MSC Mediterranean Shipping Company v Cottonex Anstalt

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DMC/SandT/17/05

MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt

Court of Appeal; Moore-Bick and Tomlinson LJJ, Keehan; [2016] EWCA Civ 789; 27 July 2016

Mr. Michael Davey Q.C. and Mr. Emmet Coldrick (instructed by Duval Vassiliades) for MSC Mediterranean Shipping Company S.A., Claimant/Appellant/Carrier

Mr. Steven Berry Q.C. and Luke Pearce (instructed by Holman Fenwick Willan LLP) for Cottonex Anstalt, Defendant/Respondent/Shipper

CONTAINER DEMURRAGE: FRUSTRATION: REPUDIATION AND LEGITIMATE INTEREST: GOOD FAITH: PENALTIES

Summary

Containers of cotton were duly delivered at Chittagong but never collected because of disputes between cargo interests. The Shipper, having being paid, was unable to deal with the cargo and the Chittagong Customs refused permission to deal with the cargo. The Carrier sued the Shipper for container demurrage.

At first instance, the Carrier was awarded demurrage up to the date the Shipper indicated it could not deal with the cargo. This appears to have been on the basis that by not returning the containers, the Shipper had repudiated the contracts of carriage, which repudiation was accepted.

On appeal, the Carrier was awarded demurrage up to a later date where it was clear that performance of the obligation to return the containers was no longer possible. This was on the basis that the (sole remaining obligation under the) contracts of carriage had been frustrated by delay.

This note has been contributed by Justin Gan Boon Eng, Solicitor (Hong Kong), Advocate & Solicitor (Singapore, non-practising)

Background

The Shipper shipped containerized cotton with the Carrier, to Chittagong, Bangladesh. The contracts of carriage provided for container demurrage to be payable if the containers were not returned after a period of “free time” at the destination.

The cargo was duly discharged at Chittagong in mid-2011 but a dispute arose between the Shipper and its consignee. Neither took delivery of the cargo. Subsequently the Chittagong Customs authorities refused permission to deal with the cargo without a Court order. It appears such a Court order was never made.

By 27 September 2011, the Shipper had obtained payment for the cargo from the banking chain/had presented documents accordingly which were accepted. So, it informed the Carrier it had no legal title to the cargo and could not deal with it.

On 2 February 2012, the Carrier offered to sell the containers to the Shipper. No agreement was reached. The Carrier continued claiming demurrage.

In mid-2013 the Carrier sued for container demurrage which it alleged continued to accrue. Mr. Justice Leggatt at first instance granted the Carrier’s claim for demurrage up to 27 September 2011, but not thereafter. This was on the basis that the Shipper had repudiated the contracts of carriage, and the Carrier had no legitimate interest in continuing them.

The Carrier appealed and the Shipper cross-appealed. On different grounds, the Court of Appeal awarded the Carrier demurrage up to 2 February 2012, at which date it held the contracts of carriage frustrated, plus the value of the containers as of that date.

Judgment

Moore-Bick LJ divided his leading judgment into 7 issues.

1. Was demurrage payable?

The Shipper argued that it was only obliged to redeliver the containers if (a) it had taken delivery of them, and (b) the Carrier had nominated a place of redelivery. This was rejected. Clause 14.8 states “Free time commences from the day the Container… is discharged from the Vessel… Demurrage… will be levied and payable… thereafter…”. A separate clause allowing the Carrier to unpack the containers and claim the costs involved if cargo interests failed to take delivery did not change the impact of Clause 14.8.

2. Were the contracts of carriage frustrated by 27 September 2011?

Parties agreed “whether the Shipper’s inability to redeliver the containers amounted to a repudiation… was in substance the same as it would be for frustration… whether the delay was such as to render performance of the remaining obligations… radically different from those which the parties had originally undertaken, or (where the delay was continuing) whether it would be regarded by a reasonable person in the position of the parties as being likely to last that long.”

Accepting the Carrier’s arguments, Moore-Bick LJ regarded the period of delay between mid-2011 when the cargo was discharged and 27 September 2011 as too short to frustrate the contracts of carriage, absent exceptional circumstances (which the High Court did not find to exist).

3. Were the contracts of carriage frustrated by 2 February 2012?

Yes. In so deciding, the Court of Appeal had in mind the further four-month delay since September 2011 and the Carrier’s offer to sell the containers to the Shipper, which sale would discharge the Shipper’s obligation to redeliver the containers. That obligation of the Shipper was the last obligation remaining under the contracts of carriage.

4. If the Shipper had repudiated the contracts of carriage was the Carrier bound to accept the repudiation?

The Court of Appeal’s reason for deciding the case focused on frustration of the contracts of carriage. However, the Court of Appeal did comment on repudiation, given the time devoted to it in the Court below and in argument.

Briefly, a repudiatory breach does not automatically end a contract. The innocent party can insist on performance or choose to end the contract. However the innocent party cannot choose the former where it has no legitimate interest in doing so, that is, the principle in White & Carter (Councils) Ltd v McGregor [1961] UKHL 5.

Here (and as highlighted by Tomlinson LJ), the Carrier continued to invoice the Shipper for container demurrage said to be accruing until just before proceedings were issued.

If necessary, the Court of Appeal would have found that the Carrier had no legitimate interest in requiring performance, because:

(a) The value of the containers was much less than demurrage already accrued.

(b) Replacement containers were easily available at Chittagong (and so the Carrier could have easily bought replacements for those held by the Chittagong Customs).

In the course of analysis Moore-Bick LJ discussed Geys v Societe Generale, [2013] 1 AC 523 (SC), where a wrongfully dismissed employee could not insist on continuing to work and suing for wages after dismissal. Moore-Bick LJ read Geys as suggesting that the White v Carter principle does not mean the Court refuses an innocent party its right to affirm the contract, but rather sometimes, for equitable reasons, declines the remedy sought by an innocent party.

5. Good faith

Moore-Bick LJ rejected the High Court’s reference to good faith in contractual dealings, and reiterated the orthodox position – English law does not recognise a general duty of good faith in contract.

6. Was the container demurrage clause penal?

No. Where the daily rate is not penal, a demurrage clause is not penal simply because it does not expressly limit the period for which demurrage may be payable. This is because “general principles of law impose a limit on the scope of the charterer’s liability”. (Presumably this refers to the frustrating delay held to exist in the case.)

7. Did the Carrier fail to mitigate its loss?

No. Mitigation does not apply to demurrage, since a demurrage clause represents parties’ agreement on the loss that would arise from delayed return.

Further, Moore-Bick LJ expressed the provisional view that quite apart from the demurrage rate, there was no obligation on the carrier to minimise the duration of the delay, for which demurrage was being charged. In any event, in the case at hand the Carrier could not have taken any steps to recover the containers, given the stance adopted by the Chittagong Customs.