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MSC Mediterranean Shipping Co SA v Cottonex Anstalt

SSM Roundel

Steamship Mutual

Published: May 01, 2015


Has an aggrieved party the right to affirm a repudiated contract and claim liquidated damages, rather than accept repudiation and claim general damages?

This was the issue which arose in the recent High Court case of MSC Mediterranean Shipping Co SA v Cottonex Anstalt. The claimant, MSC, contracted with the defendant, Cottonex, to carry raw cotton in its own containers to Bangladesh.  By the time the goods arrived, the world market in raw cotton had collapsed, and the consignee failed to collect the goods. Since ownership in the goods had passed to the consignee, Cottonex were unable to unpack the goods and return the containers to MSC.

Under the bills of lading, Cottonex was obliged to return the containers to MSC within 14 days following discharge, failing which MSC had a right to claim demurrage (a form of liquidated damages) on a daily basis. Cottonex, however, was powerless to force the consignee to collect the goods, leaving them with a potentially open-ended liability for demurrage. By the time the matter came to trial, the total amount of demurrage claimed was in excess of US$1 million, more than 10 times the value of the containers themselves.

 Cottonex advanced two arguments in defence of MSC’s demurrage claim:

  1. That MSC could and should have taken steps to mitigate its loss by unpacking and retrieving the containers themselves, or by buying replacement containers;
  2. That by making it clear that it was neither willing nor able to redeliver the containers, Cottonex had repudiated the contract, and that following such repudiation MSC had no ‘legitimate interest’ in affirming the contract.

As regards argument (a) Leggatt J held that as a matter of law there was no duty to mitigate, because the demurrage provision was a liquidated damages provision which excluded the duty to mitigate altogether.

As regards argument (b), Leggatt J held that MSC did not have an unfettered right to ignore the repudiation and claim liquidated damages indefinitely. There was no evidence that MSC was suffering any financial loss, and if the detention of the containers had been preventing MSC from fulfilling future orders, any reasonable carrier would have purchased replacement containers. Following Cottonex’s 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. It was well established in English law that, in the absence of very clear contrary language, a party must exercise an express contractual discretion in good faith for the purpose for which it was conferred, not arbitrarily, capriciously or irrationally.

MSC’s liquidated damages claim was effectively capped at the amount of demurrage which had accrued at the date of the repudiatory breach.

This judgment limits an innocent party's freedom to act in its own self-interest, and makes it clear that the decision whether to terminate the contract or not should be made in "good faith".

The courts will not allow a party to affirm a contract and rely on a liquidated damages clause if it would be wholly unreasonable to do so. 

Article by Caro Fraser

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