MSC Mediterranean Shipping Company SA v Cottonex Anstalt

Container demurrage payable under a bill of lading is liquidated damages for failure to take delivery, unpack the goods and return the containers within the agreed free time. It accrues after that period even if the carrier has not nominated a redelivery place and the containers remain undelivered. The mitigation principle cannot reduce the agreed sum or shorten the contractual period for which it is payable. A repudiatory breach does not automatically terminate primary obligations. The innocent party may keep the contract alive only while it has a legitimate interest in doing so. It is illegitimate and wholly unreasonable to keep the contract open solely to generate demurrage where there is no basis for supposing that continuing detention causes financial loss. An unfettered right to claim demurrage indefinitely in those circumstances would be penal.

The Carrier claimed container demurrage from the Shipper under five bills of lading after 35 containers of cotton remained at Chittagong because the Consignee did not collect the goods. The contractual free time was 14 days, after which clause 14.8 imposed daily charges. The Shipper argued that demurrage had not begun because no redelivery place had been nominated, that the charges could not accrue before delivery, and that the Carrier had failed to mitigate by unpacking or replacing the containers. It also argued that the Shipper’s inability to procure collection repudiated the contracts and ended the demurrage obligation.

The court considered when demurrage began and ended, the effect of mitigation, repudiation, the legitimate-interest restriction on keeping a contract alive, and the penalty rule.

1. Commencement. Clause 14.8 did not make nomination of a redelivery place a condition precedent. The Carrier’s obligation to nominate arose when the Merchant was ready and willing to return the containers. Alternatively, any loss caused by failure to nominate could be set off against demurrage. The clause, read with clause 20, required the Merchant to take delivery, unpack the goods and return the containers within the 14-day free period. Demurrage therefore began when that period expired, although the containers had not been delivered.
2. Liquidated damages and mitigation. Demurrage was liquidated damages. Its agreed daily rate made actual loss irrelevant. There was no distinction in principle between liquidating the daily rate and liquidating the period of loss. The mitigation principle could not reduce the contractual sum or shorten the period for which demurrage was payable.
3. Repudiation and legitimate interest. By 27 September 2011 the Shipper was wholly and finally disabled from procuring collection, and the prolonged delay frustrated the commercial purpose of the venture. This was repudiatory breach, but it did not automatically terminate the contracts. The Carrier elected to keep them alive. Once there was no realistic prospect of performance, and no basis for supposing that the Carrier was suffering financial loss from detention, the Carrier had no legitimate interest in doing so. Keeping the contracts alive solely to claim demurrage was wholly unreasonable.
4. Penalty. If the clause permitted indefinite demurrage regardless of loss, it would be penal because payments without end would be extravagantly disproportionate to any compensable loss and lacked commercial justification.
5. Disposition. The Carrier was entitled to demurrage at the agreed rates only until 27 September 2011. The parties were invited to agree the precise calculation.