ust the innocent party accept repudiation
M
to terminate a contract?
This question may seem simple enough to answer. Many would
answer ‘yes’ as it is the traditional view that a contract is terminated
on acceptance by the innocent party of the repudiation, and not
before. However, the recent Court of Appeal judgment in MSC
Mediterranean Shipping Company SA (‘MSC’) v Cottonex Ansalt
(‘Cottonex’) has raised doubts on the limits of this long established
principle: termination in some instances may be automatic.
MSC v Cottonex [2016] EWCA CIV 789
MSC v Cottonex involved a demurrage dispute between a carrier, MSC,
and a shipper, Cottonex. Between April and June 2011, the carrier
contracted with the shipper to carry various parcels of cotton from
Iran and the United Arab Emirates to Bangladesh. In doing so, the
carrier discharged a total of 32 containers. The contracts of carriage
– the Bills of Lading – allowed a 14 day period of free time for the
use of the containers at the destination, after which demurrage
accrued at a daily rate.
Following the collapse in the price of raw cotton, the receivers rejected
the goods, did not take the delivery and commenced proceedings
in Dhaka against the shippers disputing the date of the Bills of Lading.
Meanwhile, the shipper, having obtained payment, considered that
it had no right to deal with the goods as it no longer held title to those
goods. The result is that no one was willing or able to take delivery
of the goods which remained at the port under the control of
custom authorities.
While the contracts of carriage gave the carrier the right to unpack
the goods and dispose of them under certain circumstances, customs
authorities refused to allow the carrier to deal with the containers
without court permission. No such permission was given. Therefore,
the containers and their contents remained at the port. In the carrier’s
view, demurrage continued to accrue until the containers were
redelivered and they continued to invoice for demurrage.
In February 2012, the parties explored settlement. The carrier
proposed that the shipper buy the containers thereby discharging
their obligation to be liable for continuing demurrage. Settlement
negotiations failed and the carrier commenced proceedings for
unpaid demurrage that continued to accrue in 2013. Neither the
carrier nor the shipper terminated the contracts of carriage at any
stage before commencement of the trial.
Approaching the question
The question therefore is: Was there a frustrating delay which
repudiated the contracts and if so, was the carrier bound to accept
repudiation and therefore discharge the shipper of remaining
obligations? In other words, can the contracts be terminated
automatically by repudiation without the innocent party
accepting the repudiation?
Both Moore-Bick and Tomlinson LJJ agreed that yes, frustrating
delay did repudiate the contracts and the carrier was bound to
accept the repudiation to discharge the shipper. The carrier was
therefore entitled to damages for loss of the containers. However,
they differed in how they arrived at this conclusion.
Copyright © The Shipowners’ Club, 2016
By Indu Chitran, Claims Handler
Moore-Bick LJ took the view that by February 2012, about eight
months since discharge, the point had been reached where the
commercial purpose of the adventure had been frustrated
– commercially the containers had been lost. The carrier did not
have the option of affirming the contracts (i.e. rejecting repudiation)
as further performance had become impossible. It was as if the
containers had been destroyed.
On the other hand, Tomlinson LJJ was of the view that this was not
a situation where the carrier had a choice between:
a) Treating the remaining obligations as discharged, or
b) A
ffirming the contract in order to wait and see whether the
shipper performed the contract when the time came.
Tomlinson LJ found that in this case, the contract became
repudiated because it was no longer capable of performance
– further performance in the context of the delay would be
radically different from that which the parties originally agreed.
The carrier does not have an option to hold the contract as
subsisting when it is incapable of specific performance.
What was the outcome?
This is therefore an important judgment in which the Court of
Appeal found that a contract can be automatically terminated by
breach of contract in certain instances. It remains interesting to see
how this case will be applied in the future. Will it be confined to its facts
or will it be widely applied? Either way, there is little doubt that,
pending some further clarification from the Courts, this argument
will be canvassed aggressively by shippers impacted by the present
economic downturn seeking to discharge onerous burdens.
If you have any further questions, please do not hesitate
to contact Indu Chitran using the details below:
Email: [email protected]
D +65 6593 0436
E [email protected]
M +65 8444 6212
S indu.chitran.smpsb
T +65 6593 0420
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