MSC Mediterranean Shipping Company SA v Cottonex Anstalt

This case raises questions of some importance in international shipping about the nature and duration of an obligation to pay ‘container demurrage’.

The claimant, whom I will call “the Carrier”, is a Swiss company which carries on a container shipping business worldwide. According to its evidence, the claimant is currently the second largest carrier of containers in the world by number of container vessels operated and by container slot capacity. In 2013 it carried about 13,722,000 containers.

The defendant, whom I will call “the Shipper”, is a Lichtenstein Anstalt which trades in raw cotton.

The Carrier contracted with the Shipper to carry a total of 35 containers of raw cotton by sea from ports in the Middle East to Chittagong in Bangladesh. The containers used for the carriage were 40 foot ‘high cube’ containers provided by the Carrier. The cargo was shipped in three lots under five bills of lading. The first lot of 19 containers was loaded at Bandar Abbas in Iran under two bills of lading both dated 7 April 2011 and was discharged at Chittagong on 13 May 2011. The second lot of 12 containers was loaded at Bandar Abbas under two bills of lading dated 11 and 17 April 2011 and was discharged at Chittagong on 20 May 2011. The third lot of four containers was loaded at Jebel Ali in Dubai under a bill of lading dated 4 June 2011 and was discharged at Chittagong on 27 June 2011.

The Shipper sold the cotton to a company in Bangladesh called Regent Spinning Mills Ltd, which I will refer to as “the Consignee”. Payment was by confirmed letter of credit. The contract of sale dated 14 April 2011 contained a retention of title clause, which provided that “the goods remain the property of Seller until full execution of the payment by the Buyer”.

The Consignee has never collected the goods. Nor has anyone else. To this day the cotton remains at the Port of Chittagong, still packed inside the containers. The dispute in this case is about whether the Shipper is liable to pay the Carrier a daily charge, described as “demurrage”, for each day that the containers remain unavailable to the Carrier because they are still being used to hold the goods.

Shortly after the conclusion of the contract of sale, the market price of raw cotton collapsed and the Consignee sought to extricate itself from the contract. When the Shipper refused to cancel the contract, the Consignee sought to stop payment under the letter of credit by bringing proceedings in the courts of Bangladesh.

The Consignee commenced proceedings on 6 June 2011 against the banks which had respectively issued and confirmed the letter of credit. The Shipper was also named as a defendant, although it does not appear that the Consignee has alleged any breach of the contract of sale. Its case is that the banks were not entitled to pay against the documents presented under the letter of credit as some of the bills of lading had been fraudulently misdated to make it appear, falsely, that the goods had been shipped within the period required by the terms of the letter of credit.

On 15 June 2011 the Consignee obtained an interim injunction from the High Court in Bangladesh to restrain the issuing bank from making any payment under the letter of credit. The injunction was still evidently in place on 27 February 2013, when the court ordered that the injunction should continue for a further six months. There is no evidence which shows what, if anything, has happened in the proceedings since then.

In fact, on 23 May 2011, before the Bangladeshi proceedings were begun, the Shipper had already been paid under the letter of credit for the first two lots of cotton shipped under the first four bills of lading. The payment for the third lot shipped under the fifth bill of lading was subsequently made by the confirming bank to the Shipper on 30 January 2013.

In the period of some three and a half years during which the containers have been sitting in the Port of Chittagong, such attempts as have been made to retrieve the containers have come to nothing.

The Carrier has taken the position that it is for the Shipper or the Consignee to collect the goods and then unpack and return the containers. The Shipper has taken the position that it has no power to take delivery of the goods and that only the Consignee may do so. Meanwhile, the Consignee has made no attempt to collect the goods and has made it clear that it does not intend to do so. To add to the problems, the Bangladeshi customs authorities have apparently taken the position that they will not allow anyone to remove the containers from the yard where they are being stored without a court order.

On 3 July 2011 the Carrier was already complaining to the Shipper that the shipments were still lying uncleared in Chittagong. On 23 July 2011 the Carrier’s agent sent a formal notice to the Consignee and to the Shipper that the Carrier reserved the right to dispose of the cargo if it was not collected within 15 days and that the Consignee and the Shipper were being held responsible for all costs and charges caused by the failure to collect the goods. The Consignee responded to say that it was taking court proceedings based on an allegation that fraud had been committed in respect of the documents presented under the letter of credit and that it was not in a position to take any action to clear the consignment unless and until the issues raised in the proceedings had been resolved.

On 1 August 2011 the Carrier sent an email to the Shipper referring to the court proceedings and asking what actions the Shipper was planning to take to solve the problem with the Consignee and to pay the outstanding demurrage. This was followed up on 27 September 2011. The Shipper’s response on that date was that it did not have legal title to the goods as it had been paid for them. (In fact, payment had not at that stage been made for the third lot of four containers but the first two lots comprising 31 containers had been paid for.) The Shipper suggested that the bank would pay the demurrage charges “as soon as conflict and disputes between banks are solved”. The Carrier replied on 2 October 2011 asking for “a gesture of support by settling our demurrage”. The Carrier also observed that it would not be surprising if the amount of demurrage owed by now exceeded the value of the cargo, and said that they did not want to see a situation in which the cargo was auctioned leading to the Carrier having to forego demurrage charges.

On 25 October 2011 the Carrier sent a further formal notice to the Shipper and the Consignee regarding the mounting demurrage charges. On 2 November 2011 the Consignee wrote a letter to the Carrier further explaining its refusal to accept the documents presented under the letter of credit.

On 27 November 2011 the Carrier sent an email to the Shipper complaining that the shipments remained uncleared by the Consignee “without any certain future for our containers which are just sitting idle in Chittagong”. The Carrier said that its office in Chittagong had been in constant touch with the Consignee but without any positive response. The email requested settlement of the outstanding demurrage in an amount (which did not include the four containers used to ship the third lot) of US$127,968.

No response was received from the Shipper in the next several weeks, despite a series of reminder emails. 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.

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.

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

On 8 January 2014 Esack Brothers Industries Ltd, the owner of the container yard at the Port of Chittagong where the Carrier’s agent had arranged for the containers to be stored following their discharge from the vessels, wrote a letter to the Carrier’s agent which stated (with some obvious typographical errors corrected):

“We cannot deliver this long idle containerised cargo due to failure and incompetence of interested parties to present valid and authentic documents due to the stay order of the Court (Supreme Court Civil, Appellate Division – Title Suit 493 of 2011 dated 27 February 2013). We notified Cargo interests several times to evacuate the slots at yard but no fruitful result.

Considering the above, with regrets, in no way are we in a position to deliver or release these consignments, or to allow dealing with the cargo of cotton (including de-van cargo), as same is prevented by Bangladesh Customs until receiving of Court Order allowing delivery/release with other ancillary documents approved by Bangladesh Customs.”

Also in January 2014, a representative of the Carrier’s agent in Chittagong had a meeting with the Assistant Commissioner of Customs at which he was told that the customs authority would not allow any movement of the cargo, including unstuffing the cotton from the containers, until the court proceedings had been resolved.

In March 2014 officials from Royal Inspection International Ltd, agents appointed by the Shipper to investigate the position, travelled to Chittagong and had meetings with representatives of Esack Brothers Industries Ltd, the Carrier’s local agent and the customs authority. The inspection company reported that the customs authority would not allow the containers to be released without an order from the court and that the Consignee had made it clear that it would not take delivery of the cargo.

On 21 August 2014 lawyers in Bangladesh instructed by the Shipper sent a letter before action to the customs authority demanding permission for the cotton to be unpacked from the containers. The letter pointed out that the injunction granted by the court only prohibited payment under the letter of credit and did not prevent the containers from being unpacked. No response to this letter appears to have been received, and on 11 September 2014 the Shipper began proceedings in the Bangladeshi courts against the customs authority. These proceedings are based on a provision of the Bangladeshi Customs Act 1969 which provides that, if goods are not collected, the customs authority may auction the goods after 30 days or within such longer period as it thinks appropriate. It is not clear how this provision can be said to impose any obligation on the customs authority to sell the goods, as opposed to simply giving it a power of sale, nor what standing the Shipper has to seek any relief in circumstances where it no longer owns nor has a right to possession of the cotton.

I was informed at the start of the trial that the parties had agreed that the value of the 35 containers (measured as their replacement cost) is US$114,172. This equates to US$3,262 per container.

In a submission which can most charitably be described as displaying an excess of zeal, Mr Coldrick on behalf of the Carrier subsequently argued that, although the Carrier had agreed what it would cost to buy 35 containers, it had not agreed that there were in fact any containers available to buy at Chittagong at any relevant time (or, if there were, how quickly such containers could have been obtained). To address this unmeritorious point, I allowed the Shipper to put in evidence the quotations obtained by its solicitors which had led to the parties reaching an agreement on value. These showed that, in response to enquiries recently made, two suppliers had replied immediately with offers to provide 35 used 40 foot high cube containers at Chittagong at a price of, in one case, US$2,800 and, in the other case, US$1,900 per container. Both these quoted prices were less than the value of US$3,262 per container which the parties have agreed. There is nothing to suggest that the availability or cost of containers at Chittagong has altered in any significant way during the period since May 2011. In these circumstances I find as a fact that at all material times the Carrier could have bought replacement containers for immediate delivery at Chittagong at a cost of US$3,262 per container or less.

Various witness statements were tendered as hearsay evidence. The only witness called to give oral evidence was Mr Schonberger, the director of the Shipper. Despite its length, his evidence did not add anything material to what is recorded in the documents.

The Carrier’s claim for ‘container demurrage’ is founded on clause 14.8 of its standard terms of carriage which were printed on the back of the bills of lading. Clause 14.8 states:

“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.”

I will also quote at this stage clause 14.9 which states:

“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.”

Thus, clause 14.8 specifies the time within which containers must be returned (and the consequences of non-compliance), while clause 14.9 specifies the condition in which containers must be returned (and the consequences of non-compliance).

It is not in dispute that the period of free time provided for in clause 14.8 commenced on the dates mentioned earlier when the containers were discharged from the vessels at Chittagong. (The expression “Place of Delivery”, as defined in clause 1 of the bill of lading terms, is only applicable when the Carrier has contracted to deliver the goods at a place other than the Port of Discharge, which was not the case here.)

Clause 3 of the bill of lading terms incorporated the tariff to which clause 14.8 refers. The relevant tariff is entitled “Prevailing tariff for import detention at Bangladesh”. It specified free time of five days. However, it is common ground that this was overridden by an agreement recorded on the front of each bill of lading that the period of free time allowed at the port of destination was 14 days. The demurrage / detention charges specified in the tariff applicable to 40 foot high cube containers are: US$10 per container per day for the first 10 days; US$18 per container per day for the next 10 days; and US$24 per container per day thereafter.

The term “Merchant” is defined in clause 1 of the bill of lading terms as including “the Shipper, Consignee, holder of this Bill of Lading, the receiver of the Goods and any Person owning, entitled to or claiming the possession of the Goods or of this Bill of Lading or anyone acting on behalf of this Person.” The definition of “Goods” includes the cargo but does not include containers where, as here, they are provided by the Carrier and are not owned or leased by the Merchant. Clause 2 provides that every person defined as “Merchant” is jointly and severally liable to the Carrier for all the various undertakings, responsibilities and liabilities of the Merchant under or in connection with the bill of lading. Accordingly, the Shipper has all the liabilities of the “Merchant” under the contracts evidenced by the bills of lading, including any liability under clause 14.8 to pay demurrage.

On the Carrier’s case, demurrage started to accrue at the end of the free period of 14 days following the discharge of each lot. Thus, demurrage started to accrue for the 19 containers used to carry the first lot on 29 May 2011, for the 12 containers used to carry the second lot on 5 June 2011, and for the four containers used to carry the third lot on 13 July 2011.

At the time when this action was begun on 10 June 2013 the amount of demurrage claimed by the Carrier was US$577,184. It is the Carrier’s case that demurrage is continuing to accrue at the daily rate of US$840 (US$24 x 35 containers). As at 1 January 2015, the amount of the claim had reached US$1,090,424 plus interest from the date when each daily payment accrued. Thus, the demurrage claimed is now around 10 times the value of the containers.

Some defences raised by the Shipper were struck out as having no real prospect of success by HHJ Mackie QC on 13 June 2014. There are two issues still to be decided:

At the trial each party’s case on the latter issue was advanced in ways which had not been pleaded. In particular, in its skeleton argument for the trial the Shipper put forward for the first time a new case that it had repudiated the contracts of carriage and that in these circumstances the obligation to pay demurrage came to an end. The answers given to that case by Mr Coldrick in his oral submissions on behalf of the Carrier raised further significant points of law. Further, at the start of the trial the only dispute regarding mitigation of loss was whether or not as a matter of fact the Carrier had taken reasonable steps to mitigate its loss. However, in the course of oral argument Mr Coldrick advanced a new case that, as a matter of law, the Carrier had no duty to mitigate its loss. This point had repercussions for some of the other legal arguments.

Because the new points raised were all either matters of law or legal analysis of undisputed facts, they were all capable of being decided on the basis of the existing evidence. In these circumstances it seemed to me desirable to allow all the points to be argued so as to ensure that the dispute is decided on its real legal merits. However, the very late stage at which new points were raised meant that neither party had a full and fair opportunity to address the other party’s case at the hearing. In addition, after the hearing, I invited the parties to consider two further points of law which had not been argued.

To bring the proceedings to a conclusion in a fair and orderly way, I gave directions on 22 December 2014 for (a) each party to serve a draft amended statement of case pleading those points not previously pleaded on which it wished to rely and (b) for sequential service of further written submissions on those points. This procedure has been followed and I am satisfied that all the points have now been properly pleaded and argued. Both parties have confirmed that they wish the court to proceed to give judgment without any further oral hearing.

Although the Carrier has objected to some of the proposed amendments to the Shipper’s defence on the grounds that they are made late and/or have no real prospect of success, I do not consider that the Carrier has in the event been prejudiced by the fact that points were raised late – a complaint which anyway invites a pot and kettle observation. Nor do I consider that any of the amendments so clearly lacks any prospect of success that I should refuse permission to make it. I therefore grant permission for all the amendments sought.

Container “demurrage”, like container shipping, is a relatively modern phenomenon. No case was cited by either party which involved a claim for container demurrage. There is, however, a substantial body of case law concerning claims under voyage charterparties for “demurrage” payable to the shipowner on account of delay caused by the charterer’s failure to load or discharge cargo within an agreed period. It is well established that such demurrage represents liquidated damages. As Lord Brandon explained in President of India v Lips Maritime Corporation (The “Lips”) [1987] 2 Lloyd’s Rep 311, 315:

“[Demurrage] is a liability in damages to which a charterer becomes subject because, by detaining the chartered ship beyond the stipulated lay days, he is in breach of his contract. Most, if not all, voyage charters contain a demurrage clause, which prescribes a daily rate at which the damages for such detention are to be quantified. The effect of such a claim is to liquidate the damages payable: it does not alter the nature of the charterer’s liability, which is and remains a liability for damages, albeit liquidated damages.”

Subject to a question about whether the sum payable is a penalty which I will come to at the end of this judgment, I think it clear by analogy that clause 14.8 of the bills of lading is similarly a liquidated damages clause. Its effect is to liquidate the damages payable for breach of contract if the Merchant fails to return a container to the Carrier within the agreed period of “free time” (equivalent to laytime in a voyage charter). As with demurrage payable under a voyage charter, the clause prescribes a daily rate at which the damages for detention of the container are to be quantified. To determine when demurrage begins to run under clause 14.8, it is therefore necessary to identify the point at which a breach of contract occurred.

It is the Shipper’s case that, on the proper interpretation of clause 14.8 of the bills of lading (quoted in paragraph 26 above), it was a condition precedent to the Shipper’s obligation to return the containers that the Carrier had nominated a place at the Port of Discharge to which the Shipper was required to redeliver the containers. On behalf of the Shipper, Mr Pearce submitted that this is the plain meaning of the third sentence of clause 14.8 which states:

“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 …”

Mr Pearce argued that the effect of these words is that the Merchant only has a contractual responsibility to return the containers once there is a place nominated by the Carrier for their return. He further argued that this makes good business sense. It would, he submitted, be commercially absurd for the Merchant to be in breach of contract for failing to redeliver containers when the Merchant did not know where it had to redeliver them.

It is common ground that the Carrier has never in fact nominated a place for the redelivery of the containers. The Carrier’s evidence is that it would normally do so when the bills of lading were presented and arrangements made for the delivery of the goods – which has never happened. The Shipper contends that in these circumstances demurrage has never started to run.

I cannot see any merit in this argument. There is nothing in the language of clause 14.8 which states that the nomination by the Carrier of a place for redelivery is a condition precedent to the obligation of the Merchant to return the containers – whether by using the expression “condition precedent” or another phrase with the same meaning. Nor do I agree that such an interpretation would make commercial sense. The requirement to nominate a place to which the containers are to be redelivered only has any practical relevance if and when the Merchant has taken delivery of the containers, unpacked the goods and is ready and willing to return the containers to the Carrier. Until then, the Merchant has no need to know a place for redelivery. What would be commercially unreasonable is that a Merchant should be relieved of the obligation to pay demurrage because no place for redelivery has been nominated in circumstances where the absence of such a nomination has not prevented the Merchant from returning the containers because it is not yet ready and willing to do so. The common sense of the matter is that a failure to nominate a place for redelivery should only affect the Merchant’s liability to pay demurrage if it has prevented the Merchant from returning the containers. That sensible result is achieved by interpreting the Carrier’s obligation to nominate a place for redelivery as arising only when the Merchant is ready and willing to perform its obligation to return the containers.

Alternatively, if that is wrong, I would interpret the two obligations as independent of each other. On this interpretation, if failure of the Carrier to nominate a place for redelivery prevents the Merchant from returning the containers for a given period, any claim for demurrage in relation to that period will be defeated or offset by a claim for damages in the same amount resulting from the Carrier’s breach of its obligation to nominate.

I accordingly reject the Shipper’s argument that demurrage never began to accrue because no place for redelivery of the containers was nominated.

When reflecting on the arguments after the hearing, it seemed to me that there is a basic point about the operation of clause 14.8 on the facts of the present case which had not been addressed. The reason why the Carrier has never in fact nominated a place for the redelivery of the containers is that the containers have never been collected and remain in its custody. In these circumstances I invited further submissions from the parties on the question whether, on the proper interpretation of the bill of lading terms, demurrage can become payable under clause 14.8 if the containers have not been delivered to the Merchant.

On behalf of the Shipper, Mr Pearce submitted that the obligation under clause 14.8 to “return” the containers to the Carrier presupposes that the containers have been delivered to the Merchant in the first place. Logically, there can be no obligation on the Merchant to return the containers until it has the containers to return. If the obligation to return the containers has not arisen, there cannot be a breach of the obligation, and there is therefore no right to claim damages (liquidated or otherwise) for failing to return the containers within the agreed period of free time.

Mr Coldrick on behalf of the Carrier did not dispute that, in order to return the containers, the Merchant must first take delivery of them. He submitted, however, that the use of the word “return” in clause 14.8 does not signify that the Merchant must have taken delivery of the containers before demurrage can start to run. It merely defines what must be done by the end of the free time allowed – the containers must be returned to the Carrier. Thus, in order to avoid a breach of clause 14.8 which results in demurrage becoming payable the Merchant will need to have taken delivery of the containers and re-delivered them to the Carrier, all before the end of the free time.

When the goods are packed in containers, taking delivery of the goods will require the Merchant to take delivery of the containers. The obligation of the Merchant to take delivery of the goods is dealt with in clause 20 of the bill of lading terms. This states:

“20.

NOTIFICATION AND DELIVERY

...

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. Such storage shall constitute due delivery hereunder, and thereupon all liability whatsoever of the Carrier in respect of the Goods, including for misdelivery or non-delivery, shall cease and the costs of such storage shall forthwith upon demand be paid by the Merchant to the Carrier.

20.3

If the Goods are unclaimed within a reasonable time or whenever in the Carrier’s opinion the Goods are likely to deteriorate, decay or become worthless, or incur charges whether for storage or otherwise in excess of their value, the Carrier may at its discretion and without prejudice to any other rights which it may have against the Merchant, without notice and without any responsibility attaching to it, sell, abandon or otherwise dispose of the Goods at the sole risk and expense of the Merchant and apply any proceeds of sale in reduction of the sums due to the Carrier from the Merchant to take under or in connection with the Bill of Lading.

20.4

Refusal by the Merchant to take delivery of the Goods in accordance with the terms of this clause and/or to mitigate any loss or damage thereto shall constitute an absolute waiver and abandonment by the Merchant to the Carrier of any claim whatsoever relating to the Goods or the carriage thereof. The Carrier shall be entitled to an indemnity from the Merchant for all costs whatsoever incurred, including legal costs, for the cleaning and disposal of Goods refused and/or abandoned by the Merchant.”

These clauses give the Carrier extensive protection in circumstances where – as happened in this case – the Merchant refuses or fails to take delivery of the goods. That protection includes, at clause 20.2, a power to unpack the goods from the containers in which they have been transported if the Merchant fails to take delivery of the goods “within the time provided for in the Carrier’s applicable Tariff or as otherwise agreed”. It is common ground that “the Carrier’s applicable Tariff” referred to in this clause is the same tariff as that referred to in clause 14.8 of the bill of lading terms but also that, as mentioned earlier, a period of 14 days was in this case “otherwise agreed”. Accordingly, when this period of 14 days had elapsed and the goods had still not been collected, the Carrier was entitled to unpack the goods from their containers and thereby free up the containers for use elsewhere.

Mr Pearce on behalf of the Shipper submitted that the remedies for breach of the obligation to take delivery of the goods (and by implication the containers in which the goods are packed) are expressly set out in clause 20, and do not include any right to claim damages at all, let alone liquidated damages. Alternatively, if that is wrong and the Carrier is entitled to claim damages for breach of the obligation to take delivery, there is nothing in clause 20 which states that any such damages are liquidated, and there is no basis for reading in any such provision.

I do not accept the contention that the remedies afforded to the Carrier by clause 20 exclude ordinary common law remedies. Although, as mentioned, clause 20.2 entitles the Carrier to unpack the goods and, implicitly, recover the use of its containers if they are not collected by the Merchant before the end of the agreed period of free time, it does not oblige the Carrier to do so. Indeed, in practice – albeit not as a matter of legal obligation – it might reasonably be expected that the Carrier would normally afford some latitude and would not immediately start unpacking the containers if the goods are not collected before the end of that period. In that event, the Carrier would be without the use of the containers as a result of the Merchant’s breach of contract and would in principle be entitled to damages to compensate it for any consequential loss. It requires clear words to exclude the right to recover damages for loss caused by a breach of contract, and there are no words in clause 20 which can reasonably be construed to mean – let alone which clearly state – that the remedies it provides are intended to be in substitution for, rather than in addition to, the ordinary remedy of damages.

What is less obvious is whether the sum recoverable if the Merchant does not take delivery of the goods within the period of free time is fixed by the Carrier’s tariff. Clause 20 does not say so. One possible interpretation of the bill of lading terms is that the tariff rates apply only if the Merchant does in fact take delivery of the goods before the Carrier has exercised its right to unpack them from the containers. In that event the Merchant will become obliged under clause 14.8 to return the containers to a place nominated by the Carrier. Demurrage will then be payable for the period from when the free time ended until the containers are returned. If, on the other hand, as happened in this case, the goods remain unclaimed, the damages for loss of use of the containers remain at large.

Although this is a possible interpretation, however, I accept the Carrier’s contention that such an interpretation of the bill of lading terms would not make commercial sense. There is no logic in providing for the demurrage rate to apply if the containers are collected but not if they are left uncollected. The natural expectation is that demurrage will accrue for each day that the Carrier is deprived of the use of the containers after the end of the free time by the Merchant’s breach of contract, whether or not the Merchant does ultimately collect the containers. I accept Mr Coldrick’s submission that it would be perverse if demurrage was payable if the Merchant performs its obligations late but not if it fails to perform them at all.

I also accept that the clear intention of clause 14.8 is that demurrage will start to accrue as soon as the period of free time runs out if the Carrier is still without the use of the containers. Not only is that implicit in the provision of a period of “free time” which commences when the containers are discharged from the vessel, but it is expressly confirmed by the last sentence of clause 14.8. That provides for demurrage to be levied and payable by the Merchant “thereafter”. The word “thereafter” plainly means after “the end of the free time allowed” – the phrase used in the previous sentence. That is further confirmed by the wording of the applicable tariff itself, which shows the charges commencing when the free time ends. The requirement for the Merchant “to return the containers to a place nominated by the Carrier before or at the end of the free time” indicates that demurrage will not start to accrue if this obligation has been performed. It is implicit that, in order to perform this obligation, the Merchant will need to have taken delivery of the containers. If that has not happened and the Merchant is in breach of its obligation to take delivery of the goods (and impliedly the containers) within the free time allowed in accordance with the first sentence of clause 20.2, demurrage will start to accrue.

The relevant terms of the Carrier’s bill of lading could be much better drafted. I conclude, however, that on the proper interpretation of the contractual wording read as a whole the Merchant’s obligation upon discharge of the containers from the vessel is to take delivery of the containers, unpack the goods and return the containers to the Carrier, all within the period of free time, and that under clause 14.8 demurrage is payable upon breach of this obligation. It is fair to say that this was how both parties had understood the relevant provisions (subject to the argument already discussed about nomination of a place for redelivery) before I raised the possibility of a different interpretation.

It follows that in the present case the Shipper was in breach of the bill of lading contracts such that demurrage began to accrue when the free time expired on the dates which I have mentioned in paragraph 31 above.

The second issue is when, if at all, demurrage ceased to accrue. This issue raises questions about the inter-relationship of a liquidated damages clause which provides for payment of a daily sum until the relevant obligation is performed and the mitigation principle.

It is the Shipper’s case that the Carrier has failed to take reasonable steps to mitigate its loss either by unpacking the goods so as to retrieve the containers or, if necessary, by buying replacement containers, and that this limits the period for which the Carrier can claim demurrage.

The rules governing mitigation of damages for breach of contract are well established. They can be summarised as follows:

As mentioned earlier, in its statements of case and skeleton argument for the hearing the Carrier did not dispute that the mitigation principle is applicable as a matter of law, but argued that on the facts the Carrier has at all times acted reasonably such that there has been no failure to mitigate its loss. On behalf of the Carrier, Mr Coldrick submitted that it is plain from the evidence that the Carrier has never been in a position to unpack the containers because this would require approval from the Bangladeshi customs authorities which it is clear that they will not give without an order from the Bangladeshi court. He submitted that it would be unreasonable to expect the Carrier to have to take court proceedings in Bangladesh to try to retrieve its containers and there is in any event no expert evidence on Bangladeshi law to indicate any legal basis on which such proceedings could have been brought, the likelihood that they would have been successful or how long they would have taken and how much they would have cost. Mr Coldrick submitted that the absence of evidence on these matters is fatal to the Shipper’s contention that there has been a failure to mitigate, since it is the Shipper which bears the burden of proof.

Mr Coldrick further denied that taking reasonable steps to mitigate loss required replacement containers to be purchased. He pointed out in this context that the Shipper had refused the Carrier’s offer, made in early 2012, to resolve the matter by selling the containers to the Shipper.

On the first of these points, if the goods are not collected within a reasonable time after demurrage has started to accrue and the Carrier needs the containers for other shipments, it would normally be reasonable to expect the Carrier to exercise its right under clause 20.2 of the bill of lading terms to unpack the containers so as to recover them for further use. However, it is clear from the evidence to which I have referred in paragraphs 20-22 of this judgment that there is a problem in this case because the customs authorities at Chittagong will not allow the containers to be unpacked without a court order. There does not appear to be any legal justification for that stance. The injunction granted by the Bangladeshi courts only purported to prevent payment under the letter of credit and not to prevent movement of the goods or the containers. Nevertheless, rightly or – as it appears – wrongly, the customs authorities have taken the view that the proceedings brought by the Consignee in the Bangladeshi courts require them to refuse to permit any dealings with the cargo including the removal of the cotton from the containers.

There is no direct evidence of the attitude of the customs authorities at any time before January 2014. Despite the notice sent by the Carrier’s agent on 23 July 2011 threatening to dispose of the goods if they were not collected within 15 days, there is no evidence that the Carrier ever in fact made any attempt to exercise its right under clause 20.2 of the bill of lading terms to unpack the goods from the containers. I see no reason to suppose, however, that the attitude of the customs authorities would have been any different if the Carrier had sought to remove the cotton from the containers at any time after the injunction was granted in June 2011. I also accept the submission that the Shipper has failed to show that the Carrier ought, if acting reasonably, to have brought proceedings in the Bangladeshi courts to try to secure the release of the containers.

The second factual question raised is whether, and if so when, the Carrier should have mitigated its loss by buying replacement containers. In principle, the answer to this question seems to me to depend on three things: (i) the extent of any financial losses incurred or likely at any given time to be incurred by the Carrier as a result of its inability to use the containers; (ii) the cost of replacing the containers; and (iii) the prospect (in terms of likelihood and likely time scale) as it appeared at any given time that the existing containers could be retrieved.

There is no evidence on the first of these matters. In circumstances where it is claiming a daily demurrage rate fixed by agreement, the Carrier has not adduced evidence of any financial loss actually caused by the loss of use of the containers. Thus it is possible, for all the evidence shows, that at all material times the Carrier has had a surplus stock of containers so that the containers which have effectively been impounded at Chittagong have not in fact been required; in that event the Carrier would not have needed to acquire any replacement containers to mitigate its loss as it would have had no loss to mitigate. It is also possible that the Carrier has had a need for the containers and, rather than lose profitable business, has in fact replaced them. Without knowing what, if any, losses have actually been incurred and how, it is impossible to determine whether the Carrier failed to take reasonable steps to mitigate any such losses.

Nevertheless, some reasonable inferences may be made at a general level. According to the Carrier’s evidence, its intention and expectation was that the containers discharged at Chittagong would then be used for shipment to the United States, and thence onwards to the Middle East, and so on – a circular trade with weekly sailings. Such a round the world trip could be expected to take about 100 days. The Carrier has estimated that, based on its freight rates at the relevant time, if a round trip was lost because a container was not returned on time, the loss would have been US$5,700 – i.e. substantially more than the cost of buying a replacement container.

The Carrier’s witnesses did not say whether any business was in fact lost in this case. I think it reasonable to assume, however, that the Carrier does not in the ordinary course turn away profitable shipping business because it does not have enough containers to carry the goods. If the Carrier had an insufficient stock of containers at Chittagong to meet demand for its circular shipping business, it may fairly be presumed that the Carrier as a rational economic agent would have acquired more containers. Given that, as I have found, replacement containers were at all material times immediately available at Chittagong at a cost of US$3,262 per container or less, it would have made obvious economic sense to buy additional containers, if needed, at this cost rather than lose freight of US$5,700 per container – particularly as the containers could later have been sold if they became surplus to requirements.

Accordingly, I think it reasonable to expect that, if and when the containers detained at Chittagong were needed for onward shipments, the Carrier would have bought additional containers in order to mitigate its loss.

As mentioned earlier, although at the start of the trial the Carrier took its stand simply on the basis that it had acted reasonably, in the course of the hearing the Carrier’s case underwent a change and Mr Coldrick submitted that there is in law no scope for invoking the mitigation principle in the present case because to do so would be inconsistent with the agreement to pay demurrage.

In support of this submission, Mr Coldrick cited Abrahams v Performing Rights Society Ltd [1995] ICR 1028. This was an employment case in which the plaintiff employee was summarily dismissed. He brought an action claiming a payment in lieu of notice. The employer pleaded in its defence that the plaintiff was under a ‘duty’ to mitigate his loss during the notice period. This defence was struck out and the decision to strike out the defence was upheld by the Court of Appeal. The Court of Appeal held that the mitigation principle did not apply because the payment in lieu of notice was a contractual debt. However, Hutchison LJ (with whose judgment Aldous LJ agreed) also considered what the position would be if the provision for a payment in lieu of notice was characterised as an agreement to pay liquidated damages. He said (at p.1041C):

“As a matter of principle, where there is a liquidated damage clause which is valid – i.e. cannot be impugned as a penalty – there is no room for arguments on mitigation of damages, a concept relevant only in cases where damages are at large.”

Hutchison LJ further stated that to allow mitigation arguments where there is a liquidated damage clause would be inconsistent and unfair because it would involve limiting the damages recoverable by a plaintiff who can show that his actual loss is greater than the stipulated sum whilst permitting a defendant who can show that it is less to take advantage of that fact. It would also expose the parties to “the risk, expense and uncertainty of litigation the avoidance of which is to be presumed to be one of the principal reasons for their stipulating for liquidated damages”: see p.1040F.

Both on this authority and on principle, I think it clear that, in circumstances where the parties have agreed the amount payable by the Shipper as damages for its breach of contract, there is no scope for reducing that amount on the ground that the Carrier has failed to take reasonable steps to mitigate its loss. The purpose and effect of a liquidated damages clause is to make proof of the claimant’s actual loss unnecessary and irrelevant. Since the claimant’s entitlement to the agreed damages does not depend on whether the claimant has in fact suffered any loss at all, its entitlement cannot depend on whether any loss that it did suffer ought reasonably to have been mitigated.

On behalf of the Shipper, Mr Pearce accepted that the purpose of the demurrage clause in the bill of lading contracts is to agree in advance the sum payable per day if the containers are not returned, irrespective of the Carrier’s actual daily loss or whether there was any failure to mitigate it. However, he submitted that a demurrage clause does not oust the mitigation principle altogether. Mr Pearce adopted the view expressed by the authors of Voyage Charters (4^th Ed, 2014) at para 16.6 and Tiberg, The Law of Demurrage (5^th Edn, 2013) at para 12-03 that, although a demurrage clause liquidates the daily rate of the claimant’s loss, it does not liquidate the period of such loss, so that in the case of a charterparty the shipowner is expected to take reasonable steps to reduce the period of detention of the ship. Similarly, Mr Pearce submitted, the Carrier in this case was required to take reasonable steps to reduce the period of time for which it was deprived of the use of its containers.

Looking at the point as one of principle, I cannot accept that there is any relevant distinction between the daily rate and period of loss. There is no difference between reducing the period of the claimant’s loss and reducing the daily rate of loss after that period to nil. Unless something happens which brings the obligation to pay liquidated damages to an end, such damages continue to accrue as a matter of contract whether or not any loss is still actually being suffered by the claimant.

Nor do the two authorities cited by Mr Pearce assist his argument. The old case of Moller v Jecks (1865) 19 CD (NS) 331 concerned a ship which was detained in harbour as a result of the charterer’s failure to pay harbour dues. After nine days the Master obtained the release of the ship by paying the harbour dues himself. It was held by the Court of Queen’s Bench that the shipowner was only entitled to recover the amount of the dues paid to the harbour authorities, but not damages in the form of demurrage for the time the ship was detained. Willes J said (at p.819):

“The master might and ought to have paid those charges and sailed out of the harbour, resorting to his remedy against the merchant afterwards. A man has no right to aggravate damages against another by the course of proceeding adopted by the plaintiff here.”

The other judges agreed, Montague Smith J observing that the shipowner “might as well have paid the money on the first day as on the ninth”.

Moller v Jecks was not a case, however, in which the charterer failed to complete discharge of the cargo within the agreed lay days. Although the claim was described as a claim for “demurrage”, there is nothing in the report of the case to suggest that the charterparty provided for liquidated damages to be payable in the situation which occurred. Indeed, Willes J said in the course of argument (at p.818):

“‘Demurrage’ means a compensation for delay or detention of the ship by reason of the cargo not being taken out of her according to the terms of the charterparty. The claim here is for something altogether different.”

The claim would appear to have been one for damages for detention in circumstances not falling within the demurrage clause but where the shipowner sought to quantify its claim by using the demurrage rate. In such a case the demurrage rate may be invoked as evidence of the daily rate of loss resulting from detention of the ship; but there is no agreement to pay that rate which ousts the mitigation principle. I therefore interpret this case as an ordinary application of the mitigation principle in a situation where there was no agreement to pay liquidated damages for the period of detention.

The other case cited by Mr Pearce is Smailes & Son v Hans Dessen & Co (1906) 12 CC 117. There the shipowners stopped discharge of the cargo for several days in the exercise of a lien because the freight had not been paid. As a result, the agreed laytime was exceeded and the shipowners claimed demurrage for the additional days. The owners of the cargo argued that under the Merchant Shipping Act the shipowners could have allowed the cargo to be landed whilst preserving the lien, which was what ultimately happened, and that by not doing so sooner they had failed to take reasonable steps to mitigate their loss. The Court of Appeal decided that, on the particular facts, the shipowners had acted reasonably in not allowing the cargo to be discharged earlier. However, as Mr Pearce pointed out, there was no suggestion that the mitigation principle did not apply.

The relevant contractual provision in the Smailes case required discharge of the cargo to be completed at the rate customary at the port, “and if the ship be further detained through the fault of the charterers, ten days on demurrage over and above the said laying days at twenty pounds per day”. It seems to me that the argument that the shipowners acted unreasonably in preventing the discharge of the cargo for the period they did went to the question whether the ship was detained for that period through the fault of the charterers. Had it been found that the shipowners acted unreasonably, then it could have been said that it was their unreasonable action and not the fault of the charterers in failing to pay the freight which caused this period of detention; hence no liability to pay damages in the form of demurrage would arise. Thus, although the language of mitigation is used in the judgments, I do not consider that this case on a proper analysis shows that a shipowner has a ‘duty’ to mitigate the period for which it suffers loss resulting from detention of the ship when a ship is on demurrage.

In my view, the Shipper’s argument confuses two different things. One is a ‘duty’ to mitigate the period of loss. The other is a duty to reduce the period for which demurrage is contractually payable. As discussed, demurrage is payable whether or not any loss is being suffered and for as long as the payment obligation continues. There is therefore no scope for reducing the period for which demurrage is payable by relying on the mitigation principle. Any argument for the different proposition that the obligation to pay demurrage ceased after a certain period even though the containers had not been returned would have to be based on some legal principle under which contractual obligations are brought to an end. It could not be based on the mitigation principle.

Clause 14.8 of the bill of lading terms does not state when, once demurrage begins to accrue in the specified daily amount, the Merchant’s obligation to pay demurrage will cease. The clause says simply that demurrage will be payable “thereafter” (i.e. after the end of the free time) “in accordance with the Tariff”. The applicable tariff likewise specifies a rate which (after the first 20 days) is payable “thereafter”. On the face of it, therefore, the payment obligation is completely open-ended and continues indefinitely.

Since demurrage is intended to be a charge for the detention of the containers by the Merchant, it is implicit that demurrage will cease to be payable if and when the containers are no longer detained. That will occur if the Merchant’s obligations to unpack the goods and return the containers to the Carrier are belatedly performed or if the Carrier exercises its self-help remedy under clause 20.2 of the bill of lading terms to unpack the containers itself. It would also occur if the contract was brought to an end.

On behalf of the Carrier, Mr Coldrick submitted that those are the only circumstances in which the obligation to pay demurrage will cease.

I raised in argument the question whether on the Carrier’s case demurrage would continue to be payable if, for example, the containers were collected by the Merchant but were then stolen or destroyed in a fire before they were returned. Mr Coldrick’s answer was that in that event the contract would be frustrated, and the Shipper would thus be discharged from its obligations to return the containers and pay demurrage for their detention. It is not necessary to explore the circumstances in which the doctrine of frustration would apply, as an attempt by the Shipper to rely on that doctrine in this case was held by Judge Mackie to have no real prospect of success. Nor has the Shipper sought to argue that the refusal of the customs authorities to allow the containers to be released and the consequent inability of the Carrier to release the containers has provided a lawful excuse for non-performance.

The Shipper has, however, argued that its inability or failure (actual and/or prospective) to collect the containers amounted to a repudiation of the bill of lading contracts which brought the obligation to pay demurrage to an end. In support of this argument, Mr Pearce again relied on cases concerning charterparties. If a charterer does not complete discharge of the cargo during the agreed lay time, there is a breach of contract by the charterer which continues until discharge is completed and the ship is once more available to the shipowner. The charterer’s obligation is, however, one which sounds in damages only, unless the charterer makes it clear that it does not intend to perform its obligation or disables itself from doing so, or the delay becomes so prolonged as to amount to a repudiatory breach of the contract. Mr Pearce submitted that at that point the shipowner not only has the right to sail away, but also the duty to do so unless (perhaps) it would be reasonable to keep the vessel at port for the benefit of the charterer. In support of this submission, he referred to Tiberg, The Law of Demurrage (5^th Edn, 2013), para 12-02; Schofield, Laytime and Demurrage (6^th Edn, 2011), para 6.10, and three cases: Inverkip Steamship Co v Bunge & Co (1917) 22 CC 200: Dias Compania Naviera SA v Louis Dreyfus [1978] 1 WLR 261, 263-4; and Universal Cargo Carriers Corp v Citati [1957] 2 QB 401.

Those cases show that delay by the charterer will amount to a repudiatory breach of the contract when it becomes so prolonged as to frustrate the commercial purpose of the venture: see Inverkip Steamship Co v Bunge & Co (1917) 22 CC 200, 204: Dias Compania Naviera SA v Louis Dreyfus [1978] 1 WLR 261, 263-4; and Universal Cargo Carriers Corp v Citati [1957] 2 QB 401, 430-434. The Citati case also shows that the impossibility of performance before the delay reaches that point will amount to an anticipatory breach of a repudiatory nature. Thus, Devlin J held that the owners were entitled to succeed if they could prove that the charterer had, by the time when the owners treated the contract as at an end, become wholly and finally disabled from finding a cargo before the delay frustrated the commercial purpose of the venture.

On the facts of the present case, once the Shipper received payment for the cotton so that title to the goods passed to the Consignee under the contract of sale, the Shipper had no right to take delivery of the goods. When that point occurred depends on the interpretation of the retention of title clause in the contract of sale. As mentioned earlier, the clause stated that “the goods remain the property of Seller until full execution of the payment by the Buyer”. These words are ambiguous. One possible interpretation of them is that the Consignee does not obtain title to any of the goods until payment for all of the goods supplied under the contract has been made. The alternative interpretation is that, where payment is made for any of the goods supplied under the contract, the Consignee obtains title to those goods. It seems to me that it would take clear wording to displace the ordinary rules regarding the passing of property to the radical extent which the first of these interpretations would involve and that the second interpretation is therefore to be preferred.

It follows that the goods shipped under the first four bills of lading ceased to be the property of the Shipper when it received payment for those goods on 23 May 2011. The Consignee never sought to reject the goods. Indeed, there is no evidence that the Consignee has ever alleged any breach of the contract of sale. Any right to reject the goods, if it existed and had not already been lost by the time that payment was made, must have been lost shortly thereafter. Nor is there any legal basis, so far as I can see or that has been suggested, on which the Shipper could have compelled the Consignee to collect the goods and return the containers to the Carrier in circumstances where the Shipper no longer had title or any right to possession of the goods. I therefore conclude that by some time in June 2011 the Shipper was wholly and finally disabled from further performance of the first four bill of lading contracts.

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 (see paragraph 14 above). 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.

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

It is settled law, however, that a repudiatory breach of contract does not automatically bring the primary obligations of the parties to perform the contract to an end. Rather, it gives the innocent party a choice whether to accept the repudiation as terminating the contract or whether to keep the contract in force: see e.g. Geys v Société Générale [2013] 1 AC 523. If the innocent party chooses to terminate the contract, two consequences ensue: first, both parties are released from all their current and future primary obligations under the contract; and second, the repudiating party (whose repudiation is treated as the effective cause of the termination) is liable to pay damages to compensate the innocent party for any loss suffered as a result of the early termination: see e.g. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 849. If, on the other hand, the innocent party chooses not to accept the repudiation, both parties remain obliged to continue to perform the contract. None of the cases cited by Mr Pearce (and referred to at paragraphs 83-84 above) casts doubt on these well established principles.

In the well known case of White & Carter (Councils) Ltd v McGregor [1962] AC 413 White & Carter agreed to advertise McGregor’s business by putting advertisements on litterbins. McGregor repudiated the contract on the day it was made but White & Carter did not accept the repudiation. Instead, they went ahead and displayed advertisements in accordance with the contract, and then sued for the agreed price. The House of Lords (by a majority of 3 to 2) held that their claim succeeded.

It is sometimes said that the White & Carter case decided that the mitigation principle does not apply to an action for an agreed sum. It is true that the mitigation principle is only applicable to a claim for damages, but it also only becomes relevant once the breach of contract on which the claim is based has occurred. It is the latter point which was critical to the decision in the White & Carter case. White & Carter chose not to accept McGregor’s repudiation of the contract and instead claimed the agreed sum when it subsequently became due. Even if their claim had not been for an agreed sum but had been for damages, the mitigation principle would only have applied to the loss caused by McGregor’s failure to perform the later obligation. Thus if, for example, McGregor’s obligation had been to render some form of performance in kind in return for the display of the advertisements, it is only if White & Carter had failed to mitigate loss caused by McGregor’s failure to render that performance that the damages could have been reduced. The fact that the action was one for specific enforcement of a primary obligation (in the form of payment of an agreed sum) rather than an action for damages was not important. To establish a defence to the claim, McGregor needed to show that the primary obligation on which the claim was based did not arise at all. That depended on showing that White & Carter were not entitled to continue to perform the contract and hence trigger McGregor’s obligation to pay for the advertisements in the circumstances which had arisen. The mitigation principle had no relevance to that question.

Counsel for McGregor argued that White & Carter were not entitled to continue to perform the contract after it had been repudiated, even though the repudiation had not been accepted, or alternatively that White & Carter were not entitled to do so in circumstances where the performance involved incurring useless expense. The majority of the House of Lords did not accept these arguments. Lord Reid said (at p.430):

“It might be, but it never has been, the law that a person is only entitled to enforce his contractual rights in a reasonable way, and that a court will not support an attempt to enforce them in an unreasonable way.”

Lord Reid did nevertheless recognise two limitations on the innocent party’s freedom of choice in the event of a repudiatory breach. First, he noted that “in most cases the circumstances are such that an innocent party is unable to complete the contract and earn the contract price without the assent or cooperation of the other party” (p.430). In such circumstances, unless the innocent party is entitled to an order for specific performance to compel the other party to cooperate, the only way in which the innocent party can obtain a remedy for the other party’s subsequent non-performance of the contract is by accepting the repudiation. Second, Lord Reid suggested that there could be circumstances in which the freedom of choice of the innocent party might be limited by considerations of equity or public policy. He said (at p.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 had no interest to insist on a particular remedy, he ought not to be allowed to insist on it and, just as a party is not allowed to enforce a penalty so he ought not to be allowed to penalise the other party by taking one course when another is equally advantageous to him.”

These remarks were obiter and, it must be said, of very uncertain scope. The example given by Lord Reid of when this principle might apply was that of an expert who is engaged by a company to prepare an elaborate report. Counsel for McGregor had argued that if in this example the company repudiated the contract before any work was done, to allow the expert then to waste thousands of pounds preparing the report could not be right if a much smaller sum of damages would give him full compensation for his loss (p.428). Lord Reid indicated that in such a case “it might be that the company could show that the expert had no substantial or legitimate interest in carrying out the work rather than claiming damages” (p.431). I observe in passing that it is not obvious how this example materially differs from the facts of the White & Carter case itself.

Lord Reid’s ‘legitimate interest’ principle has been recognised in a number of later cases. I do not need to recite these cases as they have recently been the subject of a careful review by Cooke J in Isabella Shipowner SA v Shagang Shipping Co Ltd (The “Aquafaith”) [2012] EWHC 1077 (Comm); [2012] 2 Lloyd’s Rep 61. In The “Aquafaith” a ship was chartered for a minimum period of 59 months. 94 days before the end of this period the charterer repudiated the charterparty. The shipowners did not accept the repudiation, kept the ship available and claimed hire for the remaining period of the charter. On an appeal from an arbitration award, Cooke J held that the White & Carter principle applied. After reviewing the authorities, he concluded that an innocent party can only be said to have no legitimate interest in maintaining the contract if (a) damages are an adequate remedy and (b) maintaining the contract would be “wholly unreasonable”. Cooke J found that on the facts of The “Aquafaith” these requirements were not fulfilled and so the shipowners were entitled to claim the agreed hire.

The legitimate interest principle sets some constraint, albeit a weak one, on the freedom of a party when exercising a choice whether or not to terminate a contract to consult only its own interests. As Staughton LJ said in Stocznia Gdanska SA v Latvian Shipping Co [1996] 2 Lloyd’s Rep 132, 139:

“To be a legitimate interest, the innocent party must have reasonable grounds for keeping the contract open bearing in mind also the interests of the wrongdoer.”

The principle can be seen in a wider context. There is increasing recognition in the common law world of the need for good faith in contractual dealings. Further impetus has been given to this development by the unanimous judgment of the Supreme Court of Canada in Bhasin v Hrynew, 2014 SCC 71, given on 13 November 2014, holding that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs more specific rules and doctrines. One such more specific rule which is now firmly established in English law is that, in the absence of very 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 (in the sense of irrationally): see e.g. Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd's Rep 397, 404; Paragon Finance Plc v Nash [2002] 1 WLR 685, paras 39-41; Socimer International Bank Ltd v Standard Bank London Ltd[2008] 1 Lloyd's Rep 558, 575–577; British Telecommunications Plc v Telefónica O2 UK Ltd [2014] UKSC 42, para 37. The cases in this line of authority have all been concerned with the exercise of discretionary powers conferred by the express terms of the contract, whereas the choice whether or not to terminate the contract in response to a repudiatory breach is one which arises by operation of law. However, I cannot see why this should make any difference in principle. In each case one party to the contract has a decision to make on a matter which affects the interests of the other party to the contract whose interests are not the same. The same reason exists in each case to imply some constraint on the decision-maker’s freedom to act purely in its own self-interest. The essential concern, as Rix LJ observed in the Socimer case at para 66, is that the decision-maker’s power should not be abused.

I would accordingly regard the line of authority dealing with the exercise of an option to terminate the contract and the line of authority dealing with the exercise of a contractual discretion as concerned with materially identical questions and as establishing essentially the same test.

Applying these principles to the present case, if the Carrier had accepted the Shipper’s repudiation of the bill of lading contracts, the Shipper would thenceforth have been released from its obligations to take delivery of the goods and return the containers to the Carrier. The Shipper would therefore also have been released, as from the date of termination of the contracts, from its obligation to pay demurrage while those primary obligations remained unperformed. Instead of those primary obligations, the Shipper would have been liable to pay damages to compensate the Carrier for any loss caused by their termination. The calculation of those damages would be at large and therefore subject to the mitigation principle. Thus, damages would only be awarded if and in so far as the Carrier was able to show that the Shipper’s inability to remove the cotton from the containers and return them to the Carrier’s use has caused the Carrier financial loss since the termination date; and any such loss would not be recoverable if and insofar as the Carrier failed to take reasonable steps to mitigate it.

As it is, the Carrier has chosen not to terminate the bill of lading contracts in response to the Shipper’s repudiatory breach and instead to keep the contracts in force and go on claiming demurrage.

Mr Pearce on behalf of the Shipper sought to distinguish the White & Carter line of cases on the ground that they are concerned with anticipatory breaches of contract and that the situation is different where the repudiation consists in an actual breach. I cannot accept, however, that this is a relevant distinction. As I have indicated, the point illustrated by the White & Carter case is that, where there is a repudiation which is not accepted, the primary obligations remain in force and are not replaced by a claim for damages. It is therefore only as and when breaches of those obligations occur that any ‘duty’ to mitigate arises – and not before. This analysis is not affected by whether the repudiatory breach is anticipatory or consists in an actual breach which gives rise to a right of termination.

In the ordinary case where the Carrier has control over the containers and the goods and can freely exercise its right under clause 20.2 to unpack the containers and thereby recover the use of them, it is reasonable to expect that the Carrier will exercise this right once it becomes clear that the Merchant has repudiated the contract of carriage and is not going to take delivery of the goods. I find it difficult to envisage what legitimate commercial justification there could be in such a case for leaving the goods in the containers and continuing to claim demurrage.

It is, however, an unusual feature of the present case that, as I have found, the customs authorities in Bangladesh have at all material times refused to allow the goods to be released or even unpacked from the containers. On behalf of the Carrier, Mr Coldrick submitted that, in circumstances where the Carrier was and is prevented by the customs authorities from unpacking the containers and recovering them for further use, it has a legitimate interest in keeping the contracts alive and in collecting daily demurrage as compensation for the loss of use of the containers.

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. The present case is materially different in this regard from the White & Carter case. In that case McGregor had repudiated the contract but White & Carter were able to enforce performance of McGregor’s primary obligation to pay for the advertisements by performing their own side of the bargain and suing for the agreed sum. Similarly, in The “Aquafaith” the shipowners were able to keep the ship available until the end of the charter period and obtain specific performance of the charterers’ obligation to pay the agreed hire. By contrast, in the present case the Shipper’s obligations were not specifically enforceable both because they are not obligations of a kind which the court will ordinarily specifically enforce and because the court would not in any event order the Shipper to do what is impossible.

The Carrier’s only interest in keeping the contracts in force in these circumstances was to continue to claim demurrage. The question therefore becomes whether after 27 September 2011, being the date at which I have found that it was clear that the Shipper had repudiated the contracts, it was legitimate for the Carrier to keep the contracts in force solely in order to claim demurrage rather than be left with a claim for unliquidated damages.

Over three and a half years have now passed since demurrage started to accrue and over three years have elapsed since, on my finding, it was clear that the contracts had been repudiated. I raised with the parties the question whether, if the Carrier is correct in its contention that it has been throughout this time, and remains, entitled to keep the contracts in force so that demurrage has continued to accrue and will potentially continue to accrue indefinitely, the demurrage provision in clause 14.8 is a penalty clause and therefore unenforceable. On behalf of the Shipper, Mr Pearce gave an affirmative answer to that question.

On behalf of the Carrier, Mr Coldrick submitted that it is not now open to the Shipper to advance this argument because at an earlier stage of the proceedings the Shipper applied for permission to amend its defence to plead that the demurrage provision is a penalty clause and its application was refused by HHJ Mackie QC, who held that the contention did not have a real prospect of success: see [2014] EWHC 2638 (Comm) at para 21. Mr Pearce responded that the argument which the Shipper was then seeking to make was a different one from that now put forward. At the hearing before Judge Mackie the Shipper adduced evidence that the daily rate of demurrage prescribed by the Carrier’s tariff is approximately 10 times the daily loss likely to be caused to the Carrier by a loss of the use of the containers, and argued that the daily rate is therefore penal. By contrast, the argument now made is directed not at the size of the daily rate but at the period for which demurrage can accrue.

Mr Coldrick replied that courts decide issues and not arguments, and the fact that the Shipper now wishes to advance an argument which was not advanced before Judge Mackie is not a reason which can justify re-litigating the issue of whether the demurrage provision is penal. That issue has already been decided by Judge Mackie when he refused permission to amend. That decision, Mr Coldrick submitted, gives rise to an issue estoppel; alternatively, allowing the Shipper to contend that the demurrage provision is a penalty would be an abuse of process because contrary to the principle in Henderson v Henderson (1843) 3 Hare 100 that a party is ordinarily required to bring forward its whole case and not just part of it.

I accept that a decision on an application for permission to amend is capable of giving rise to an issue estoppel. I do not accept, however, that the issue decided by Judge Mackie was the same issue as that now raised. Judge Mackie decided that the daily rate of demurrage is not penal. The issue now raised is whether a provision which potentially allows demurrage to accrue indefinitely is penal. As stated in Phipson on Evidence (18^th Edn, 2013) para 43-33, the safest test is to inquire whether the same evidence would support both issues. The evidence relied on at the hearing before Judge Mackie is irrelevant to the point now in issue, which indeed does not depend on evidence at all.

Even if I am wrong about this and the issue is regarded as being the same, the principles of estoppel arising out of court proceedings are essentially concerned with preventing abuse of process and are not to be applied inflexibly where in exceptional circumstances this would work injustice: see Arnold v National Westminster Bank [1991] 2 AC 93, 107-110; Spicer v Tuli [2012] 1 WLR 3088, 3095, para 16. Importantly, no point arose at the time of the hearing before Judge Mackie about the period of demurrage, as the case at that stage was being conducted by both parties on the assumption that the period for which demurrage could be claimed was limited by the mitigation principle. The argument now made is therefore not one which could reasonably have been made at that time. It is only because the Carrier has since changed its case so as to contend, correctly as I have held, that the mitigation principle has no application that the possibility of demurrage continuing to accrue indefinitely has arisen. In these circumstances it would be unjust to prevent the Shipper from raising this point and it cannot be said that to do so is an abuse of process.

The law relating to penalty clauses has recently been reviewed by the Court of Appeal in Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539, [2014] 2 All ER (Comm) 125. As Christopher Clarke LJ observed in that case at para 44: “The law of penalties is a blatant interference with freedom of contract”. While the common law attaches very great importance, however, to enforcing contracts which parties have freely entered into, this is not the only value which the English law of contract upholds. Another important object of the law is encouraging efficiency and the productive use of resources. As Lord Sumption explained in his dissenting judgment in Geys v Société Générale [2013] 1 AC 523 at para 117, this value underlies the law’s reluctance to grant specific performance and its willingness in general to allow parties to break their contracts if it pays them to do so after taking the payment of damages into account. Mitigation rules which prevent the injured party from recovering compensation for losses which could reasonably be avoided by purchasing a substitute for the lost performance are also designed to encourage the efficient use of resources. So is the law’s refusal to enforce promises which constitute an unreasonable restraint of trade. The refusal to enforce penalty clauses has a similar rationale. While these rules undoubtedly limit the parties’ freedom of contract, they do so in order to protect their freedom to break their contract if continued performance becomes inefficient and to deploy their resources elsewhere.

From the judgment of Christopher Clarke LJ (with whom Tomlinson and Patten LJJ agreed) in the Makdessi case and the authorities discussed in that judgment, I extract the following key principles:

I would add that, in assessing for the purpose of comparison with the sum payable under the contract the sum which the injured party could recover as compensation for its loss in the absence of the payment provision, it is clearly necessary to take into account the mitigation principle: see Chitty on Contracts (31^st Edn, 2012), para 26-175; Lansat Shipping Co Ltd v Glencore Grain BV [2009] 2 Lloyd’s Rep 688.

Applying these principles, if the position were that, in the face of a repudiation of the contract of carriage by the Merchant, the Carrier could simply decline to accept the repudiation as bringing the contract to an end and go on claiming demurrage indefinitely, the sum payable would be manifestly extravagant in comparison with the maximum amount of damages which, if damages were at large, the Carrier could conceivably recover. That is because, if damages are at large, they are limited by the mitigation principle. If the containers are in the Carrier’s possession, it will normally be straightforward for the Carrier to mitigate its loss by unpacking the containers. If the containers are not in the Carrier’s possession, the ability to buy replacements limits the extent of the recoverable loss which the Carrier can suffer. As I have held, however, the period for which demurrage is payable is not limited by the mitigation principle.

The ability to claim demurrage in a significant category of cases in an amount which is extravagantly high in comparison with the sum that would be required to compensate for loss caused by the breach signifies that the payments cannot be justified as a pre-estimate of the loss. Nor can I see any other commercial justification for such an arrangement. Making every allowance for the advantages of certainty and avoiding disputes, it is impossible to justify on compensatory grounds a provision which can require payments without end for so long as the Carrier chooses to keep the contract in force. Such a clause could only be explained as serving the function of penalising breach of the contract.

Accordingly, if clause 14.8 of the bill of lading terms gave the Carrier an unfettered right to ignore the fact that the Shipper has repudiated the contract and to carry on claiming demurrage indefinitely, I would hold that the clause is penal.

In the event I do not consider that the Carrier has such an unfettered right. I nevertheless find the distinction between a valid liquidated damages clause and a penalty clause relevant and helpful in identifying the extent of the Carrier’s legitimate interest in keeping the contracts of carriage alive in the present case in order to claim demurrage. I note that the analogy with a penalty clause is one which was expressly drawn by Lord Reid in the passage of his speech in the White & Carter case which I quoted at paragraph 93 above.

The law concerning penalties confirms that the legitimate purposes of a clause providing for payment of a fixed sum of money upon a breach of contract are, first and foremost, to compensate the innocent party for financial loss caused by the breach and, second, to avoid the costs and uncertainties involved in having to prove what loss has actually been suffered by quantifying in advance the damages payable. A provision which cannot be justified on these grounds will be regarded as penal and will not be enforced. Following this logic, it seems to me that it would be proper for the Carrier to keep the contract of carriage in force in order to claim demurrage even after the contract has been repudiated by the Merchant provided that there is at least some basis for supposing that the Carrier’s inability to use the containers is causing it to suffer ongoing financial loss. In such circumstances it can in good faith be said that the demurrage clause is being used to provide compensation for loss resulting from a breach of the contract and that the decision to rely on the clause rather than to terminate the contract and claim unliquidated damages is serving the proper purposes of giving certainty and avoiding disputes about the amount of damages to which the Carrier is entitled. The position is different, however, if there is no basis for supposing that any such loss is being suffered. In that case I cannot see that the Carrier has any legitimate interest in keeping the contract alive solely in order to claim demurrage.

Approaching the matter in this way, I can see no basis at all for supposing that by 27 September 2011 the Carrier was suffering any financial loss as result of its inability to use the containers. In the first place, there is no evidence that the Carrier was suffering any such loss – the Carrier having chosen not to adduce evidence that it in fact suffered any financial loss as a result of the Shipper’s breach of contract. Secondly, as I discussed earlier when considering the question of mitigation, if the detention of the containers at Chittagong meant that the Carrier did not have as many containers as it needed for onward shipments, any reasonable Carrier would long before then have acquired replacement containers. Thirdly, the Carrier’s offer made in January 2012 to sell the containers to the Shipper seems to me to confirm that, by then at any rate, the Carrier was not suffering any loss of revenue as a result of its inability to use the containers and that its only potential claim was for the replacement cost.

There is a further reason why, as it seems to me, it cannot be said that the Carrier was suffering any loss on 27 September 2011 (or subsequently) as a result of the Shipper’s breach of the contracts of carriage. It follows from my finding that the customs authorities in Bangladesh have at all material times refused to allow the containers to be released that, even if the Shipper had been in a position to take delivery of the containers and had tried to do so, the Carrier would not have been able to give possession of the containers to the Shipper. It cannot in these circumstances be said that the Shipper’s breach of contract has caused any loss to the Carrier, as the action of the customs authorities – which was outside the control of the Shipper – would have prevented the Carrier from performing its own contractual obligation and caused the containers to remain impounded in any event.

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.

In summary, for the reasons given, I have reached the following conclusions:

In the result, I find that the Carrier is entitled to be paid demurrage from the dates and at the rate claimed until 27 September 2011. I invite the parties to agree the calculation of the precise sum due.