Introduction

It is quite common for contracts of carriage between carriers and shippers to contain a clause in the bills of lading providing for a period of free time for the use of containers of goods at their destination, after which the containers have to be returned or redelivered to the carriers, otherwise demurrage would become payable at a daily rate.

In the recent case of MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789, the Court of Appeal considered the question of whether such demurrage on containers which could not be redelivered to the carrier could accrue indefinitely pursuant to a contractual provision.

The Facts

The carriers, MSC Mediterranean Shipping Company S.A. (“MSC”), and the shipper, Cottonex Anstalt (“Cottonex”), contracted for the carriage of 35 containers of raw cotton to Chittagong, Bangladesh. The cargos were shipped in three consignments under five bills of lading. Each of the bills of lading contained a clause providing for a period of free time for the use of the containers at their destination, after which demurrage became payable at a daily rate.

The containers were discharged at Chittagong on various dates between May and June 2011. Unfortunately, following a collapse in the price of raw cotton, a dispute arose between the Cottonex and the consignee who was supposed to pick up and pay for the raw cotton when they arrived in Chittagong. As a result, despite the fact that Cottonex had received payment for the raw cotton and title had passed to the consignee, the consignee refused to take delivery of the same and the containers were left at the port in Chittagong until the date of the judgment.

On 27 September 2011, Cottonex informed MSC that it no longer had legal title to the goods and would be unable to redeliver the containers within the foreseeable future. However, MSC insisted that the containers be redelivered and that demurrage would continue to accrue in the meantime.

On 2 February 2012, in order to resolve the deadlock, MSC offered to sell the containers to Cottonex, but the parties failed to reach any agreement for sale.

This triggered the question of whether Cottonex was liable to pay demurrage to MSC indefinitely (as the containers were still left at the port as at the date of judgment) while the deadlock remained unresolved.

The First Instance’s Decision

At first instance, Leggatt J held that MSC was entitled to demurrage but only for the period commencing from the expiry of the agreed free time until 27 September 2011 (i.e. the date when Cottonex had, by its letter, indicated that it would not be able to perform its contractual obligation to redeliver the containers and had thereby repudiated the contracts in question). Once the contracts were so repudiated, Leggatt J was of the view that MSC no longer had any legitimate interest in keeping the contracts alive in hope of future performance.

Leggatt J also raised the question of whether a contractual provision allowing demurrage to accrue indefinitely was penal in nature and hence unenforceable. Nevertheless, he held that the issue was not relevant to the present case as the demurrage clause in question was limited by “legitimate interest”. Demurrage was not payable indefinitely at the first place.

Both parties challenged Leggatt J’s decision, and hence the present appeal (and cross-appeal) took place.

The Court of Appeal’s Decision

At the appeal, the Court agreed with Leggatt J that once the free time as stipulated in the contracts had expired, demurrage began to run as liquidated damages for Cottonex’s failure to redeliver or return the containers. The failure of MSC to nominate a place for redelivery of the containers was not a condition precedent to Cottonex’s obligation to pay demurrage.

The Court also held that Leggatt J was right in deciding that Cottonex should not be liable to pay demurrage for an indefinite period. Nevertheless, it had adopted reasoning that is quite different from that of the lower courts.

In summary, the Court held that:-

1.       Leggatt J was wrong to decide that Cottonex has repudiated the contract on 27 September 2011. The letter from Cottonex on 27 September 2011 was not sufficient to constitute a repudiatory breach of the contracts, because back then, the length of the delay in performance of the contract (i.e. around two and a half months) was too short to have sufficiently frustrated the commercial purpose of the contract.

2.       Cottonex was only in repudiatory breach in early February 2012, when evidence showed that both parties recognised that it would be impossible for Cottonex to perform its obligations to redeliver the containers under the contracts, by virtue of the offer made by MSC to sell the containers to Cottonex to resolve the deadlock. In the Court’s words, it is only by 2 February 2012 that “the point had been reached at which commercial purposes of the adventure had become frustrated”.

3.       Although it is settled law that a repudiatory breach of contract gives the innocent party the right to choose whether or not to terminate or to affirm (i.e. keeping the contract alive) the contract, in cases where the commercial purpose of the contract had become frustrated as a result of the breach, such option is likely to be lost as the original obligations under the contract can no longer be performed by the defaulting party.

4.       On the facts of this case, even if it had been open to MSC to continue to insist on performance of the contract, MSC had no legitimate interest to do so because the accrued demurrage had already exceeded the value of the containers by a considerable amount. Replacement containers were also easily available at Chittagong. MSC would have no interest in keeping the contract alive other than to earn demurrage pending the containers’ return.

5.       As a result, MSC was only allowed to claim demurrage up to 2 February 2012 (and damages for the value of the replacement containers).

Implications

This case illustrates that while a shipper who fails to return or redeliver containers in breach of a contract cannot easily escape from his liability to pay for the demurrage, but he will not be liable to pay for such demurrage indefinitely. The Court will take into account the parties’ actions and correspondences during the delay in the performance of the contract to determine the amount of demurrage payable.

Further, it should be noted that even though it is settled law that a repudiatory breach of a contract would give the innocent party a right to choose whether to terminate or to affirm the contract, if such repudiation would effectively mean a frustration of the commercial purpose of the contract, the innocent party may no longer have a legitimate interest in holding the defaulting party to its obligations. In such circumstances, the innocent party may not be allowed to insist on the continue performance of the contract by the defaulting party.

For the shippers, to avoid payment of demurrage to the carriers, they should communicate to the carriers immediately once they have realised that there is no prospect for them to redeliver the containers to the carriers.  For the carriers, they should try to avoid communicating with the shippers on the disposal of the containers, as such actions may suggest that they have realised that it would be impossible for the shippers to perform their contractual obligations.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

T: (852) 2810 1212

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.