Thursday, 2 April 2015

Liquidated damages - no need to mitigate, but unlikely to continue indefinitely

April 2, 2015. 

MSC Mediterranean Shipping Company SA v. Cottonex Anstalt [2015] EWHC 283 (Comm)

A carrier, whose containers had been detained for a long time and seemed to be unlikely to be returned, was found not to have the right to daily liquidated damages for an open ended period. Whilst an innocent party has the option whether to accept a repudiatory breach of contract, terminate the contract and claim damages at large, or instead to keep the contract alive and claim contractual debts or damages, it is not without restriction when exercising its choice. If the damages accrued under a contractual liquidated damages regime become wholly unreflective of the innocent party's loss after time, then the innocent party's right to keep a contract alive in the face of a repudiatory breach is not absolute.  


The background facts

The defendant shipper ("the Shipper") shipped cotton in 35 containers provided by the claimant carrier ("the Carrier") from Middle Eastern ports to Chittagong, Bangladesh, with the containers being discharged in May and June 2011.

The Consignee/Buyer of the cotton has never collected it. Following a fall in the market price, the Consignee tried to extract itself from its contract with the Shipper. In June 2011, the Consignee obtained an interim injunction from the Bangladeshi Court restraining payment by the issuing bank under its letter of credit, but that payment had already been made.

The containers have remained at Chittagong ever since. The Carrier's position was that it is for the Shipper or the Consignee to collect the goods and then return the containers. The Shipper's position was that only the Consignee had the power to do so. The Consignee made no attempt to do so, however, and the Bangladeshi customs authorities apparently refused to allow anyone to remove the containers without a court order.

The Carrier claimed demurrage from the Shipper in respect of each container pursuant to its standard terms of carriage which were printed on the back of the bills of lading. Those terms provided that after 14 days of "free time" following discharge, demurrage charges would be US$10 per container per day (escalating over time to US$24). By 1 January 2015, the demurrage was over US$ 1 million.

The replacement cost of the 35 containers was agreed to be US$114,172, or US$3,262 per container. 

The Shipper claimed that the Carrier had failed to take reasonable steps to mitigate its loss by either unpacking the containers or buying replacements, and that this limited the period for which the Carrier could claim demurrage. 

The Commercial Court decision

The Court found that it was reasonable to expect that the Carrier would have bought additional containers in order to mitigate its loss. However, because the purpose of a liquidated damages clause is to make proof of the Claimant's actual loss unnecessary and irrelevant, the Court also found that its entitlement to claim demurrage cannot depend on whether it should reasonably have mitigated its actual loss.

The Court noted that, in charterparty cases, delay by the charterer will amount to repudiatory breach of the contract when it becomes so prolonged as to frustrate the commercial purpose of the venture, and that impossibility of performance before the delay will amount to anticipatory breach of a repudiatory nature. The Court found that because the Shipper could not compel the Consignee to collect the goods, this was impossibility of performance, and that the Shipper therefore was in repudiatory breach of the bill of lading contract by September 2011.

In the face of a repudiatory breach, the innocent party has a choice whether to accept that breach, thereby bringing the contract to an end, or to keep the contract alive. In the leading case in this area of White & Carter Ltd v. McGregor, the House of Lords commented that the freedom of choice in such circumstances could be limited by considerations of equity or public policy, and suggested that a party may not be entitled to keep a contract alive unless he has a legitimate interest (financial or otherwise) in doing so.

In the Aquafaith in 2012, it was found that an innocent party can only be said to have no legitimate interest in keeping the contract alive if (a) damages are an adequate remedy; and (b) maintaining the contract would be "wholly unreasonable".

Here, the Court noted that it is an established rule that in the absence of clear language to the contrary, a contractual discretion must be exercised in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably.

So the Court held that, once it was clear that the Shipper was in repudiatory breach of its obligations to procure collection of the goods and redelivery of the containers (due to impossibility), the Carrier no longer had any reason to keep the contracts alive in the hope of future performance.

The Court also concluded that whilst it would be proper for the Carrier to keep the bill of lading contracts alive to claim demurrage after the Shipper's repudiatory breach if the inability to use its containers was causing it ongoing financial loss, there appeared to be no such financial loss to the Carrier here from September 2011 onwards. Accordingly, the Court found that the Carrier had no legitimate interest in keeping the contracts alive to claim demurrage after that date. As a result, the Carrier's claim for container demurrage was limited to the period to September 2011.

Comment

The findings in this case as to the lack of a mitigation obligation where there are liquidated damages, and the circumstances in which there is a legitimate interest in keeping a repudiated contract alive, are of general importance, both to shipping contracts other than bills of lading and to contracts generally in any industry.

In light of this judgment, a party claiming liquidated damages for a potentially lengthy period would be well advised to review its position periodically, to determine whether it continues to suffer actual financial loss and, if so, whether steps may be taken to bring that loss to an end. The questions of whether something is a repudiatory breach, and of whether a party should accept that breach are often difficult ones however, even for lawyers practising in this area, and large sums often turn on fine distinctions. Caution is therefore required.

The actions required in pursuance of an obligation to mitigate (even though no such obligation was said to exist here) and acceptance of repudiation would probably have been similar in this case, i.e. "abandon" the containers in Chittagong, buy replacement containers, and claim actual loss. This means that the legal distinction between the two issues perhaps is not very wide as a matter of fact. 

The Carrier was put in a difficult position here through no fault of its own. It was the only party which endeavoured to take positive steps to try to overcome the difficulties in Chittagong and get its containers back, but it was nevertheless found to have acted unreasonably. This judgment does not seem to take account of the fact that carriers may be charged storage charges by the owner of the port at which containers are detained due to matters outside their control (perhaps because no such charges applied here), such that the carrier would incur an additional loss every day that a container was detained. It might be that carriers are deemed to have a legitimate interest in keeping a contract alive in circumstance where such charges applied. 

Source: http://incelaw.com
             http://library.dbs.ie

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