Some recent court decisions shed new light on the law concerning container detention charges, write Hazel Brasington and Dean Kambovski.
This article was originally published by Lloyd's List Australia and has been reproduced with permission.
Container detention charges – up in the air again?
Shipping companies would find it difficult to keep container stock moving efficiently without charging cargo interests a daily rate for overdue containers. For the most part, cargo interests accept this as a necessary evil, but overprotective container detention terms cause friction and have received airplay in Australian courts.
The English High Court, meanwhile, has recently taken a fresh look at whether escalating and unending charges can be enforced regardless of the circumstances. What does this all mean for Australia?
The current Australian position
Container demurrage had surprisingly little judicial consideration in Australia until 2010, when the NSW Consumer Trader and Tenancy Tribunal found that a daily container "detention fee" imposed by a bill of lading, was an unenforceable penalty, on the basis that it was extravagant and unconscionable in comparison to the greatest loss that could conceivably be proved to have flowed from the breach of contract by the shipper. That decision was overturned on appeal to the Supreme Court of NSW on technical jurisdictional grounds. This meant that it was unnecessary for the Court to deal with the central question about the enforceability of the charges.
However in 2011, the question returned to the Tribunal in a different case and it was determined that daily charges payable for late return of containers were not penalties. It characterised them as agreed compensation for possession and use of the containers and found that the charges did not arise from a breach of contract.
In 2012, the New South Wales District Court made a similar determination concerning Cosco Container Lines' "Impor Net Agreement". Although it required return of the containers after 10 days "free time", no amount was immediately payable if this was not done. This meant the charges were not penalties because again, they did not arise from a breach of the contract. Accordingly, at this point, it appeared reasonably settled that a breach of contract was the necessary trigger to detention charges being determined to be unenforceable penalties.
Then came Andrews v Australia and New Zealand Banking Group Ltd in which the High Court (in the context of bank fees and charges) found that the penalty doctrine may apply in circumstances where the payment is not triggered by a breach of contract. The High Court also emphasised a distinction between a fee that is security for performance of an obligation and a fee under a pre-existing arrangement for the provision of further services or accommodation. There has as yet been no further judicial determination as to how this distinction might be applied in the context of container detention. However, this might not be the case for long. The Australian law on contractual penalties continues to evolve with the Full Federal Court just (at the time of writing) having reversed the first instance decision in the bank fees class action Paciocco v Australia and New Zealand Banking Group Ltd  FCAFC 50.
The English position
English High Court - MSC v Cottonex Anstalt  EWHC 283
An English case decided late last year, concerned a cargo of cotton discharged at Chittagong in mid-2011. Luckily for Cottonex, it had been paid for most of the cargo just before a collapse in the price of cotton at that time.
The Consignee never made any attempt to collect the cargo and the Bangladesh customs authorities would not allow anyone to remove the containers without a Court order. In September 2011, the carrier, Mediterranean Shipping Company (MSC) notified both shipper and consignee that it reserved the right to dispose of the cargo if not collected holding each responsible for all costs and charges. Cottonex denied liability on the basis that title to the goods had passed on payment.
MSC's clause stated:
"The Carrier allows a period of free time for the use of the Containers in accordance with the Tariff... The Merchant is required and has the responsibility to return ... the Container ... before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery. Demurrage, per diem and detention charges will be levied and payable by the Merchant thereafter in accordance with the Tariff."
MSC also had the right to unpack and store the goods and, if they remained unclaimed, to abandon or dispose of them.
After a 14 day "free" period, the applicable demurrage charge was US$10 per container per day for the first 10 days, US$18 daily for the next 10 days and US$24 daily thereafter. By January 2015, the total demurrage claim had reached over US$1 million, or approximately 10 times the value of the containers.
The English High Court held that the parties intended demurrage to start to run as soon as "free time" ran out. Cottonex was in breach of contract from that time. It did not matter that no one had taken delivery of the cargo. The Court determined the purpose of the clause was to quantify the damages payable for the breach of contract, namely the Merchant's failure to return a container to the Carrier within the agreed period of "free time".
Unsurprisingly, Cottonex argued that the Carrier had failed to take steps to mitigate its loss by unpacking the goods and retrieving the containers, or if necessary, buying replacement containers.
The Court held that because the parties had agreed specific amounts payable by the Shipper as damages for its breach of the contract, the mitigation principle did not apply and demurrage could accrue. Any argument that demurrage ceased to be payable after a specific period of time must however be founded upon some legal principle capable of bringing the parties contractual obligations to an end.
Does detention continue indefinitely?
In MSC v Cottonex, Cottonex argued that its inability or failure to collect the containers amounted to a repudiation of the contract of carriage, which brought any obligation to pay demurrage charges to an end.
The Court agreed, finding that title in the cotton had passed to the consignee so that Cottonex had no right to take delivery. Nor could Cottonex have compelled the Consignee to take delivery. At that stage, Cottonex was wholly and finally disabled from further performance of the contact. The court determined that by September 2011 the delay in collecting the goods had become so prolonged as to "frustrate the commercial purpose of the venture". Cottonex's liability for demurrage continued only until then.
"Legitimate interest" principle
In response to a repudiatory breach, an innocent party may choose either to terminate the contract (from which point the parties are released from their obligations) and seek damages, or maintain the contract. The Court confirmed that this choice is constrained to the extent that the innocent party must have a "legitimate interest" in maintaining the contract.
Had MSC elected to terminate, Cottonex would have been relieved of its obligations under the contract, including the obligation to pay ongoing container demurrage, and would have been liable to pay damages (the calculation of which would have been subject to the mitigation principle).
Ordinarily, where the carrier has control over its containers, it could exercise its rights to unpack the containers and re-take possession of them. This case was unusual as the Bangladesh customs authorities' actions did not allow that to occur. Once it became clear that there was no realistic prospect that Cottonex could collect the goods and return the containers, MSC no longer had any reason to keep the contracts in force other than to continue to claim demurrage. The carrier's election was entirely unreasonable, as it was not invoking the demurrage clause for a proper purpose, but rather to "seek to generate an unending stream of free income".
The Court noted that it would be proper for a carrier to keep the contract in force and claim demurrage even after repudiation by the Merchant, provided there was some basis for supposing that the Carrier's inability to use the containers was causing it to suffer ongoing loss. In the circumstances of this case where the customs authorities had refused to allow the containers to be released (a matter outside Cottonex's control) the Court inferred that a reasonable carrier would have acquired replacement containers.
Is an unlimited demurrage clause a penalty?
The Court also considered the separate question of whether MSC's container demurrage provision amounted to an unenforceable penalty. Hon Leggatt J found that a provision which allows demurrage to be recovered indefinitely even when no reasonable Carrier would be suffering a loss, goes outside compensation, and he would hold such a clause unenforceable as a penalty.
If the decision in MSC v Cottonex is followed in Australia, it seems that where circumstances prevent a merchant from returning containers, or the delay is such that the contract of carriage has been repudiated, the carrier will not be permitted to keep the contract alive and recover ongoing demurrage unless it has a "legitimate interest" in doing so. A carrier in that situation is unlikely to have the required legitimate interest unless it can show that it continued to suffer actual loss and damage that could not be avoided by taking repossession of containers or purchasing replacements.
Considering the evolving judicial position in Australia on the question of penalties, container detention charges may once again be closely scrutinised.
Australian courts must also consider the High Court's distinction between security for performance of an obligation and a fee charged for the provision of further services or accommodation. As this distinction is difficult to apply in the specific context of container detention charges, MSC v Cottonex could provide useful guidance to the industry.