29/07/2016
MSC v Cottonex [2016] EWCA Civ 789
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On 27 July 2016 the Court of Appeal handed down judgment in this interesting case raising important issues relating to the law of contract and international trade.
The case arose out of the shipment of 35 containers of cotton to Bangladesh in mid 2011. The containers were owned by the carrier of the vessel, and under the terms of the contracts of carriage the shipper was obliged to redeliver the containers within 14 days of discharge, failing which it would be liable for ‘demurrage’. As a result of the fall in price in cotton, the receivers rejected the cotton, and the containers therefore remained uncollected at the port.
The carrier brought an action against the shipper for demurrage, and the main issue was whether, and if so how, demurrage had come to an end notwithstanding that the containers had never been redelivered. The carrier’s position was that demurrage would continue to run for so long as the containers remained delivered, and could therefore in principle run forever. The shipper’s position was that the carrier’s right to claim demurrage came to an end once the contracts had been repudiated, either because at that point the carrier had an obligation to mitigate the contracts by buying replacement containers, or because the carrier had no legitimate interest in affirming the contracts thereafter.
At first instance, Leggatt J held that the contracts had been repudiated by delay by 27 September 2011, i.e. about 3.5 months after discharge, and that from that point the carrier had no ‘legitimate interest’ in affirming the contracts, applying the principle in White & Carter v McGregor [1962] AC 413. In reaching that conclusion, Leggatt J relied on considerations of ‘good faith’, which according to the Judge underpinned the ‘legitimate interest’ principle. Leggatt J rejected the argument based on mitigation, holding that the doctrine of mitigation could not apply to a claim for liquidated damages.
The Court of Appeal held that the contracts were repudiated on a slightly later date than that held by the Judge (2 February 2012), but agreed with the Judge that thereafter the contracts came to an end. However, the Court of Appeal reached this conclusion by a rather different process of reasoning from the Judge, holding that in circumstances where the contracts had been repudiated by a delay which frustrated the commercial purpose of the venture, the carrier simply had no right to affirm the contracts at all, since the contracts automatically came to an end. It was therefore held that the ‘legitimate interest’ principle had no application (although the Court of Appeal indicated that it would have agreed with Leggatt J that the carrier had no legitimate interest in affirming the contracts if the question had arisen). In light of this conclusion the Court of Appeal did not need to consider whether the doctrine of mitigation applied, but indicated that its provisional view was that the Judge was right on this issue.
The decision of the Court of Appeal that a contract can be automatically terminated by a breach of contract in some circumstances is an interesting and important one, since the traditional view is that (subject to possible limitations on the right to affirm), a repudiation of a contract does not bring a contract to an end unless it is accepted by the innocent party. The precise limits of this principle are not entirely clear, and it remains to be seen how the principle will be applied in future cases.
Luke Pearce (instructed by Holman Fenwick Willan LLP) appeared for the Respondent.
