16/02/2015

MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt

On 12 January 2015 Leggatt J handed down judgment in a case raising several important issues of law relating to the operation of demurrage clauses, the nature of a duty to mitigate and the White & Carter v McGregor principle.

The claimant, MSC, is the second largest carrier of shipping containers in the world.  The defendant, Cottonex, is a cotton merchant.  In 2011, MSC carried 35 containers of raw cotton to Bangladesh pursuant to 5 bills of lading under which Cottonex was named as shipper.  The goods had been shipped pursuant to a contract of sale entered into between Cottonex and a Bangladeshi cotton mill called Regent.  Regent refused to accept delivery of the cotton, and instead commenced proceedings in the Bangladeshi courts seeking to prevent payment to Cottonex under letters of credit which had been opened pursuant to the contract of sale.  Although those proceedings resulted in an injunction purporting to prevent the banks from paying Cottonex, in fact the banks did make payment, as a result of which Cottonex lost title to the goods.  Further, the Bangladeshi customs authorities took the position that nobody was to remove the goods from the containers without express permission from the Bangladeshi court, which had not been obtained. In the event, the containers remained in the port of Chittagong uncollected, some 3.5 years after they arrived.  

Under the bills of lading, Cottonex was obliged to return the containers to MSC within 14 days following discharge, to “a place nominated by the carrier”, failing which MSC had the right to claim "demurrage" at a daily rate pending redelivery.  Since the containers had not been returned within 14 days, MSC brought proceedings in the Commercial Court against Cottonex claiming demurrage, which it contended would accrue for as long as the containers remained unreturned.  On that basis, the total amount claimed was in excess of US$1 million as at the date of trial, which sum would (on MSC's case) continue to accrue following trial indefinitely.  The replacement costs of the containers themselves were only around US$114,000.  

The main issue in the trial was whether, assuming demurrage had begun to accrue at all, it had stopped running by the date of the trial, and if so when and how.  Cottonex argued that it had stopped long ago, because MSC could have taken simple steps to mitigate its loss, and MSC were not entitled to claim demurrage for such a period of detention as could have been avoided by the taking of such steps.  In particular, Cottonex argued that MSC could and should have taken steps to retrieve the containers for itself, failing which it should have bought replacement containers.  While the Judge held that it would have been reasonable to expect MSC to take these steps (paras 62-68), he held that as a matter of law there was no duty to mitigate at all, because the demurrage provision was a liquidated damages clause which excluded the duty to mitigate altogether.  In this regard, the Judge declined to follow the view expressed by the authors of Voyage Charters and Tiberg on Demurrage (in the context of charterparty demurrage clauses) to the effect that, although a demurrage provision excludes the shipowner’s duty to mitigate his daily loss caused by the detention of his ship, it does not exclude his duty to mitigate the period of detention (paras 69-78).

In the alternative to the mitigation argument, Cottonex contended that in any event by about September 2011 at the latest it had repudiated the contracts by making it clear that it was not willing or able to redeliver the containers either at all or without excessive delay (or by failing in fact to deliver the containers without excessive delay), and that following that repudiation MSC had no “legitimate interest” in affirming the contract (cf The Aquafaith [2012] 2 LLR 61).  That argument was accepted by Leggatt J (paras 83-121).  According to the Judge, the right to affirm the contract following a repudiatory breach could not be an unfettered one, because if MSC had the right simply to sit back and claim demurrage indefinitely the demurrage clause would be an unenforceable penalty (paras 111-116).  Instead, the position was that, following a repudiation of the contract, MSC only had the right to affirm the contract and claim demurrage if it had a “legitimate interest” in doing so.  In this regard, it was held that whether or not a party has a legitimate interest in affirming a contract depends upon essentially the same considerations as whether or not a party has acted reasonably in exercising a contractual discretion.  And so a party faced with a repudiatory breach must act in “good faith”, having regard not only to his own interests but also to the interests of the other party, and must not exercise his option to affirm “arbitrarily, capriciously or unreasonably (in the sense of irrationally)” : para 97 (citing, inter alia, Socimer International Bank Ltd v Standard Bank London Ltd [2008] 1 LLR 558, 575-577; and British Telecommunications Plc v Telefonica O2 UK Ltd [2014] UKSC 42).  On the facts of the case it was held that MSC had no legitimate interest in affirming the contract beyond 27 September 2011 (which is the date by which it was held that Cottonex had repudiated the contracts), because there was no reason to suppose that it was suffering any loss after that date (paras 117-121).       

Luke Pearce appeared on behalf of the Defendant (instructed by Holman Fenwick Willan LLP).