FML Timeline: MSC Mediterranean Shipping Company SA v Cottonex Anstalt

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MSC agreed to ship 35 containers of Cottonex’s cotton to Bangladesh, where a buyer had agreed to purchase the cotton. The contract allowed 14 days from the date the containers were put ashore in Bangladesh for the containers to be returned to MSC (the 14 day period), after which time daily demurrage charges were imposed, without any time limit.

While in transit, there was a collapse in the price of raw cotton and the buyer, having paid for the order, refused to collect it on arrival. The port authority subsequently refused to let anyone unload the containers without a Court Order, thus preventing Cottonex from returning them to MSC.

On 27 September 2011, Cottonex informed MSC that it no longer had legal title to the cotton, but MSC insisted that the contract remained in place and that the demurrage charges would continue.

On 02 February 2012, MSC offered to sell the containers to Cottonex in order to stop the demurrage charges, but the sale was never concluded as the parties could not agree a price.

MSC issued proceedings to claim the liquidated damages from the end of the 14 day period until such time that Cottonex returned the containers.

Decision

This was an in-part successful appeal by MSC, and an unsuccessful cross-appeal by Cottonex, of a High Court judgment.

The High Court held that MSC should not be permitted to keep the contract alive for the sole purpose of claiming demurrage charges indefinitely unless it had a “legitimate interest” in doing so (applying White & Carter (Councils) v McGregor [1962] AC 413). It also held that the choice of whether to terminate or affirm a contract in response to a repudiatory breach should be exercised in good faith. MSC was entitled to liquidated damages from the expiration of the 14-day period until 27 September 2011 (the date on Cottonex repudiated the contract).

Repudiatory breach and frustration

The Court of Appeal held that MSC was entitled to the demurrage charges up to 01 February 2012 and the damages for the loss of the containers, which were treated as lost on 02 February 2012.

The court agreed that MSC was only entitled to the demurrage charges to the date on which the contract was repudiated, but found that the repudiatory breach occurred on 2 February 2012, rather than on 27 September 2011.

The court held that the delay between the 14 day period and 27 September 2011 was too short to frustrate the commercial purpose of the contractual adventure. However, by 20 February the delay had continued for another four months and MSC had made an offer to sell the containers to Cottonex in order to provide a solution to the problem. This was a clear indication that that the commercial purpose of the contract had been frustrated, ie the delay was such as to render performance of the remaining obligations under the contract of carriage radically different to those that the parties had originally undertaken. This was because a sale would have discharged all of Cottonex’s remaining obligations under the contract. Consequently, it was ruled that on this date, the repudiatory breach had occurred.

Legitimate interest

The Court held that MSC did not have the option to affirm the contract in the first place once the commercial purpose of the venture had become frustrated. By 02 February 2012, Cottonex could no longer redeliver the containers and, having caused the repudiatory breach, was liable in damages for their loss.

As a result, the question of whether there was a legitimate interest in affirming the contract did not require consideration.

However, Bick LJ stated (obiter) that as MSC had no commercial interest in keeping the contract alive beyond claiming the demurrage charges (which, by the time of the repudiatory breach, exceeded the value of the containers), even if it were possible for MSC to affirm the contract, it would have had no legitimate interest in doing so.

Good faith

The Court declined to recognise a duty of good faith, as to do so would risk undermining the terms agreed by the parties. It held that the law should develop along established lines and that judges should not look for a “general organising principle drawn from cases of disparate kinds”.

Noteworthy/ Novel points

In White & Carter, Lord Reid identified two grounds that justify the limitation of the contractual rights of the innocent party: (i) where the innocent party is unable to complete the contract without the other’s cooperation; or (ii) where the innocent party has “no legitimate interest” in continuing performance of the contract rather than claiming damages.

MSC suggests that there is a third ground: where further performance by the defaulting party is impossible because the commercial purpose of the venture has been frustrated.

The judgment also supports the Courts’ recent approach that there is no overriding principle of good faith under English law.

In the High Court, the judge held that there is no duty to mitigate a party’s actual loss when it claims liquidated damages; nor does a party claiming liquidated damages owe any duty to reduce the period over which that claim arises. These comments were approved obiter in the Court of Appeal.