UK: Stop The Clock - Examining Indefinite Demurrage Claims (MSC v Cottonex)

Last Updated: 2 December 2016
Article by Allen Marks

Commercial analysis: Allen Marks, director at Campbell Johnston Clark, explains how the judgment in MSC Mediterranean Shipping Co v Cottonex usefully puts into perspective the point in time when the affirmation of a contract ceases to be an acceptable remedy.

Original News

MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789, [2016] All ER (D) 159 (Jul)

The Court of Appeal, Civil Division, held that, in circumstances where, under bills of lading, the defendant shipper was obliged to redeliver containers to the claimant carrier or suffer the imposition of demurrage, but was unable to redeliver in the foreseeable future because it did not have title, the carrier was only entitled to demurrage up to the date when it had been told of that impossibility. That was because it had then been clear that the shipper had repudiated the contract and the carrier was not in a position to wait for the contract to be performed as its performance had become impossible.

What is the significance of this decision?

The major significance is that the court on its own volition was willing to impose a date on which it considered delay had become so prolonged as to frustrate the commercial purpose of the contract and that was to be considered a repudiatory breach of the contracts.

Notwithstanding the generally understood principle of English law regarding repudiation, which provides that when one party is in repudiatory breach of contract, the other party is not necessarily bound to accept that repudiation, the courts (at first instance and on appeal) recognised that while an innocent party may have entitlement to the remedy of affirmation, in certain circumstances the court will decline to grant that remedy if the court considers damages as adequate remedy instead.

From review of the judgments at first instance and at appeal, it can be seen how the courts dealt with this. The Commercial Court said, as of September 2011 in the first instance, the date when Cottonex (the shipper) informed MSC (the carrier) that it did not have legal title to the goods, the carrier could not be considered to be bound any more, and so it was repudiatory conduct, which the carrier should have accepted.

The Court of Appeal disagreed, and said that September 2011 was too early, as it was only two and a half months after the last containers had been discharged and such a relatively short period of delay was not sufficient. Instead, it ruled that the contract became repudiated as from February 2012. How is it especially significant to the shipping and commodities industries?

This judgment slightly contrasts with the decision in Isabella Shipowner SA v Shagang Shipping Co Ltd 'The Aquafaith' [2012] EWHC 1077 (Comm), [2012] 2 All ER (Comm) 461. There Cooke J considered that, in a case of purported early redelivery by 94 days in a charterparty for 59 months, the owner did not have to accept the charterers' repudiation. Instead, the owner could refuse to accept the charterers' repudiation and affirm the contract.

However, since Isabella v Aquafaith many legal advisers remained nervous of giving such advice to innocent parties. Thus the Court of Appeal decision here shows that where a party considers that it has a continuing right to claim damages, eg, a demurrage clause, it actually has to look at a point from which its actions (of affirmation) could be considered unreasonable. If a party is thinking it has a demurrage clause which will keep demurrage accruing and keep it entitled to damages, the legal advice one needs to give it now has to be that at some point the clock probably has to stop, particularly if damages are an adequate remedy. This judgment puts into perspective at what point in time affirmation of a contract ceases to be an acceptable remedy.

Briefly, what was the background to this decision?

35 containers of raw cotton were shipped from various ports in the Middle East to Bangladesh pursuant to five bills of lading. Following discharge in May 2011, the consignee failed to collect the containers because following conclusion of the sale contract and shipment of the cargo, the market price of raw cotton fell.

Thereafter, the consignee sought to cancel payment of the sale contract price under the letter of credit and litigation proceedings were commenced in Bangladesh by the consignee against the shipper, resulting in an interim injunction being issued in June 2011 to restrain the issuing bank from making any payment. However, prior to the proceedings the shipper had received payment for part of the cargo. In light of the proceedings, the Bangladeshi customs authorities refused to release the containers from the yard without a court order.

In August 2011, the carrier emailed the shipper asking what actions had been taken by the shipper to release the containers and sought confirmation that demurrage would be paid. The shipper responded on 27 September 2011 that it had no title to the goods, as payment had been received and property had passed to the consignee. Accordingly, the shipper was not liable to return the containers to the carrier.

The carrier commenced proceedings in the English High Court against the shipper, claiming container demurrage. Pursuant to the bill of lading terms, the shipper had responsibilities of a 'merchant' as defined in the contract, including the obligation to pay demurrage in accordance with clause 14.8. It was agreed that the period of free time stated in clause 14.8 commenced on 13 May 2011 for the first 10 containers, on 20 May 2011 for the second lot of 12 containers and on 27 June 2011 for the last four containers.

The shipper argued that demurrage had not accrued because the carrier had not nominated a place for the return of the containers and that such an obligation constituted a condition precedent of the contract. Alternatively, it was argued that the carrier failed to mitigate losses by either purchasing replacement containers or emptying the containers and arranging their removal from the yard.

What were the key legal issues before the court?

  • Under the terms of the bills of lading, was the shipper liable to pay the carrier demurrage in the first place?
  • Was the judge at first instance entitled to find that the commercial purpose of the adventure had become frustrated on 27 September 2011, when the shipper informed the carrier that it did not have legal title to the goods as it had been paid for them?
  • If not, the Court of Appeal asked, could it had become frustrated for a longer period of time—in other words, by 2 February 2012, at the point when the carrier offered to sell the containers to the shipper?
  • If the shipper had repudiated the contracts of carriage in the bills of lading, was the carrier bound to accept the repudiation and basically entitled to a different form of damages other than demurrage?
  • Is a carrier's right to recover demurrage affected by the existence of a general duty of good faith in matters of contract?
  • Was the demurrage clause penal in its nature, ie, was it a penalty clause?
  • Was the carrier in breach of its duty to mitigate its losses caused by the delay?

Has this judgment brought clarity? Does it leave any unresolved issues?

It has brought clarity as it suggests you cannot have damages at large running indefinitely, even if there is a demurrage clause in the contract. Moore-Bick LJ said a demurrage clause is not a penalty clause, but one can't expect it to keep running and running as a lawful claim in damages. He also commented on the good faith issue—reiterating the fact that English law does not recognise any general duty of good faith in matters of contract.

It still leaves unanswered the question of when enough is enough—where is the point where repudiation applies and the other party is effectively obliged to accept the repudiation to start to mitigate their losses?

Are there any trends developing in this area of law?

In general, it is one of a long line of cases dealing with affirmation as a remedy and repudiation, from Isabella v Aquafaith back to White & Carter Councils Ltd v McGregor [1962] AC 413, [1961] 3 All ER 1178 where Lord Reid held that, once there was no realistic prospect that the shipper would perform its remaining primary obligations, the carrier ceased to have any legitimate interest in keeping the contracts of carriage alive in the hope of future performance.

An unhappy marriage still exists between the likes of the Isabella v Aquafaith decision, where the court ruled that owners did not have to accept charterer's repudiation of a 59-month contract where 94 days remained. It was, Cooke J said, for charterers to look to find a fixture(s) for the vessel, not for owners to accept the repudiation and mitigate. In this case, however, the court has said that at some point, you will have to look at when the contract has become frustrated and the innocent party is obliged to accept repudiation.

The recent UK Supreme Court decision in Cavendish Square Holdings Ltd and ParkingEye Ltd v Beavis [2015] UKSC 67, [2015] All ER (D) 47 (Nov) dealt with liquidated damages and set the true test as to whether a liquidated damages penalty clause is a detriment imposed on the contract-breaker and is disproportionate. In light of the MSC v Cottonex judgment, the trend is that this isn't necessarily the case—as long as it is not audacious and ridiculous, it is acceptable to have a liquidated damages penalty clause in a contract which is negotiated on a level playing field with (quite often) the assistance of professional advisors.

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor

Originally published in Lexis PSL

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.