How long can a carrier claim demurrage for unreturned containers

MSC Mediterranean Shipping Company SA v. Cottonex Anstalt [2016] EWCA Civ 789

A container line, whose containers had been detained for a few months and seemed to be unlikely to be returned for some time, was not able to claim demurrage from the Shipper for an open-ended period.

The background facts

This case arose out of the shipment of 35 containers of cotton from Middle Eastern ports to Chittagong, Bangladesh. When the market price for cotton fell, the Buyers refused to collect the cargo and, as a result, the containers remained uncollected at the Port of Chittagong. The customs authorities also indicated that they would not allow anyone to remove the containers without a local court order. The Shipper allegedly tried to but did not get this order. The Carrier, who owned the containers, brought a claim against the Shipper under the bill of lading for over US$ 1 million in respect of container demurrage. The Shipper objected to this on the basis that the replacement costs of the containers amounted to just over US$ 100,000.

To understand the judgment, there are three key dates to keep in mind:

(1)  The containers were discharged in Chittagong between May and June 2011;

(2)  on 27 September 2011, the Shipper informed the Carrier that it did not own the cargo because it had already been paid, that it would not be paying the demurrage claimed and it suggested that the Carrier recover this money from the bank, who had paid the Shipper for the cargo;

(3)  on 2 February 2012, in an attempt to break the deadlock, the Carrier offered to sell the containers to the Shipper. The parties nearly agreed a price, but the Shipper thought the Carrier was asking too much, so the deal fell through.

The Court of Appeal decision

At first instance, the Commercial Court allowed the Carrier to recover demurrage up until 27 September, but said the Carrier had had no ‘legitimate interest’ from that point onwards in keeping the contract alive in the hope of future performance. The Court of Appeal allowed the Carrier to claim demurrage for longer, until 2 February, but in reaching this decision it took a different approach.

The Court of Appeal said the right to choose to affirm the contract did not even arise, because the frustration of the contract by delay meant that, in commercial terms, the containers had been lost, so they could no longer be redelivered. It being impossible to perform the contract, the right to elect to keep it alive did not even arise. If, however, this was not correct, the Court of Appeal said that “This is a classic case in which it would have been wholly unreasonable for the carrier to insist on further performance.”

Various other points arose in the course of the judgment. The Court of Appeal rejected the lower court’s assertion that there was an increasing recognition in the common law world of the need for good faith in contractual dealings.

It held as an aside that there was no reason why a clause such as a demurrage clause in a charterparty would be regarded as penal simply because it did not have a cut-off period.

Finally, on the issue of whether the Carrier was in breach of a duty to mitigate the loss caused by the delay (by buying replacement containers), the Court of Appeal held that because the contract had been terminated in February, there was no need to decide this point. However, had it been forced to do so, the Court of Appeal would have upheld the Commercial Court’s decision and rejected this argument.

Comment

This is an interesting judgment on several points. From a practical point of view, it will give comfort to many carriers in the same situation, particularly as regards the duty to mitigate and the risk of these charges being held to be penalty clauses. It also means that the shipper/receiver who does nothing much to deal with a problem like this, and who does not make his position clear, may be liable to pay at least six months of detention charges, plus the cost of the containers. The precise amount will depend on the facts and often this will be difficult to estimate. Cargo interests may, therefore, wish to be proactive because otherwise the container detention clock may go on ticking for a long time.

From a legal perspective, the Court of Appeal has poured cold water on a gathering momentum to introduce a general concept of good faith into matters of contract. It has also made a slight change to the orthodox rule that where there is frustration by breach due to delay, the innocent party may either accept that breach as terminating the contract or elect to affirm the contract, subject to certain limitations. According to this judgment, the delay to the return of the containers was so long that it was as if the shippers had destroyed the containers, so the innocent carrier had no right to affirm the contract. The automatic loss of the right to choose to keep the contract alive, following a frustrating delay, might well not be so fair and obvious in all cases.

Source : InceLaw