Conflicts of interest in commodity brokerage

Commercial brokerage relationships often arise in the global commodity business because the commodity trading activities take place across different countries. Vietnamese law does not have regulations restricting market access of commercial brokerage activities.[1] Therefore, both Vietnamese and foreign enterprises can participate in this activity as long as they fully meet the conditions under Vietnamese laws.

The relationship between the parties to a commercial brokerage agreement is very complex. As a result, there are always potential conflicts of interest leading to risks for the broker, who acts as an intermediary and has interdependent interests.

Concept of conflicts of interest in commercial brokerage

Black’s Law Dictionary defines a Conflict of interest as “..a clash between public interest and the private  pecuniary interest of the individual concerned. A situation in which regard for one duty tends to lead to disregard of another”.[2]

The Organization for Economic Cooperation and Development (OECD) defines a conflict of interest as “a conflict between the public duty and the private interest of a public official, in which the public official’s private-capacity interest could improperly influence the performance of his/her official duties and responsibilities”.[3]

In the commercial brokerage relationship, as an intermediary to connect buyers and sellers to facilitate a transaction,[4] the broker is not allowed to take part in the performance of contracts between the principals, except where so authorized by the principal.[5]

Thus, in the transaction through a commercial brokerage, there are two main relationships: (i) the relationship between the broker and the principal and (ii) the relationship between the principal and the third party (partners for buying and selling goods or providing services). The existence of two legal relations at the same time may lead to conflicts of interest between the parties in such relationship.

While the broker aims at the remuneration from the principal, the principal, on the other hand, aims at two benefits: potential customers from the broker; and its own interests in dealing with third parties.

Meanwhile, the principal has to extract a commission to pay the broker, thereby significantly reducing the profit earned from transactions with third parties. This leads to the principal’s tendency to breach his obligations to the broker.

Some typical risks specific to the broker

Typically in practice, a brokerage contract will be agreed upon for a definite duration. During that period of time, the broker will receive remuneration on the orders arising from the third party to the principal. The remuneration level and the payment of brokerage remuneration are primarily based on the agreement in the brokerage contract.[6]

The principal fails to fulfill the obligation is to pay brokerage remuneration. The broker typically receives commissions that are charged once the parties have entered in the sale and purchase agreement or even when such transaction has successfully completed in many cases. At this point, the broker’s obligations are completed and the principal may not fulfill its contractual obligation to pay remuneration.

The principal and third party directly perform the transaction without informing the broker. Brokerage remuneration is typically calculated as a certain percentage of the transaction amount. With this method of calculation, the remuneration for each transaction may not be large because it depends on the value of each transaction. Therefore, the principal can go through the broker to deal with the first orders. After obtaining third-party information, the principal commonly tends to find ways to eliminate the broker’s role. In order to achieve that, the principal may disclose information about the brokerage contract and offer the third party a discount that is less than brokerage remuneration. In fact, the third party will easily agree and find a reason to terminate the relationship with the broker. Because of not directly participating in the performance of purchase and sale contract, it is difficult for the broker to observe the transaction process between the parties. As a result, the broker may not know and may not have grounds to ask the principal to pay remuneration.

The brokerage contract fails to state the essential obligations. According to the Commercial Law 2005, the form of a commercial brokerage contract is not required to be in writing.[7] In many cases, the parties to a commercial brokerage relationship, based on trust, only enter into an agreement verbally or via internet application. In case of a dispute, the determination of the brokerage relationship and the agreed terms is very complicated. At the same time, the obligations of the principal under the Vietnamese laws are relatively insufficient and ambiguous, including the obligation to provide information and the obligation to pay remuneration.[8] Other obligations, for example, information confidentiality, are not specified in laws. If such obligations are not clearly stated in the brokerage contract, it may not be legally binding on the parties.

Measures to mitigate risks and protect the broker’s interests

Firstly, the brokerage contract needs to be made in writing, in which, there must be the information confidentiality obligations between the parties. At the same time, the broker may request a provision on the principal’s obligation to notify the broker of transactions with third parties that relates to the brokerage contract. Clearly specifying the obligations of the principal in the brokerage contract is the basis for determining breach of contract in order to claim for payment of penalty and compensation for damages.

Secondly, it is necessary to agree on a penalty clause in case the parties violate their obligations in the brokerage contract. Because only when there is an penalty clause in the brokerage contract, the broker has the right to claim for payment of penalty if it can be proved that there is a breach of contractual obligations.[9] In case the parties choose the applicable law as Vietnamese law, the level of penalty for breach of contract shall be agreed by the parties, but not exceeding 8% of the value of the breached contractual obligation.[10]

To put this into perspective, let’s look at a case law of the Judgment 04/2008/KDTM-GDT dated April 2, 2008 on the “dispute over brokerage contract” related to a timber export contract.[11] Accordingly, Tan Thuan Company, the broker, sued to request the defendant, to pay the brokerage remuneration according to the brokerage contract signed between the two parties and the late payment interest. The Court of First Instance accepted the entire petition of Tan Thuan Company. However, upon the defendant’s appeal, the Court of Appeal only accepted the request for payment of brokerage fees, and rejected the request for the late payment interest. If the plaintiff and the defendant had agreed on a contractual penalty, the broker would have been compensated for a part of the damage caused by the broker.

Thirdly, in the event of a dispute, the broker has the right to request the principal to pay a compensation due to a breach of contract. In principle, the compensation must be based on actual, direct damage that the aggrieved party had to suffer, and direct profits it should have earned.[12] However, in practice, proof of damages is considered complex and difficult.

In conclusion, conflicts of interest in commercial brokerage often result in significant risks for the broker. Meanwhile, Vietnam does not have adequate regulations on commercial brokerage to govern all issues arising in reality. Therefore, the broker needs to set out specific obligations in the contract to protect its interest in case of a dispute.

Lists of Reference

[1]: https://dpi.danang.gov.vn/hoi-dap?p_p_id=dpihoidap_WAR_dpihoidap100SNAPSHOT&p_p_lifecycle=0&p_p_state=normal&p_p_mode=view&_dpihoidap_WAR_dpihoidap100SNAPSHOT_action=chitietcauhoi&id=2254 (Last accessed on 13th December, 2021);

[2] Rebecca Walker, “Conflicts of Interest in Business and the Professions: Law and Compliance”, Publisher: Thomson Reuters (2011), Page 9, §1:3, cited definition from Black’s Law Dictionary (West Publishing Co. 1991);

[3]OECD, “Conflict of Interest Policies and Practices in Nine EU Member States: A Comparative Review”, 18/07/2007, Page 6.

[https://www.oecd-ilibrary.org/governance/conflict-of-interest-policies-and-practices-in-nine-eu-member-states_5kml60r7g5zq-en] (Last accessed on 13th December, 2021);

[4]Article 150 of the Commercial Law 2005;

[5]Article 151.4 of the Commercial Law 2005;

[6]Article 153 of the Commercial Law 2005;

[7]Section 2, Chapter V of the Commercial Law 2005;

[8] Article 152 of the Commercial Law 2005;

[9] Article 300 of the Commercial Law 2005;

[10] Article 301 of the Commercial Law 2005;

[11] https://caselaw.vn/ban-an/1060/04-2008-kdtm-gdt#/ (Last accessed on 13th December, 2021)

[12] Article 302 of the Commercial Law 2005.

Tran Thi Trang (Junior Associate)
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