Container demurrage, frustration and the end of the commercial adventure

MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789 (27 July 2016)

In this case, the Court of Appeal considered whether container demurrage could continue to accrue indefinitely where containers had become trapped beyond the parties' control and could not realistically be returned.

The decision provides important guidance on the interaction between demurrage clauses, frustration and repudiation of contracts, and identifies the point at which a contractual adventure has effectively come to an end.

The background facts

The dispute arose from the carriage of several consignments of raw cotton by MSC Mediterranean Shipping Company SA (MSC) from the Middle East to Bangladesh on behalf of Cottonex Anstalt (Cottonex).

The cargo was carried in containers owned by MSC under five bills of lading. Each bill of lading contained a clause (clause 14.8) providing a period of free use of the containers after discharge (in this case 14 days), following which demurrage would be payable at agreed daily rates until the containers were returned.

What initially appeared to be a routine shipment became commercially problematic when the international price of cotton fell sharply while the cargo was in transit. A dispute developed between Cottonex and the buyer over the dating of the bills of lading, after the goods had already arrived at the port of discharge (Chittagong), which led to proceedings before the High Court in Dhaka in which the buyer sought injunctive relief restraining payment by the confirming bank. Although Cottonex ultimately received payment under the letters of credit, neither Cottonex nor the consignee was prepared to take responsibility for collecting the goods, while the customs authorities maintained that the containers could not be unpacked or released without a court order.

On 27 September 2011, Cottonex sent MSC a message in which it contended that it no longer held legal title to the goods, which it considered belonged to the banks involved in the transaction. Cottonex therefore maintained that it would be inappropriate for it to settle MSC's outstanding debit notes for demurrage, whilst expressing the view that MSC's charges would ultimately be met once the disputes between the banks had been resolved.

MSC rejected that position and responded that it continued to hold Cottonex responsible under the bills of lading for the return of the containers and that demurrage would continue to accrue in the meantime. On 2 February 2012, to break the deadlock, MSC offered to sell the containers to Cottonex, however, the negotiations amounted to nothing.

With the containers still stranded at Chittagong and no realistic prospect of their release, MSC commenced proceedings in the English Commercial Court seeking to recover container demurrage under the bills of lading.

By the time the litigation had commenced, the accrued demurrage was substantial and continued to increase on a daily basis. MSC's primary case was that, pursuant to the contractual demurrage regime, Cottonex remained liable for the detention of the containers until they were redelivered.

Cottonex resisted the claim on several grounds, contending, among other things, that its inability to redeliver the containers within the foreseeable future amounted to repudiation of the contracts which MSC was obliged to accept, thereby bringing an end to any continuing obligation to pay demurrage.

The Commercial Court decision

The Court accepted that demurrage was payable under the bills of lading once the agreed free-time period had expired. The central issue was whether Cottonex had repudiated the contracts of carriage and if so, what effect that had on the continuing obligation to pay demurrage.

The Court decided that Cottonex's communication on 27 September 2011 amounted to a repudiation of the contracts and MSC was not entitled to insist on their continued performance merely in order to allow demurrage to continue accruing indefinitely. The Court concluded that, by that date, the parties had effectively reached an impasse from which there was no reasonable prospect of escape.

MSC appealed, and Cottonex cross-appealed on aspects of the Court’s reasoning, bringing the dispute before the Court of Appeal.

The Court of Appeal decision

Whether demurrage became payable

The Court of Appeal concluded that demurrage became payable in accordance with the express terms of the bills of lading. The containers were discharged, the agreed 14 day free-time period expired, and the containers were not returned.

Under clause 14.8, demurrage therefore accrued as liquidated damages for the detention of MSC's containers. The fact that the containers were trapped in Bangladesh did not prevent the demurrage provisions from operating. Nor was MSC required to nominate a place for redelivery before demurrage could begin to run. Once the free time had expired, the contractual entitlement to demurrage crystallised.

Frustration

The issue was whether the delay in this case was such as to render performance under the contract radically different to that which the parties had originally undertaken, such that the contract was frustrated.

The Court of Appeal did not find that the contract was frustrated on 27 September 2011, when Cottonex informed MSC that it could not recover and return the containers. At that stage, only a relatively short period had elapsed since discharge. Indeed, the parties continued actively attempting to resolve the impasse for several more months.

However, by 2 February 2012 the position was materially different. By then, the parties had exhausted potential solutions. MSC had even proposed selling the containers to Cottonex as a means of breaking the deadlock.

That proposal was highly significant because it demonstrated that MSC itself recognised the practical impossibility of recovering its containers through performance of the existing contractual arrangements. It was at this point that the impasse had become effectively permanent, and the remaining contractual obligations had been transformed into something radically different from those originally contemplated by the parties.

Consequences

Cotttonex’s conduct amounted to repudiation, notwithstanding MSC’s failure to accept the repudiation and elect to terminate. However, the contracts did not end because a repudiatory breach was accepted.

They ended because supervening events rendered further performance impossible. In those circumstances, the parties' rights and obligations were brought to an end by operation of law rather than by election. The practical effect was that MSC remained entitled to demurrage that had accrued before frustration, thereby preserving the contractual risk allocation agreed between the parties.

Comment

The significance of the decision lies in the Court of Appeal's recognition that, although demurrage clauses are designed to provide certainty and allocate the consequences of delay, they do not operate in a legal vacuum.

The Court of Appeal accepted that demurrage was contractually payable and rejected various attempts to avoid the operation of the clause. At the same time, it recognised that - where supervening events have destroyed the commercial purpose of the venture and rendered further performance radically different from that originally contemplated - the doctrine of frustration imposes a limit on the continued operation of the contractual regime.

The decision also recognises that, in certain circumstances, repudiation by a party can bring a contract to an end without the innocent party electing to accept the repudiation and terminating the contract. This is because an innocent party cannot affirm a contract under which a defaulting party is no longer able to perform its obligation.

The decision remains one of the leading authorities on the interaction between demurrage, frustration and repudiation, and provides valuable guidance on the point at which a contractual adventure can properly be said to have come to an end.

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This article was co-authored by Associate, Gerry Comninos.