MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789

The UK Court of Appeal recently handed down a decision which considered the right to affirm a repudiated contract in cases where the commercial purpose of the venture has become frustrated.

The dispute involved a shipment of cotton in containers to Bangladesh in June 2011. The only part of the contracts of carriage left unfulfilled was redelivery of the empty containers. However, the containers were effectively detained by customs and unable to be returned. The carrier made a claim against the shipper for demurrage (charges for detention of containers after designated 'free time' has expired), which by the time of the claim had risen to around $1 million and continued to accrue at US$840 per day.

The Court of Appeal held that the contract of carriage came to an end at the time that the commercial purpose of the adventure had become frustrated and further performance was impossible, just as if the containers had been destroyed. As such, the option to affirm was not available to the carrier.

In coming to effectively the same decision, the lower court applied the 'legitimate interest' principle. Justice Leggatt held that the carrier could not affirm the repudiated contract as the only interest in keeping the contract alive was to "generate an unending stream of free income" in demurrage. The Court of Appeal agreed that this was the case, but came to their decision on the basis of frustration.

As a side note, the Court of Appeal reined in Leggatt J's application in the lower court of a general duty of good faith in discretional contractual dealings, including the election to affirm a repudiated contract, noting the danger of such a general duty being undermined by frequent invocation.

Findings relating to demurrage

The Court of Appeal affirmed a number of findings made by Leggatt J, including:

  • While a failure to nominate a place might relieve the shipper of a liability for demurrage if it prevented him from redelivering, demurrage begins to accrue regardless of whether the carrier has nominated a place for redelivery;
  • Free time starts to run on discharge of the containers from the vessel, not upon delivery of the containers to the merchant;
  • Ordinary principles relating to mitigation of loss do not apply in a case in which the parties had agreed a daily rate of demurrage as liquidated damages for the detention; and
  • While a clause in a voyage charter providing for the payment of demurrage at a daily rate will not be regarded as penal simply because it fixes no express limit on the period of the charterer's liability, such a clause may be held to be penal if the effect in the circumstances is for demurrage to accrue indefinitely.

Comment

This case makes the interesting proposition that a repudiated contract ends once the remaining commercial purpose of the adventure has become frustrated, and thus an innocent party will not have the option to affirm. As such, an innocent party to a repudiated contract may only be able to recover damages up until the time that the contract became frustrated.

To deal with this development, carriers should consider whether a contract has become frustrated in determining whether to affirm a contract, such as for demurrage, when there are indications that performance has become impossible. This decision may also provide an avenue for container detention charges to be held penal, albeit in limited circumstances.

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