of structuring the transaction. 

The majority of the judges ­further concluded that the broker appeared to have been more focused on establishing good relations with the buyers than ensuring the best interests of its client who were about to exit the market. This, in the Court’s view, was so reprehensible that the Court held the broker’s conduct as grossly negligent. 

As regards losses, the Court found that there were alternative buyers and that the vessel’s quotas could have been sold for a higher price had the broker not negotiated exclusively with the buyer group. The Court also considered that the appendix to the MoA prepared by the broker obliged the seller to structure the sale as a sale of assets, and that it was likely that this had deprived the seller of the possibility to obtain a more favourable price as a sale of shares would have to be agreed by the buyers. 

The total loss for the seller was held to be NOK 35 million; ­however, a reduction was made due to the seller’s own contribution to its losses. Thus, the Court concluded that the brokerage firm was liable to the sellers for a loss of NOK 24 ­million, of which the broker was held jointly liable for NOK 5 million of the amount.  

Comments

This decision highlights the risks and potential exposure brokers face when making commercial assessment on behalf of their clients. Nonetheless, the decision provides useful guidance on the threshold for liability and the duty of care which brokers and their employers have to their clients in shipping transactions. There are a number of important takeaways of this case:

• Written agreements: The lack of a written agreement or even a confirmation of assignment, meant that the broker and his ­employer did not have any means to effectively limit liability.
• Written correspondence: When considering the evidence and deciding on the facts, the limited amount of written correspondence worked to the broker’s disadvantage.
• Client focus: An apparent lack of focus on the client’s best interest may easily amount to negligence, and in certain circumstances, this may also be grossly negligent. 
• Relevant expertise: The ­appendix to the MoA drafted by the broker effectively bound the seller to an asset sale. Where legal or tax issues occur, be ­cautious of the delineation against legal and tax advice and engage relevant expertise.