Australia: Demurrage clauses and their enforceability under English Law

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

The England and Wales Court of Appeal (Civil Division) in its 27 July 2016 judgment in MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789, commented on several matters relating to container demurrage clauses in bills of lading. This case provides some useful insights for carriers and shippers.

Containers stuck in Port of Chittagong following dispute between shipper and consignee

The facts were that MSC (the carrier) contracted with Cottonex Anstalt (the shipper) to carry raw cotton by sea to Bangladesh in containers. Each of the bills of lading provided for a period of free time for the use of containers at their destination after which container demurrage became payable to MSC at a daily rate.

Payment for the cotton was to be made by confirmed letter of credit. Following a collapse in the price of raw cotton, a dispute arose between the shipper and the consignee over the dating of the bills of lading with the consignee being unwilling to take delivery of the goods. However, the shipper presented certain documents to a bank and obtained payment. As a result, the shipper considered that it had no right to deal with the goods because in the shipper's view, property in them had passed to the consignee. The result was that neither the consignee nor the shipper was willing or able to take delivery of the goods which remained at the discharge port under the control of the customs authorities.

The bills of lading contained terms which gave the carrier the right under certain circumstances to unpack the goods and dispose of them but the customs authorities at Chittagong refused to allow the carrier or anyone else to deal with them without a court order permitting this. No such order was made and, as a result, the containers remained at the Port of Chittagong at which they had arrived between May and June 2011.

Court considers container demurrage obligation

On 27 September 2011, the shipper sent a written message to the carrier, MSC, which the Judge below interpreted as a statement that the shipper no longer had title to any of the goods and would be unable to redeliver the containers within the foreseeable future, if at all. The Court of Appeal said that whether the carrier interpreted the message that way is doubtful, but in any event the carrier continued to insist that the containers be redelivered and that in the meantime container demurrage would continue to accrue.

On 2 February 2012, the carrier offered to sell the containers to the shipper, but the shipper considered the price sought was too high.

The Court of Appeal noted that the Judge below had held that at all material times replacement containers were immediately available for purchase at Chittagong for US $3,262 each. The container demurrage claimed by MSC in its 10 June 2013 claim form was US $577,184 calculated up to 30 April 2013 and said to be ongoing until the containers were redelivered.

The Court below held that by its 27 September 2011 message, Cottonex had informed MSC that there was no realistic prospect of it being able to redeliver the containers, the delay had become so prolonged as to frustrate the commercial purpose of the adventure and that Cottonex was therefore in repudiatory breach of all the contracts of carriage. The Court below held that once there was no realistic prospect that the shipper (Cottonex) would perform its remaining obligations, MSC ceased to have any legitimate interest in keeping the contracts of carriage alive in the hope of future performance.

Carrier entitled to claim demurrage finds Court of Appeal

The Court of Appeal disagreed with the Judge below and held that MSC was entitled to claim demurrage up until 2 February 2012 which, as mentioned above, was the date on which MSC agreed to sell the containers to the shipper but a price could not be agreed on. Moore Bick LJ said in paragraph 28 of his judgment that the unsuccessful negotiations as regards the proposed sale of the containers provided "the clearest indication that the commercial purpose of the adventure had by then become frustrated" and in Moore Bick LJ's opinion, the shipper was in repudiation of the contract from that date, being 2 February 2012.

Moore Bick LJ said that the fact that by 2 February 2012 the point had been reached at which the commercial purposes of the adventure had become frustrated meant that in commercial terms the containers had been lost. They could no longer be delivered in the context of the original adventure (if at all).

Moore Bick LJ relevantly said that as at 2 February 2012:

... The accrued demurrage already exceeded by a considerable amount the value of the containers. Replacement containers were readily available at Chittagong and the carrier had no interest in keeping the contract alive other than to earn demurrage pending their return. This is a classic case in which it would have been wholly unreasonable for the carrier to insist on further performance. The only reasonable course for it to take would have been to accept the shipper's failure to redeliver the containers as a repudiation of the contract .... (at [43])

Moore Bick LJ said the loss to MSC resulting from the failure to return the containers was represented by their value on 2 February 2012 when the commercial purpose of the adventure became frustrated. In paragraph 51 of his judgment, Moore Bick LJ varied the judgment below so as to award MSC demurrage calculated up to 1 February 2012 and damages in respect of the loss of the containers calculated by reference to their value on 2 February 2012.

In paragraph 45 of his judgment, Moore Bick LJ noted that English Law does not recognise any general duty of good faith in matters of contract.

In considering the question of whether it could be said that the container demurrage clause was unenforceable as a penalty, Moore Bick LJ relevantly said:

... Since I agree with the judge that the carrier did not have an unfettered right to affirm the contract and recover demurrage indefinitely, the point does not arise, but as far as I know it has never been suggested that a clause in a voyage charter providing for the payment of demurrage at a daily rate may be regarded as penal simply because it fixes no express limit on the period of the charterer's liability. The reason is that, as the judge himself held (and as I agree), in an appropriate case general principles of law impose a limit on the scope of the charterer's liability. (at [46])

On the issue of mitigation of damages, Moore Bick LJ relevantly said:

... The daily rate of demurrage was agreed on the assumption that it was sufficient to compensate the carrier in full for that loss. The containers would not cease to be profit earning chattels simply because the carrier obtained additional containers to meet any specific requirement. The shipper's argument assumes that any containers obtained by the carrier, whether to meet an immediate requirement for additional space or otherwise, could be regarded as substitutes for those which the shipper continued to detain, but that is not the case. They would simply have increased the carrier's stock. They would be true substitutes only if the contract were terminated without the redelivery of the original containers. (at [49])

MSC v Cottonex Anstalt lessons for ocean carriers and cargo interests

The Court of Appeal's judgment in MSC v Cottonex Anstalt will provide some comfort to ocean carriers as regards the enforceability under English Law of container demurrage clauses in bills of lading.

The Court of Appeal's judgment does point to the advisability of cargo interests being proactive as regards dealing with container demurrage claims.

Robert Tuck
Commercial litigation
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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