MSC Mediterranean Shipping Company SA v Cottonex Anstalt

This matter comes before the court by way of an appeal and cross-appeal against the order of Leggatt J. giving judgment for the appellant, MSC Mediterranean Shipping Co. S.A. (“the carrier”) against the respondent, Cottonex Anstalt (“the shipper”), for the sum of US$98,599.70 in respect of demurrage on 35 containers used for the carriage of raw cotton from Bandar Abbas and Jebel Ali to Chittagong.

The facts giving rise to the dispute between the parties are set out in detail in the judgment below. The following summary is sufficient for present purposes.

Each of the bills of lading contained the following clauses:

“14.8

The Carrier allows a period of free time for the use of the Containers and other equipment in accordance with the Tariff and as advised by the local MSC agent at the Ports of Loading and Discharge. Free time commences from the day the Container and other equipment is collected by the Merchant or is discharged from the Vessel or is delivered to the Place of Delivery as the case may be. The Merchant is required and has the responsibility to return to a place nominated by the Carrier the Container and other equipment before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery. Demurrage, per diem and detention charges will be levied and payable by the Merchant thereafter in accordance with the Tariff.

14.9

The Merchant shall redeliver, to a place nominated by the Carrier, the Containers and other equipment in like good order and condition, undamaged, empty, odour free, cleaned and with all fittings installed by the Merchant removed and without any rubbish, dunnage or other debris inside. The Merchant shall be liable to indemnify the Carrier for any and all costs incurred reinstating or replacing Containers and other equipment not returned in the condition as specified above, including the reasonable legal expenses and costs of recovering the costs incurred and interest thereon.

20.2

The Merchant shall take delivery of the Goods within the time provided for in the Carrier’s applicable Tariff or as otherwise agreed. If the Merchant fails to do so, the Carrier may without notice unpack the Goods if packed in Containers and/or store the Goods ashore, afloat, in the open or under cover at the sole risk of the Merchant. . . .”

In the present case the parties agreed that the Merchant should have the benefit of 14 days free time at Chittagong.

The present proceedings are the culmination of the dispute between the carrier and the shipper. By a claim form issued on 10^th June 2013 the carrier sought to recover the sum of US$577,184 in respect of demurrage incurred up to 30^th April 2013 and said still to be accruing at the rate of US$840 a day. Its case was that demurrage would continue to accrue at that rate until the containers were redelivered. By its re-amended points of defence the shipper alleged that its obligation to redeliver the containers was conditional upon the nomination of a place at which redelivery was to take place. No place of redelivery had been nominated and no demurrage was therefore payable. It also contended that the carrier should have mitigated its loss by exercising its rights under the bills of lading to unpack the containers and dispose of the goods or by purchasing replacement containers. It was not part of the shipper’s case at that stage that the contracts of carriage had been discharged as a result of its own repudiatory breach.

The matter came on for trial before Leggatt J. As part of his skeleton argument for the trial Mr. Pearce, who represented the shipper, sought to raise for the first time an argument that by late 2011 or early 2012 his client’s inability to redeliver the containers within the foreseeable future amounted to a repudiation of the contracts which the carrier was obliged to accept, thereby bringing to an end any continuing obligation to pay demurrage. The judge allowed him to argue the point and gave him permission to amend the points of defence in order to ensure that it was properly pleaded. That decision has given rise to one of the grounds of appeal, to which it will be necessary to refer in due course.

The trial concluded on 2^nd December 2014. A few days later two additional points occurred to the judge on which he sought the parties’ assistance. On 8^th December 2014 he wrote to the parties inviting their comments on the construction of clauses 14.8 and 14.9 of the bill of lading and on whether, if clause 14.8 had the effect for which the carrier had contended, it could be regarded as a genuine pre-estimate of damages rather than a penalty. On 22^nd December 2014 the judge wrote to the parties again. He referred to the fact that the argument had developed in ways that did not reflect the statements of case and proposed that, in order to bring the case to a conclusion in a fair and orderly way, the parties should be given an opportunity to amend their pleadings and file further submissions on any points not previously covered by them. In the event, both parties served draft amendments to their statements of case and further written submissions on the points raised by them.

In a judgment delivered on 12^th February 2015 the judge held that the carrier was entitled to recover demurrage for the period between the expiry of the 14 days’ free time and the 27^th September 2011, when it received the message to which I referred earlier. He rejected the shipper’s submission that demurrage had not begun to accrue because the carrier had not nominated a place for redelivery, although he recognised that a failure to nominate a place might relieve the shipper of a liability for demurrage if it prevented him from redelivering. He also rejected a submission arising from a question he had himself raised after the close of the hearing that demurrage did not begin to run unless the containers had actually been delivered to the merchant, holding that free time started to run on discharge of the containers from the vessel and that demurrage was payable after the expiry of the free time.

The judge rejected what had originally been the shipper’s primary defence, holding that the carrier had not failed to mitigate its loss by failing to exercise its rights under the bill of lading or by failing to take proceedings in Bangladesh to secure their release. He also held that the ordinary principles relating to mitigation of loss do not apply in a case in which the parties had agreed a daily rate of demurrage as liquidated damages for the detention. In his view no distinction was to be drawn for that purpose between the daily rate of demurrage and the period for which it continued to accrue.

However, in the judge’s view the central issue was whether the shipper had repudiated the contracts of carriage and if so, what effect that had on the continuing obligation to pay demurrage. As to that, he held that by 27^th September 2011, when the shipper informed the carrier that there was no realistic prospect of its being able to redeliver the containers, the delay had become so prolonged as to frustrate the commercial purpose of the adventure and that the shipper was therefore in repudiatory breach of all the contracts of carriage. After discussing the speech of Lord Reid in White & Carter (Councils) Ltd v McGregor [1962] A.C. 413 and its application in a number of subsequent cases, he held that, once there was no realistic prospect that the shipper would perform its remaining primary obligations, the carrier ceased to have any legitimate interest in keeping the contracts of carriage alive in the hope of future performance.

It was in the course of reaching that conclusion that the judge considered whether clause 14.8 was penal in nature. At an earlier stage in the proceedings His Honour Judge Mackie Q.C. had dismissed an application by the shipper to amend its points of defence in order to raise that argument. It is not surprising, therefore, that the carrier argued that the issue was res judicata and the point was therefore not open to the shipper. However, the judge took the view that the earlier application to amend had been concerned only with the daily rate of demurrage and that the shipper was not precluded from contending that clause 14.8 was penal if it provided for the payment of demurrage indefinitely. After considering recent developments in the law relating to penalties, in particular the decision of this court in Makdessi v Cavendish Square Holdings B.V. [2013] EWCA Civ 1539, [2014] 2 All E.R. (Comm) 125, he held that if the bill of lading had given the carrier an unfettered right to claim demurrage indefinitely, its effect would have been penal, but in fact it did not do so, because the carrier had no legitimate interest in keeping the contract alive after it had been repudiated on 27^th September 2011 merely in order to claim demurrage.

From all this it can be seen that, although the judge canvassed a number of other issues, his decision ultimately turned on his conclusion that the shipper had repudiated the contracts of carriage and the carrier had no legitimate interest in affirming them.

The notice of appeal and the respondent’s notice between them give rise to four main points: (i) whether under the terms of the bills of lading the shipper became liable to pay demurrage in the first place; (ii) whether the judge was entitled to find that by 27^th September 2011 the commercial purpose of the adventure had become frustrated; (iii) if not, whether the commercial purpose of the adventure had become frustrated by 2^nd February 2012, when the carrier offered to sell the containers to the shipper; and (iv) whether, if the shipper had repudiated the contracts of carriage, the carrier was bound to accept that repudiation as discharging them. Although none of them played a prominent role in the arguments before us, three additional points raised in the judgment call for comment: (v) whether the carrier’s right to recover demurrage was affected by the existence of a general duty of good faith in matters of contract; (vi) whether clause 14.8 was or might be penal in nature; and (vii) whether the carrier was in breach of a duty to mitigate the loss caused by the delay.

Although the form of bill of lading used in this case makes provision for carriage between inland places of collection and delivery, the carriage covered by the bills of lading in this case was from the port of loading to the port of discharge. The relevant parts of clause 14.8 for present purposes provided that free time commenced on the day the containers were discharged from the vessel and imposed an obligation on the merchant to return them to a place nominated by the carrier before or at the end of the free time.

Mr. Berry Q.C. submitted that the obligation to redeliver the containers at or before the expiry of the free time was conditional upon the merchant’s having taken delivery of them and on the carrier’s having nominated a place of redelivery. In support of the first he relied on clause 20.2, which obliges the merchant to take delivery of the goods within the agreed time, and submitted that the obligation to redeliver the containers cannot arise until the merchant has taken delivery of them. As to the second, he submitted that the merchant could not be in breach of contract in failing to redeliver the containers to a place nominated by the carrier if the carrier had not nominated a place for their redelivery.

The judge rejected both of those submissions and in my view he was right to do so. Clause 14.8 has to be understood in the broader context of the carriage of goods by sea. In that context the concept of demurrage is well recognised as the payment of liquidated damages for the detention of the carrying vessel beyond the laydays at the port of loading or discharge. In the context of container transport “free time” is the equivalent to laydays and establishes the period included in the freight for which the container is at the disposal of the merchant. One would naturally expect, therefore, that free time would begin to run when the container is put at the merchant’s disposal at the agreed destination. In the case of port to port carriage, clause 14.8 provides that free time is to run from the day the container is discharged from the vessel. On the plain language of the clause, therefore, it is clear that time began to run from the date of discharge. Clause 20.2 is dealing with a different matter altogether, namely, the merchant’s obligation to take delivery of the goods within the free time and the carrier’s right to take matters into its own hands, if he fails to do so, by unpacking the containers and putting the goods into store. In my view clause 20.2 has no direct bearing on clause 14.8; the failure to take delivery of the goods within the free time by unpacking the containers merely provides the springboard for the carrier’s right to do the job itself.

The judge held that the nomination of a place for redelivery was not a condition precedent to the obligation to pay demurrage. In my view that was clearly correct. Under clause 14.8 the running of free time was triggered by the discharge of the containers and the carrier could not be expected to nominate a place for redelivery before the containers had been discharged. Once the free time had expired demurrage began to run as liquidated damages for the detention of the containers. That detention continued, whether or not the carrier had nominated a place for redelivery, until the merchant was ready and willing to redeliver the containers. If at that stage the carrier had failed to nominate a place for redelivery and had thereby prevented the merchant from redelivering the containers, I agree with the judge that a claim for demurrage would be met by cross-claim for damages in an equivalent amount. However, in this case questions of that kind do not arise.

It is convenient to deal with issues (ii) and (iii) together, since they are closely related. The judge held that property in individual parcels of goods passed to the consignee as and when payment was made in respect of them. As a result, when on 23^rd May 2011 the shipper received payment in respect of the goods covered by the first four bills of lading, title in those goods passed to the consignee. On that basis he held that by some time in early June 2011 the shipper had become wholly and finally disabled from further performance of those contracts. He continued:

“87.

This was not immediately apparent to the Carrier. On 27 September 2011, however, the Shipper informed the Carrier that it did not have legal title to the goods as they had been paid for . . . . The Shipper had not by that date yet been paid for the third lot of four containers shipped under the final bill of lading. However, the Carrier did not know this and would reasonably have understood from the email of 27 September 2011 that there was no realistic prospect of the Shipper being able to arrange for any of the containers to be collected. I in any event consider that by this time the delay in collecting the goods had become so prolonged as to frustrate the commercial purpose of the venture.

88.

In these circumstances I find that from 27 September 2011 the Shipper was clearly in repudiatory breach of all the contracts of carriage.”

As I have already mentioned, the question whether the shipper had repudiated the contracts of carriage, and if so what the consequences were, did not arise on the pleadings as they stood at the beginning of the trial, but was added at the instigation of the judge after the conclusion of the hearing. The carrier objected to its doing so on the grounds that a plea of that kind would give rise to issues of fact which had not been canvassed at trial. In the event the judge gave permission for the amendment on the basis of an assurance by the shipper that it was seeking to do no more than place a limit on its liability for demurrage. As he said in his judgment, in his view the amendments were simply bringing the statements of case into line with the arguments made at trial. He did not think that the carrier had suffered any prejudice by the way in which the case had developed.

Before us Mr. Davey Q.C. submitted that the judge should not have given permission for such a radical amendment to the case at that stage. He contended that, rather than simply allowing the parties to bring the statements of case into line with the arguments put forward at trial, the judge had suggested new defences and had decided the case partly on the basis that after the shipper’s repudiation damages were at large and the carrier had failed (indeed, had not attempted) to prove that it had suffered any loss. He invited us to set aside the judge’s grant of permission to amend and with it the basis of the judgment.

Although the course taken by the judge in this case was unusual and not one to be encouraged, I am far from persuaded that it was not open to him, having regard to the nature of the issues and the basis on which the case had been argued. In his opening skeleton for the trial counsel for the shipper argued that demurrage ceased to accrue once the contracts of carriage had been repudiated. Although the argument was expressed in terms of mitigation, it was in substance that the carrier was bound to accept the shipper’s repudiation and sue for any loss suffered in consequence. It may be that some confusion arose from the way in which the shipper characterised its case, but I think the nature of the argument was clear and the judge was well aware of the extent to which the carrier had had a fair opportunity to deal with it. To say, as Mr. Davey did, that the argument gave rise to new factual issues relating to the carrier’s proof of loss puts the matter too high. At no time was it ever suggested that the carrier had suffered any specific loss as a result of the continued detention of the containers, and indeed, since replacement containers were at all times readily available, it is difficult to see how it could have done so. In my view there was no prejudice to the carrier in allowing the pleadings to be brought into line with the arguments made at trial and no grounds on which this court could properly set aside the judge’s order.

Mr. Davey submitted that the judge was wrong in holding that the commercial purpose of the adventure had been frustrated by 27^th September 2011 and also in holding that the carrier was bound to accept the shipper’s repudiation as discharging the contracts of carriage and bringing an end to its obligation to pay demurrage. He argued that although the shipper remained liable as the original party to the bill of lading, its obligation could, and normally would, be performed by the consignee, who would take delivery of the containers, unpack them and return them to the carrier or his agent. The fact that in this case the shipper itself could no longer control the goods did not itself lead to the conclusion that its obligation under the contract could not be performed. Moreover, since the last group of containers had been discharged only on 27^th June 2011, some 3 months earlier, a reasonable person would not consider that the delay had been sufficient to frustrate the commercial object of the venture as a whole. He submitted that the earliest time by which it had become apparent to a reasonable observer that the containers could not be redelivered within the foreseeable future was 2^nd February 2012, when the carrier offered to break the deadlock by selling them to the shipper.

Although the judge found that by some time in June 2011 the shipper had become wholly and finally disabled from further performance of the first four bill of lading contracts because property in the goods had passed to the consignee, I think he must have been directing his mind simply to the shipper’s own position. I do not think that he can have intended to hold that the contract had at that stage been repudiated, because both parties to the contracts of carriage must have contemplated that property in the goods would or might be transferred to the consignee shortly after the goods had been loaded and in any event well before the containers reached Chittagong. The fact that the shipper would be unable personally to perform the remaining obligations of unpacking the containers and returning them to the carrier could not itself amount to a repudiation of the contracts and the judge did not so hold. On the contrary, he held that the shipper was in repudiation only from 27^th September 2011.

I referred earlier to the terms of the message sent by the shipper to the carrier on 27^th September 2011. Mr. Davey submitted that it did not amount to a clear statement of inability to perform the contract and that on the contrary it demonstrated that the shipper was continuing to make every effort to redeliver the containers, but for the time being was unwilling to settle the claim for demurrage, because it was not confident of being able to recover from one or other of the banks which by then was holding the bills of lading. In my view there is much force in that argument, but it does not ultimately assist the carrier as long as the judge’s finding that by 27^th September 2011 the delay was already sufficient to frustrate the commercial purpose of the venture stands.

It was common ground on the basis of authorities such as Universal Cargo Carriers Corpn v Citati [1957] 2 Q.B. 401 and Nitrate Corporation of Chile Ltd v Pansuiza Compania de Navegacion S.A. (The ‘Hermosa’) [1980] 1 Lloyd’s Rep. 638 that the test for determining whether the shipper’s inability to redeliver the containers amounted to a repudiation of the contract was in substance the same as it would be for frustration, namely, whether the delay was such as to render performance of the remaining obligations under the contract of carriage radically different from those which the parties had originally undertaken, or (where the delay was continuing) whether it would be regarded by a reasonable person in the position of the parties as being likely to last that long. In cases in which the contract has been affected by delay which is of uncertain duration, as, for example, in the case of a strike, the question is one of fact and degree on which opinions may sometimes reasonably differ: see Pioneer Shipping Ltd. v B.T.P. Tioxide Ltd. (The ‘Nema’) [1982] A.C. 724 per Lord Diplock at page 744. As Lord Roskill (with whom the other members of the House agreed) put it in that case at page 752D-F:

“Whether or not the delay is such as to bring about frustration must be a question to be determined by an informed judgment based upon all the evidence of what has occurred and what is likely thereafter to occur. Often it will be a question of degree whether the effect of delay suffered, and likely to be suffered, will be such as to bring about frustration of the particular adventure in question. Where questions of degree are involved, opinions may and often legitimately do differ. Quot homines, tot sententiae. The required informed judgment must be that of the tribunal of fact to whom the issue has been referred. That tribunal, properly informed as to the relevant law, must form its own view of the effect of that delay and answer the critical question accordingly.”

The judge’s finding, therefore, can be overturned only if it can be shown that it was not reasonably open to him.

Mr. Davey criticised the judge’s finding as being both unreasoned and unsustainable. As he pointed out, the date appears to have been chosen by reference to the shipper’s message mentioned earlier and not by an analysis of the periods of delay affecting the different contracts and its effect in each case. By 27^th September 2011 the length of delay varied (after allowing for the free time) between four months and two-and-a-half months, periods far too short, he submitted, to justify the conclusion that all the contracts of carriage had become frustrated.

The impasse in this case had been created not so much by the shipper’s loss of control over the cargo as by the refusal of the consignee or the bank holding the bills of lading to deal with the goods sensibly or to apply to the court for an order empowering them to unpack and store the goods for the account of whom it might concern. The customs authorities would not allow the carrier to unpack the containers without an order of the court and there was no sign that such an order was likely to be forthcoming in the foreseeable future. In those circumstances I can well understand that there might be real concern about how long the delay might continue and, if the containers had been the kind of profit-earning equipment that could not readily be obtained elsewhere, the commercial purpose of the adventure might be found to have become frustrated. However, one would normally expect to see some support in the judgment for such a conclusion based on the effect of the delay and its likely duration. In fact, the judge did not explain how the delay that had occurred by 27^th September 2011 or its likely continuation led him to his conclusion. I find that surprising, because, in the absence of some special circumstances it is hard to see how such a relatively short delay can have been sufficient to frustrate the commercial purpose of the adventure. I can see a possibility that the uncertainty surrounding the future course of events and the shipper’s ability to redeliver the containers might lead to such a conclusion, but the judge did not base his decision on any assessment of that kind. With all respect to the judge, therefore, I do not think that his finding can stand.

However, by early February 2012 the delay had continued for another four months. On 2^nd February 2012 the carrier offered to sell the containers to the shipper in order to provide a solution to the problem. Negotiations ensued, albeit unsuccessfully. That, it seems to me, was the clearest indication that the commercial purpose of the adventure had by then become frustrated. Such a sale would have discharged the shipper’s obligation to redeliver the containers and with it the final obligations under the contracts of carriage which still remained to be performed. In my view the shipper was in repudiation of the contract as from that date.

The judge rightly recognised that a repudiatory breach of contract does not automatically discharge the parties from further performance but gives the innocent party the right to choose whether to treat it as having that effect. He then embarked on an extensive discussion of Lord Reid’s well-known observations in White & Carter (Councils) Ltd v McGregor concerning the possible need for the innocent party to have a legitimate interest in affirming the contract if he wished to insist on its performance. Having considered a number of cases in which that question has been discussed, including Stocznia Gdanska SA v Latvian Shipping Co [1996] 2 Lloyd’s Rep 132 and Isabella Shipowner SA v Shagang Shipping Co Ltd (The “Aquafaith”) [2012] EWHC 1077 (Comm), [2012] 2 Lloyd’s Rep 61, and having also referred to what he described as an “increasing recognition in the common law world of the need for good faith in contractual dealings”, he reached the following conclusion:

“104.

I have no doubt that the Carrier had a legitimate interest in keeping the contracts of carriage in force for as long as there was a realistic prospect that the Shipper would perform its remaining primary obligations under the contracts by procuring the collection of the goods and the redelivery of the containers. Once it was quite clear, however, that the Shipper was in repudiatory breach of these obligations and that there was no such prospect, the Carrier no longer had any reason to keep the contracts open in the hope of future performance.”

Having then considered whether clause 14.8 was penal in nature and for that reason unenforceable, he held that, if (contrary to his earlier conclusion) it had entitled the carrier to continue to recover demurrage indefinitely, despite there being no evidence of any actual loss, it would have been. In his view that reinforced his conclusion that the carrier had no legitimate interest in affirming the contract. He said:

“121.

I accordingly find that the Carrier had no basis for claiming on 27 September 2011 that it was suffering any loss as a result of the Shipper’s breach of contract. In these circumstances I conclude that the Carrier had no legitimate interest in keeping the contracts of carriage in force after that date in order to continue claiming demurrage. Its election to do so, and to go on doing so ever since, can in my view properly be described as wholly unreasonable. It is wholly unreasonable because the Carrier has not been keeping the contracts alive in order to invoke the demurrage clause for a proper purpose but in order, in effect, to seek to generate an unending stream of free income.”

Mr. Davey’s primary submission was that the shipper’s obligation to redeliver the containers continues indefinitely and that demurrage is therefore payable from day to day in respect of its continuing breach and continues to accrue even now. He therefore criticised this part of the judgment, in particular on the grounds that it was not unreasonable in the circumstances in which the carrier found itself to insist on payment for the continued use of the containers by those interested in the cargo for as long as the situation remained unresolved. He did not, however, challenge the judge’s analysis root and branch by seeking to persuade us that the principle of legitimate interest, on which the judge ultimately based his decision, was not well-founded in law.

In the celebrated passage in his speech in White & Carter (Councils) v McGregor Lord Reid said at page 431:

“It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If a party has no interest to enforce a stipulation, he cannot in general enforce it: so it might be said that, if a party has no interest to insist on a particular remedy, he ought not to be allowed to insist on it.”

Lord Reid was directing himself to a case in which the innocent party could perform his obligations under the contract, and so earn the price of his services, without the co-operation of the other party. The present case is rather different, however, because the carrier has performed all its obligations under the contracts of carriage and the shipper’s breach consists only of the failure to unpack and redeliver the containers. That is the obligation which the shipper has repudiated. The question, then, is whether the carrier can refuse to accept the shipper’s repudiation as discharging the contract (and with it his continuing obligation to redeliver the containers) and if so, whether it can obtain a remedy in damages for their continued detention.

In Attica Sea Carriers Corp v Ferrostaal Poseidon Bulk Reederei (The ‘Puerto Buitrago’) [1976] 1 Lloyd’s Rep. 250 a vessel had been chartered by demise on terms which required the charterer to redeliver her at the end of the charter period in the same good order and condition as on delivery and to carry out at its own expense any repairs necessary in order to do so. In the event, the vessel needed extensive repairs which, if carried out, would have cost twice as much as her value when repaired. The charterer declined to carry out the repairs and the owner refused to accept redelivery until it had done so, claiming that hire continued to be payable for as long as the vessel remained in the possession of the charterer. This court held that carrying out the necessary repairs was not a pre-condition to effective redelivery, so that the charterer could redeliver the vessel in her unrepaired state, even though that involved a breach of contract. In the alternative, applying the principle derived from the passage in Lord Reid’s speech in White & Carter to which I have referred, all three members of the court held (albeit obiter) that, if that were wrong, the owner ought in all reason to have accepted the charterer’s repudiation, since damages provided it with an adequate remedy. Accordingly, it could not recover hire.

An unsuccessful attempt was made to rely on the White & Carter principle in Gator Shipping Corpn v Trans-Asiatic Oil Ltd S.A. (The ‘Odenfeld’) [1978] 2 Lloyd’s Rep 357. Kerr J. discussed in detail the decision in White & Carter itself and its application in The ‘Puerto Buitrago’, which he clearly regarded as an extreme case in which a decision to affirm the contract would have been wholly unreasonable. In a number of subsequent cases, which were collected and discussed by Cooke J. in Isabella Shipowner S.A. v Shagang Shipping Co. Ltd (The ‘Aquafaith’) [2012] EWHC 1077 (Comm), [2012] 2 Lloyd’s Rep. 61, some attention has been paid to the extent to which the innocent party’s refusal to accept the repudiation must depart from what would be regarded as reasonable in order to bring the principle into play. The outcome of the debate has been, perhaps inevitably, inconclusive, but the decisions reflect a continuing recognition that the principle has a role to play in appropriate cases.

As the judge said, it is settled law that a repudiatory breach of contract does not automatically discharge the parties from performance of their remaining primary obligations (usually referred to as “terminating” the contract); it gives the innocent party a choice between treating those obligations as discharged and affirming the contract in order to wait to see whether the guilty party performs its obligations when the time comes. The authority relied on by the judge as illustrating and supporting that principle was Geys v Société Générale [2013] 1 A.C. 523, a decision concerning the repudiation by an employer of a contract of employment. The case raised a number of questions, but the only one of relevance to the present case was whether the contract had been terminated when the employer wrongfully dismissed the employee, or only when the employee accepted the employer’s conduct as having that effect. The Supreme Court held that the general rule applies to contracts of employment and that the contract came to an end only when the employee elected to treat the employer’s conduct as terminating it. That was the case despite the fact that it was accepted that an employee who has been summarily dismissed cannot sue for his wages in respect of the period after his dismissal.

The decision is of importance primarily because it laid to rest the proposition that in the context of the law relating to employment a contract could be discharged unilaterally, i.e., that a repudiatory breach by one party was sufficient to bring it to an end without the consent of the other. It is also important, however, because it explains why the innocent employee cannot recover his wages for the period during which the contract remains alive. Lord Wilson, with whom Lord Hope, Lady Hale and Lord Carnwath agreed, emphasised the distinction between rights and remedies. In paragraph 77, having referred to equity’s unwillingness to order specific performance of a contract of employment, he explained that a contract of employment was a special case, but only in terms of remedies. Then, having referred to a passage in the judgment of Erle J. in Goodman v Pocock (1850) 15 Q.B. 576, 583–584 to the effect that after dismissal the employee could not hold himself available for work and sue for his wages, he said:

79.

Ever since then the law has been clear that, save when, unusually, a contract of employment specifies otherwise, the mere readiness of an employee to resume work, following a wrongful dismissal which he has declined to accept, does not entitle him to sue for his salary or wages. “He cannot”, as Salmon LJ said in Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 Q.B. 699 , 726, “sit in the sun …” The law takes the view that it is better for the employee (as well, of course, as for the employer) that his claim for loss of wages or salary should be confined to a claim for damages and therefore be subject to his duty to mitigate them by taking all reasonable steps to find other work. . . . It has added to the making of a contract of employment into a special case—but, again, only in terms of remedies. Emphasis added.)

In paragraph 86 Lord Wilson discussed the decision in Decro-Wall International S.A. v Practitioners in Marketing Ltd [1971] 1 W.L.R. 361. The case arose out of the repudiation by the claimant, a French manufacturer of tiles, of a contract under which the defendant had agreed to provide it with marketing services. The claimant relied on Lord Reid’s observation in White & Carter about the need for the existence of a legitimate interest in keeping the contract alive in support of its argument that its own repudiation had brought the contract to an end. The court rejected that submission and re-emphasised that the contract remained in being until the innocent party elected to treat it as discharged. Lord Wilson referred with approval to a passage in the judgment of Sachs L.J. in which he observed that: “[I]t is the range of remedies that is limited, not the right to elect.”

Lord Sumption dissented. He held in paragraph 130, basing himself on an earlier passage in Lord Reid’s speech in White & Carter, that there is a general principle of law that an innocent party to a repudiated contract cannot treat it as subsisting unless he can either perform it without the co-operation of the other or compel him to provide that co-operation. That does not assist the shipper in the present case, however, since the carrier has already performed substantially all its obligations and can even nominate a place for redelivery of the containers (the only obligation that might be said to be outstanding) without the co-operation of the shipper.

It may be that the implications of Lord Reid’s observation in White & Carter and the principles of law which underpin it have yet to be fully identified, but the existence of the broad principle towards which he pointed has been accepted in a number of cases, of which The ‘Puerto Buitrago’ is but one example. In Clea Shipping Corp v Bulk Oil International Ltd (The ‘Alaskan Trader’) [1984] 1 All E.R. 129 Lloyd J. upheld the decision of a commercial arbitrator that the owner of a vessel let under a time charter could not recover hire because it had no legitimate interest in affirming the charter following its repudiation by the charterer. The judge in that case described the principle as being that the court on equitable grounds refuses to allow the innocent party to enforce his full contractual rights, but I am inclined to think that the observations of Lord Reid himself in White & Carter and of Lord Wilson in Geys v Société Générale suggest that the true explanation may be that in an appropriate case the court in the exercise of its general equitable jurisdiction will decline to grant the innocent party the remedy to which he would normally be entitled. This may appear to be a distinction without a difference and in most cases that may be so, but in some cases, of which Geys v Société Générale is an example, it is a distinction of importance.

However, in my view the proposition that in the present case demurrage can continue to accrue indefinitely until the containers are redelivered to the carrier fails to take account of the fact that by 2^nd February 2012 the remaining commercial purpose of the adventure had been frustrated, i.e., the performance of the contracts of carriage had become radically different from that which the parties had envisaged when they entered into them. That situation having been brought about by a breach of contract on the part of the shipper, two questions arise: can the carrier still insist on performance of the shipper’s obligation to redeliver the containers; and if not, what damages flow from the breach of that obligation?

The fact that by 2^nd February 2012 the point had been reached at which the commercial purposes of the adventure had become frustrated meant that in commercial terms the containers had been lost. They could no longer be redelivered in the context of the original adventure (if at all). Lord Reid’s observations in White & Carter and the dicta the cases to which I have referred were directed to cases in which the party in breach was refusing to perform continuing obligations or obligations that fell due for performance at a future date. In such cases the existence of a legitimate interest in holding the defaulting party to its obligations may arise. Although the party in default may already be in breach of its obligations, the important question for these purposes is whether the innocent party has a legitimate interest in affirming the contract by insisting on performance in the future or is required to accept an anticipatory breach of all obligations remaining to be performed.

If it had been open to the carrier to affirm the contract I should have agreed with the judge that it had no legitimate interest in continuing to insist on performance by the shipper of its remaining obligations under the contracts. The accrued demurrage already exceeded by a considerable amount the value of the containers. Replacement containers were readily available at Chittagong and the carrier had no interest in keeping the contract alive other than to earn demurrage pending their return. This is a classic case in which it would have been wholly unreasonable for the carrier to insist on further performance. The only reasonable course for it to take would have been to accept the shipper’s failure to redeliver the containers as a repudiation of the contract. However, I do not think that the option of affirming the contracts remained open to the carrier once the adventure had become frustrated, because at that point further performance became impossible, just as it would if the shipper or those for whom it was responsible had caused the containers to be destroyed. With respect to the judge, therefore, I do not think that this is a case in which the White & Carter principle applies. As at 2^nd February 2012 the shipper could no longer redeliver the containers and, having brought about that situation by its breach, had become liable in damages for their loss.

The loss to the carrier resulting from the failure to return the containers is represented by their value on 2^nd February 2012 when the commercial purposes of the adventure became frustrated. (The provision for the payment of demurrage did not contemplate a total loss of the containers and has no application to it.) If there were any evidence that the containers had deteriorated significantly during the period of their detention, there might be a question whether the payment of demurrage was intended to compensate the carrier for that element of its loss. If the deterioration were simply a result of the passage of time, I think that it was, but it is unnecessary to reach a final decision on that point because for better or worse the judge found that at all material times replacement containers were available for immediate delivery at Chittagong at an agreed cost of US$3,262.

The judge drew support for his conclusion from what he described as an increasing recognition in the common law world of the need for good faith in contractual dealings. The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences and I do not think it is necessary or desirable to resort to it in order to decide the outcome of the present case. It is interesting to note that in the case to which the judge referred as providing support for his view, Bhasin v Hrynew, 2014 SCC 71, [2014] 3 S.C.R.494, the Supreme Court of Canada recognised that in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland [2013] EWCA Civ 200 this court had recently reiterated that English law does not recognise any general duty of good faith in matters of contract. It has, in the words of Bingham L.J. in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] Q.B. 433, 439, preferred to develop “piecemeal solutions in response to demonstrated problems of unfairness”, although it is well-recognised that broad concepts of fair dealing may be reflected in the court’s response to questions of construction and the implication of terms. In my view the better course is for the law to develop along established lines rather than to encourage judges to look for what the judge in this case called some “general organising principle” drawn from cases of disparate kinds. For example, I do not think that decisions on the exercise of options under contracts of different kinds, on which he also relied, shed any real light on the kind of problem that arises in this case. There is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement. The danger is not dissimilar to that posed by too liberal an approach to construction, against which the Supreme Court warned in Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619.

I think it appropriate to refer briefly to this part of the judgment below, despite the fact that it did not form a significant part of the arguments on the appeal, because it formed one of the grounds of appeal and was the subject of written submissions. It is also a point of potential general significance. Judge Mackie refused to give the shipper permission to amend its points of defence to raise the question whether the daily rate of demurrage was penal because he considered that the argument had no prospect of success. In my view he was right to do so, but the judge’s concern was directed to a different question, namely, whether a clause which on the face of it allowed the carrier to recover demurrage indefinitely should for that reason be regarded as penal. Since I agree with the judge that the carrier did not have an unfettered right to affirm the contract and recover demurrage indefinitely, the point does not arise, but as far as I know it has never been suggested that a clause in a voyage charter providing for the payment of demurrage at a daily rate may be regarded as penal simply because it fixes no express limit on the period of the charterer’s liability. The reason is that, as the judge himself held (and as I agree), in an appropriate case general principles of law impose a limit on the scope of the charterer’s liability.

By its respondent’s notice the shipper contended that the judge’s decision should be upheld on the alternative ground that the carrier ought to have mitigated the loss flowing from the detention of the containers by obtaining replacements. The judge rejected that submission, relying on the decision of this court in Abrahams v Performing Rights Society Ltd [1995] I.C.R. 1028 and, as he saw it, on the absence of any distinction for these purposes between the rate of demurrage and the period in respect of which it was payable.

It was common ground before us that the principles relating to mitigation had no application to the daily rate of demurrage, which reflected the parties’ agreement on the extent of the loss flowing from the detention of the containers, but Mr. Berry submitted that the judge had wrongly failed to recognise a critical distinction between the agreed daily rate and the period for which it became payable. He argued that the carrier had an obligation to minimise the duration of the delay, and thereby his loss, in so far as he was able to do so.

In view of my conclusion on the issue of repudiation and its effect on the contracts of carriage in this case, it is unnecessary to reach a final decision on this question. My provisional view, however, is that the judge reached the right conclusion. The assumption underlying clause 14.8 is that any delay beyond the free time in redelivering the containers would deprive the carrier of the use of a profit-earning chattel, so causing it loss. The daily rate of demurrage was agreed on the assumption that it was sufficient to compensate the carrier in full for that loss. The containers would not cease to be profit-earning chattels simply because the carrier obtained additional containers to meet any specific requirement. The shipper’s argument assumes that any containers obtained by the carrier, whether to meet an immediate requirement for additional space or otherwise, could be regarded as substitutes for those which the shipper continued to detain, but that is not the case. They would simply have increased the carrier’s stock. They would be true substitutes only if the contract were terminated without the redelivery of the original containers.

The cases on which Mr. Berry relied, Moller v Jecks (1865) 19 C.B. (N.S.) 331 and Smailes and Son v Hans Dessen & Co. (1906) 12 Com. Cas. 117, were both concerned with delays to cargo-carrying vessels and thus with very different situations. Only if it had been possible for the carrier to take steps to obtain redelivery of the containers might they have provided any useful analogy. In fact, I agree with the judge that Moller v Jecks was not concerned with demurrage as such but with damages for detention of the vessel at the port after discharge had been completed. I accept that on one view the judgments in Smailes and Son v Hans Dessen & Co. proceed on the assumption that the vessel’s owners were under a duty to take reasonable steps to minimise the delay in discharging, but the case is equally explicable on the basis that the owners were under an obligation not to delay discharging by acting unreasonably. I doubt whether the case provides authority for any broader proposition, but in any event it is not on a par with the present case, in which it was not possible for the carrier to take any steps to obtain redelivery of the containers.

For the reasons I have given I have reached the conclusion that the judgment below should be varied to reflect the carrier’s right to recover demurrage in respect of the detention of the containers up to and including 1^st February 2012 and damages in respect of the loss of the containers calculated by reference to their value on 2^nd February 2012, and that to that extent the appeal should be allowed.

I entirely agree with my Lord’s penetrating analysis of this interesting case. I add a few words only on the consequence of our conclusion that by 2 February 2012 the commercial purpose of the adventure had become frustrated, by reason of the shipper’s continuing breach of contract consisting in its failure to redeliver the containers within the free time allowed, which thereby became repudiatory. Was it open to the carrier thereafter to assert an entitlement to continuing demurrage, or did the contract come to an end as from 2 February 2012?

In Decro-Wall, above, Sachs L.J. at page 375 said this:

“The truth of the matter is that there are a great many cases in which it is of no benefit to the innocent party to keep the contract alive for the simple reason that, in the long run, unless the repudiating party can be persuaded or impelled to change his mind and withdraw his repudiation, the only remedy available to the innocent party will lie in damages. So there are vast numbers of cases where the innocent party can in one sense be said to be forced to adopt the only practicable course because any other would be valueless. In such cases it is the range of remedies that is limited, not the right to elect.”

Left to my own devices, I think that I would have concluded that Sachs L.J. was there doing no more than to point out that “the reality is that deadlocked situations of this kind are usually resolved by the practicalities” – see per Kerr J in The ‘Odenfeld’, above, at page 375. Salmon L.J. had already made that point in his judgment in Decro-Wall at page 370. Thus I think that there is a danger in taking the last sentence of what Sachs L.J. said out of context. I think that Sachs L.J. was saying that because the range of remedies is for practical purposes limited, usually the situation will be resolved by reference to those practicalities. I am not sure that he was saying that there are circumstances in which the range of remedies available to the innocent party is by operation of law limited so as to prevent the exercise of one or more of those remedies otherwise theoretically available.

The first enquiry to which this gives rise in my mind is whether it is possible to characterise the conduct of either the carrier or of both the carrier and the shipper as treating the contract as, as from 2 February 2012, effectively at an end. In many if not most cases in which the conundrum with which we are here concerned arises this is the practical solution to an apparent problem of analysis. However the second enquiry, prompted by the first, is whether we are in truth dealing with a deadlocked situation.

Unfortunately the practical solution is not available here. It is perhaps worth setting out the judge’s relevant findings:

“17.

. . Some time in January 2012, however, there was a telephone conversation in which the Carrier offered to sell the containers to the Shipper. According to the Carrier's manager, Mr Sethuraman, who made this offer, the Shipper specifically asked for such an offer as a practical solution because the containers were likely to remain blocked for the foreseeable future. This discussion was referred to in an email from the Carrier to the Shipper dated 2 February 2012, which said: "we have already given the necessary solution from our side which is to buy our containers and settle up to date demurrage". According to its director, Mr Schonberger, the Shipper did not accept the Carrier's offer because the amount of money which the Carrier wanted for the containers was US$200,000 and the Shipper thought that this price was too high.

18.

In March and again in June 2012 the Shipper indicated that it was expecting a decision in the court proceedings which should clarify the situation. However, despite a series of emails from the Carrier in the second half of that year asking to know what was happening with the case, there was no response from the Shipper.

19.

It does not appear that any material development occurred during 2013.”

The judge might have added that throughout 2012 and 2013 the carrier regularly invoiced the shipper for demurrage alleged to be continuing to accrue. These proceedings were served in June 2013 claiming demurrage of US$577,184 up to 30 April 2013 “and continuing to accrue at the daily rate of US$840 thereafter”.

I would note in parenthesis that, as is apparent from the above, the carrier’s offer to sell the containers to the shipper was in fact made in January 2012, and not on 2 February, but I would agree that it is sensible to fix the relevant date by reference to the email sent on 2 February, which left the offer open for acceptance. This may be somewhat arbitrary but it is pragmatic. Whether or not delay is such as to bring about frustration calls for a pragmatic judgment.

Since manifestly the parties did not as from 2 February 2012 treat the contract as at an end, the theoretical problem of the unaccepted repudiation apparently arises starkly, unless of course the contract had in fact come to an end, irrespective of the carrier’s apparent affirmation.

The decision of the majority of the Supreme Court in Geys undoubtedly in my view marks a departure from the understanding of the law as emerging through the line of authority helpfully collected and considered by Cooke J in The “Aquafaith”, above. Those cases are, as Lord Sumption observed in his dissenting judgment in Geys, at [116] -

“116.

. . . authority for a general rule that the innocent party to a repudiated contract cannot treat it as subsisting if (i) performance on his part requires the co-operation of the repudiating party, and (ii) the contract is incapable of specific performance, with the result that that co-operation cannot be compelled. The purpose of the right to treat a repudiated contract as subsisting is to enable it to be performed at the option of the innocent party. It is difficult to see why the law should recognise such a right in a case where the contract cannot be either performed or specifically enforced.”

Cooke J in The “Aquafaith” put it like this:

“44.

The effect of the authorities is that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as "wholly unreasonable", "extremely unreasonable" or, perhaps, in my words, "perverse".”

We are of course bound by the decision in Geys but in my view it is distinguishable. Geys is, broadly speaking, a case in which the situation is as my Lord puts it at [36] above – a case where the innocent party has a choice between, on the one hand, treating the remaining obligations as discharged or, on the other hand, affirming the contract in order to wait to see whether the guilty party performs its obligations when the time comes. The present case is different. I do not believe that Lord Wilson in Geys had in mind a case where a contract has become repudiated because it is no longer capable of performance, as in the classic case of frustrating delay. That is the present case. Our conclusion is that as from 2 February 2012 the contract in its agreed form was not capable of performance – further performance in the changed circumstances brought about by the delay would be radically different from that agreed. The guilty party can no longer perform its obligations when the time comes. The time for performance of the obligations of the guilty party is long past. Redelivery of the containers at some future date would be an act radically different in kind from redelivery of the containers in accordance with the contractually agreed time-scale. In those circumstances, as it seems to me, the innocent party simply cannot treat the contract as subsisting because it is no longer capable of performance as agreed. There is no alternative to the conclusion that the contract has come to an end. The fact that the carrier continued to press for performance, in the shape both of redelivery of the containers and the payment of demurrage, is neither here nor there. Those were acts in vain, unrelated to an existing contract.

Lord Sumption in Geys at [116] of his judgment, which I have set out above, found it difficult to see why the law should recognise a right to treat a repudiated contract as subsisting when either it cannot be performed without co-operation of the repudiating party or it is incapable of specific performance. A case where further performance, by either party, would be radically different from that agreed by the terms of the contract seems to me an a fortiori case.

I also think that this is what Kerr J had in mind in The ‘Odenfeld’ when, after the observation which I have cited at paragraph 54 above, he said, at page 375:

“Moreover, the passage of time might in itself alter the legal position of the parties, because an insistence to treat the contract as still in being might in time become quite unrealistic, unreasonable and untenable.”

I would accordingly hold that the contract did not subsist after 2 February 2012. On that ground I support my Lord’s conclusion that demurrage is not recoverable after 1 February 2012 and that the carrier is entitled to recover damages for the loss of its containers, on the basis that they were lost on 2 February 2012. Those damages should be assessed by reference to the replacement cost found by the judge, US$3,262 per container.

I agree with both judgments.