Once on Demurrage, Always on Demurrage?

MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789 was an appeal from the first instance Commercial Court decision (here) and raises important issues relating to the law of international trade.

The Court of Appeal held that demurrage on detained containers did not accrue indefinitely and that, in contrast to the decision in the Commercial Court that MSC had no legitimate interest in keeping the contract alive beyond the 27 September 2011, the well recognised English law position that an innocent party can choose whether to bring the contract to an end by accepting repudiatory conduct or affirm the the contract, did not apply in this case because the contract had been frustrated by delay.

The Facts

The case arose out of a shipment of raw cotton carried in 35 containers to Bangladesh, in mid-2011. The containers were owned by the carrier and under the terms of the relevant bills shippers were obliged to return the containers within 14 days of discharge from the vessel, failing which demurrage for late delivery would begin to accrue.

The price of raw cotton collapsed and receivers failed to take delivery. The result of this was that the containers remained uncollected, and the Bangladeshi port authorities refused to allow carriers or anyone else to unpack the goods.

On 27 September 2011 shippers informed carriers that legal title to the goods had passed to receivers since it had received payment for the cotton under the letters of credit. It was also argued that they were no longer the lawful holder of the bills. On this premise shippers refused to pay demurrage.

Carriers pursued an action against shippers to seek recovery of outstanding demurrage, arguing that demurrage continued to accrue for so long as the containers were not redelivered. On the other hand, shippers argued that their inability to redeliver the containers within the foreseeable future amounted to a repudiation of contract, which carriers were obliged to accept, thereby bringing the contract and any continuing obligation to pay demurrage to an end.

First Instance

Leggatt J held that the demurrage clause was triggered and as a result demurrage did accrue, but it did so only up until the 27 September 2011 when the shipper repudiated the contract and there was no realistic prospect of redelivery. Thus it was held that at this point carriers had no legitimate interest in keeping the contract alive. To do so would be “wholly unreasonable because the carrier has not been keeping the contracts alive in order to invoke the demurrage clause for a proper purpose but in order, in effect, to seek to generate an unending stream of free income”. In reaching this conclusion the judge relied on English common law principle of good faith in contractual dealings and the exercise of contractual discretion a being analogous to the exercise of an option to terminate a contract.

Court of Appeal

The carriers appealed and continued to argue that demurrage accrued indefinitely with a corresponding obligation on the shippers to pay damages until redelivery.

It is worth taking a step back to consider the key legal principles in this context. Under English law a contract which is capable of performance, but is repudiated by a party does not come to an end unless that repudiatory conduct is accepted by the innocent party as bringing the contract to an end. Alternatively the innocent party can affirm the contract and insisting on performance subject to having a legitimate interest to do so. This principle was discussed and reaffirmed in the context of time charterparties in the Aquafaith (here).

In the Court of Appeal in MSC v Cottonex Anstalt, Moore-Bick LJ held that the contract came to an end automatically on 2 February 2012 when in an attempt to break the deadlock the carriers offered to sell the containers to the shippers. This was on the basis that as a result of the shippers breach the commercial purpose of the contract had become frustrated. The judge went on to state that any consideration as to whether or not carriers had a legitimate interest in affirming the contract was a moot point since the contract had in any event become frustrated. Therefore, in contrast to the decision at first instance, the focus was on frustration rather than repudiation of the contract. As a result of the decision that the contract had automatically ended it was not open to the carrier to affirm the contracts since it was no longer capable of performance. However, having brought about that situation by its breach in failing to redeliver the containers, the shipper was liable in damages for the loss of the containers.

Likewise considerations of good faith were dismissed on the basis that it may undermine commercial certainty, setting a dangerous precedent for parties to invoke this principle and detract from terms which the parties have previously agreed. When commenting on the support the judge in the Commercial Court derived from this principle Moore-Blick LJ said:

“The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences and I do not think it is necessary or desirable to resort to it in order to decide the outcome of the present case.

and

There is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement. The danger is not dissimilar to that posed by too liberal an approach to construction, ..”

Shippers also argued that carriers were under a duty to mitigate its losses by buying replacement containers. Moore-Bick LJ rejected this argument holding that the duty to mitigate does not arise in a claim for liquidated damages.

Tomlinson LJ supported the leading judgment stating “there is no alternative to the conclusion that the contract has come to an end”.

Comments

The key message from this decision is that parties negotiating demurrage clauses should not expect a constant income stream once the clause is triggered. Determination of the amounts due will largely depend on whether or not the contract has become incapable of performance and has become frustrated. This will of course depend on the individual facts of any matter and the steps taken by the parties in relation to performance.
Source: Steamship Mutual