Losing the right to affirm – a new view on repudiatory breaches
Under English contract law, where there has been a repudiatory breach of contract, the innocent party has the right to either affirm or terminate the contract; as well as claim damages. Breaching a condition of the contract, or breaching a term that deprives the innocent party of substantially the entire benefit of the contract, is normally repudiatory. However, a recent decision from the Court of Appeal means it may no longer be as straight forward anymore.
MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789
Background
Cottonex engaged the services of MSC, a cargo carrier, to ship 35 containers of raw cotton to Bangladesh. Upon arrival in Bangladesh, the price of cotton had plummeted triggering a dispute between Cottonex and the consignee. Neither party accepted delivery of the 35 containers of cotton; therefore the containers remained at the port under the control of the customs authorities.
The agreement between Cottonex and MSC stated that Cottonex had 14 days of free use of the containers before a daily fee for failing to unload the containers (a “demurrage”), would become payable. Cottonex notified MSC that title had passed to the consignee and that any demurrage should be borne by the consignee.
After almost eight months, MSC sought to break the deadlock and offered to sell the containers to Cottonex, but attempts to negotiate were unsuccessful. MSC therefore sought to recover the liquidated damages owed for the continuing delay in returning the 35 shipping containers.
Decision
The High Court held that when Cottonex informed MSC that it no longer had legal title to the goods and therefore would be unable to redeliver the containers, MSC knew there was "no longer a realistic prospect of the containers being able to be redelivered, the delay had become so prolonged as to frustrate the commercial purpose of the adventure and the shipper was therefore in repudiatory breach."
As a result, MSC no longer had a legitimate interest in keeping the contract alive in the hope of future performance. To do so would be "wholly unreasonable… and in effect generate an unending stream of free income."
The Court of Appeal arrived at the same outcome but via different reasoning. It held that MSC offering to sell the containers to Cottonex was the clearest indication that the remaining commercial purpose of the adventure had been frustrated. Therefore, it was at this point that the contract was no longer capable of being performed. Accordingly, the choice between termination or affirmation of the contract was no longer available.
Comment
Whilst this decision relates to shipping contracts, the issues discussed could be relevant to all types of contract. This case limited the rights of the aggrieved party to prevent abuse of position by having an unlimited right to make an ongoing claim. The court also considered penalty clauses and stressed that a clause for the payment of demurrage at a daily rate, should not be regarded as a penalty clause simply because no time limit on liability had been agreed. MSC did not have an unfettered right to affirm the contract and recover demurrage indefinitely. A final takeaway point raised was the Court’s keenness to steer clear of a 'good faith' test as it believed it would be invoked as often to undermine as to support the terms in which the parties have reached agreement. Instead of arguing that it is unreasonable, the Court sought to develop the law along established lines, in this instance, frustration. It was noted that in the future there may be a need for a 'good faith' test in contract law, but this did not need to be established to provide an outcome in this instance.
This article was written by Freddie Spearman. For more information please contact Freddie on +44 (0)20 7427 6718 or freddie.spearman@crsblaw.com
