The Court of Appeal held that where the commercial purpose of a contract becomes impossible to complete, that contract may automatically end.
The Court of Appeal decision on MSC v Cottonex
In this recent decision, the Court of Appeal held that where the commercial purpose of a contract becomes impossible to complete, that contract may automatically end, despite the fact that this had been caused by the breach of one party.
Thirty five containers of raw cotton were shipped to Chittagong, Bangladesh and arrived between 13 May and 27 June 2011.
Disputes arose between the shipper (Cottonex) and the consignee, which meant that the consignee refused to take delivery of the containers, but that the shipper was also unable to take back possession of them either.
On 27 September 2011 the shipper sent a message to MSC suggesting that it was likely to be impossible to collect the containers but that matters were still being argued in court. On 2 February 2012, MSC tried to break the deadlock by offering to sell the containers to the shippers, but they could not agree a price. By the time a claim was issued in 2013, the claim was for around US$ 577,000, and continuing to accrue.
The normal position in English law is that where one party to the contract is unwilling or unable to perform, then the “innocent party” has a choice whether to either bring the contract to an end or to “affirm” or “maintain” the contract. (The innocent party can only affirm the contract where it would not be “wholly unreasonable” or “perverse” and where the innocent party can perform its obligations without the co-operation of the guilty party.)
The High Court held that, in this case, the contract came to an end in September 2011 when the shipper indicated it would be impossible for them to perform and the carrier had no right to affirm.
The Court of Appeal disagreed and held that the point at which the contract actually came to an end was February 2012. They held that, as a result of breach by Cottonex, and by that time, “any further performance by either party would be radically different from that agreed by the terms of the contract” and therefore effectively “impossible” or “frustrated”. This is arguably a new approach which means that, in these particular circumstances, the innocent party has no “choice” whether to terminate or affirm. Termination took place automatically.
Therefore, the carrier was only able to claim demurrage up to February 2012 as well as the replacement cost of the containers in the local market.
This means that, when containers are abandoned or “stuck” in legal or customs formalities or disputes, then although container demurrage will run for a period of time (which will depend on the facts of the case), it will not run indefinitely. When containers are “stuck”, the parties would be well advised to start thinking about what the cost of replacement containers might be.
Arguably this Court of Appeal decision applies to bring any commercial contract to an end automatically, where it becomes impossible (or radically different) to perform that contract as a result of breach by one party.
If you would like to discuss this any further then please do not hesitate to get in touch with us.
The content of this article is for general information only. For further information regarding claiming demurrage on abandoned containers please contact Alex Davey or a member of the Shipping team. Law covered as at December 2016.