CLAIMING DEMURRAGE FOR UNRETURNED CONTAINERS
A Case Study
Time and tide wait for none. The earliest acknowledged record of this proverb is by St. Marher in 1225; however, the actual origin of this saying cannot be certainly determined. St. Marher had stated that ‘te tide and te time þat tu iboren were, schal beon iblescet’. Although the essence of this proverb is about the value of time, we have observed that it has substantial nexus with the concept of shipping and maritime activities.
A few centuries ago, there were no flights to transport goods in a day’s time. Ergo, large containers that consume substantial space, finances, and physical effort to were employed to carry and store the consignment. For instance, person A had sent a container from the United States to Dubai. However, A’s associates, who were assigned to take delivery of the goods in Dubai had failed to do so. Unlike rejecting your everyday online purchases at the time of its delivery, it is pretty strenuous to send back a container that weighs over a couple of tons back to another corner of the world. Carrying cargo by sea also permits merchants to consign a larger quantity of goods with reduced freight charges and, undeniably, no retailer prefers to pay more. The aviation industry is a relatively novel compared to the shipping and maritime industry. The origin of containerization of goods dates back to the early eighteenth century used for the purpose of railways trade. However, with the surge in international trade, the need for container shipping increased, and several governments further developed the containerization system for efficient trading of supply cargos. Since then the industry has grown tremendously to the extent that each day thousands of containers arrive at seaports from various countries around the world. Globalization further supplemented to this phenomenon and succored liner shipping to emerge as one of the crucial elements of international trade and commerce. Everyone can now avail these shipping services, and therefore it resembles, in principle, a public transportation service carried out with the help of containers of various capacities.
The nature of transaction for the supply of the container to a merchant is similar to the contract for a supply of vessel to a voyage charterer under a charter party. Accordingly, the parties may incur an extra charge for the usage of the container beyond the agreed time.
The merchants are granted a schedule in their contract, under container demurrage clause, to unload the container and any additional usage of time beyond the given time is considered chargeable. Therefore, container demurrage is often charged by the shipping lines for not returning the containers in a reasonable period or in the agreed time.
The demurrage is liquidated damages in western as well as common law jurisdictions. However, under UAE law, demurrage is chargeable for a fixed period beyond the agreed time and additional terms as provided under Article 231 of the Federal Law Number 26 of 1981 on Maritime Commercial Law (the Maritime Law). Over and above the stated period, demurrage is comprehended to be applied as per the customs under Article 8 (2) of the Maritime Law and therefore, considered as liquidated damages.
Since the demurrage provisions and specifically container demurrage remains untested under UAE laws there remains a possibility for application of established international customs. Given the same, it becomes pertinent to be acquainted with the updates on international regime over the issue.
In the case of MSC Mediterranean Shipping Company SA V Cottonex Anstalt 2016[i] , the court of appeal in agreement with Justice Leggatt’s judgment under MSC Mediterranean Shipping Co SA v Cottonex Anstalt 2015[ii], decided whether the obligation of the merchant to re-deliver the containers continues indefinitely and also defined the scope of their liability to pay demurrage. Further, the courts also looked into the issue of non-breaching party’s exercise of the option to keep the contract active and the nature of their duty to mitigate the losses.
Facts of the Case
MSC Mediterranean Shipping Company SA, one of the largest carriers of shipping containers in the world was the claimant in the case mentioned above whereas Cottonex Anstalt, a cotton merchant was the defendant. In 2011, MSC contracted with the respondent, to carry raw cotton in its containers to Bangladesh. The carrier company (MSC) took 35 containers of raw cotton to Bangladesh as per five (5) bills of lading, and Cottonex was the shipper. The Shipper had agreed on the sale of such cotton to the Bangladeshi receiver company. By the time the goods arrived at the port of Chittagong, the world market for raw cotton had collapsed, and consequentially the market prices for the cotton plunged. Thus, the Bangladeshi receiver i.e. consignee of a shipment of containerized cotton refused to collect the goods and failed to take delivery at the port of discharge in Chittagong, Bangladesh.
Consignee's bank issued a letter of credit and despite the consignee’s attempt to prevent payment, the bank paid to the Cottonex. Consequently, the ownership of the goods transferred to the recipient and Cottonex was rendered incapable of unloading the goods and returned the containers to MSC. Meanwhile, the Bangladeshi customs authority disallowed anyone from emptying the containers without a court order while there was an ongoing dispute between consignee and its bank.
Under the bill of ladings, Cottenex was obliged to return the containers within fourteen (14) days from the date of discharge. MSC sought to recover the demurrage for unreturned containers from Cottonex as per the agreed bill of ladings and began charging them demurrage after 14 days of free-time even though Cottonex had lost title over the goods and was incapable of collecting it. Therefore, Cottonex refused to pay demurrage as being devoid of claim over goods and being paid through the letter of credit, thereby having no authority to deal with cotton or container and Cottonex no longer remained a legal holder of the bills of lading. The claim of demurrage from MSC left Cottonex potentially liable for open-ended liability until the matter was under trial. Till the time the issue reached trial proceedings, the containers remained uncollected on the port of Chittagong for almost three (3) and half years after they arrived and the total claim amount for demurrage was more than US Dollars one million which was ten times more the replacement value of the containers.
MSC also offered Cottonex to buy the container in 2012 but the offer was refused. The case was filed by MSC in London in 2011 to recover the demurrage which runs till the time the container is returned amounting to US Dollars 1 million and kept counting.
Court of First Instance
The main issues raised during the trial were liquidated damages and duty to mitigate, repudiatory breach of contract and duty to act in good faith.
Cottonex advanced the following arguments in defense against the demurrage claims:
i. MSC should have taken steps to mitigate the losses by unpacking and returning the containers or by buying the replacement containers.
ii. Cottonex conveyed their unwillingness and incapability to re-deliver the container to MSC. Hence, Cottonex had repudiated the contract and following that MSC had no “legitimate interest” in affirming the contract.
In February 2015, Justice Leggatt held that MSC ceased to have a legitimate interest in keeping the agreement alive in expectation of future performance as Cottonex made it clear that they are neither able to nor willing to redeliver containers without excessive delay. However, there was no obligation on the MSC to mitigate losses as the demurrage provisions are considered liquidated damages clause which excludes the duty to mitigate. According to Leggatt J, MSC did not have unfettered right to avoid a repudiatory breach and claim the liquidated damages for indefinite period making the liquidated damages an unenforceable penalty. Further, there was no evidence of financial loss to MSC, and if such detention of container prevented the MSC from performing future contractual obligations, MSC would have purchased the replacement containers.
After reviewing some case laws, the court came to the conclusion that following Cottonex’s repudiation of contract MSC only had a right to affirm the contract and claim demurrage if it had a legitimate interest in it. However, in given circumstances, MSC, the Carrier, had no legitimate interest in keeping the contracts of carriage alive after that date to continue claiming demurrage for an unlimited period as such act is wholly unreasonable. Finally, the court acknowledged, but did not create any precedent regarding the increasing need for good faith in contractual dealings and for the purpose of which it stated that it should not be exercised “arbitrarily, capriciously or unreasonably.”
Court of Appeal
Aggrieved by the judgment, MSC appealed before the Court of Appeal (CA) and persisted with the same argument as put before the court of the first instance. MSC again argued that the Cottonex was duty bound under contractual obligations to return the containers and such commitment continues indefinitely, and so continues the demurrage. The CA disagreed with MSC’s argument and in consonance with Justice Leggatt’s opinion on the issue of continuing liability for an indefinite period. However, the CA did not agree with Leggatt J’s rationale as to when the accruing demurrage had come to an end.
The CA held that failing to return the container amounts to a breach of contract but such breach was not immediately repudiatory. Leggatt J stated that not returning the container amounts to a repudiatory breach only when the delay renders the performance of the other obligations under the contract of carriage fundamentally distinct from those which the parties had initially undertaken. Another instance of a repudiatory breach was when the delay was continuing as long as it can be comprehended by a reasonable person in the position of the parties that the delay is likely to last that long. As per Leggatt J such period was when MSC had no title to the goods or possession of the bill of ladings. However, CA disagreed with the view and adjudicated that such incident happened in 2012 when MSC offered Cottonex to buy such containers and the offer was declined which is the clearest indication that the purpose has been frustrated.
Consequences of Repudiatory breach
Justice Moore-Bick L. agreed on the issue of no legitimate interest to carry on with an affirmation of the breached contract and adjudicated that there was no option of affirming the contract once the performance sought becomes impossible and the adventure frustrated as if the shipper or whosoever responsible has destroyed the containers. Therefore, the innocent party has no right to affirm the contract as the operation of law will automatically discharge the contract.
This case certainly has vast implications for container trade and shipping lines. The shipping lines need to consider re-drafting their contracts as the demurrage cannot be kept open-ended as provided in the judgment which would have significant value in the UAE or case of contracts being governed by English law. STA’s team of shipping lawyers in Dubai will be happy to assist you through the process of re-drafting and to advise on implications of unreturned containers in UAE and under English law.
[i] MSC Mediterranean Shipping Company SA v. Cottonex Anstalt  EWCA Civ 789
[ii] MSC Mediterranean Shipping Co SA v Cottonex Anstalt  EWHC 283 (Comm)