Mike Burns asks if we are to say goodbye to the container demurrage gravy train?

It is not an overstatement to describe the ready supply of empty containers to service export demand as the lifeblood of business for shipping line operators. The recent – albeit short lived – spike in global freight rates following the Hanjin insolvency, was attributable not simply to Hanjin vessels being withdrawn for the market, but also some half a million Hanjin owned and leased containers ‘disappearing’ from the global container supply chain; a case of reduced capacity driving prices, but also illustrating the importance of container equipment as well as ships.

Away from the acute fallout from Hanjin, a more chronic issue for shipping line operators in recent years has been ‘losing’ containers to customers who simply fail or delay to return containers after discharge and delivery, leaving them to languish in foreign ports or inland terminals for many years. This can leave operators with a re-supply headache. As both a deterrent and protection against this malaise, liner bill of lading terms commonly permit (after a short ‘free’ period) the carrier to charge a daily container demurrage or quay rent to the defined ‘Merchant’ until redelivery of containers. Though not a panacea, this has seemingly provided a mechanism to enable operators to keep the meter running indefinitely, and provide a wide compensation (or penalty, depending on one’s perspective) regime for failing to return empty boxes.

However the English Court Of Appeal, in its recent decision in MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA 789 has now curtailed carriers’ ability to recover container demurrage in this way, upsetting a long- standing market understanding, at least on the side of box ship operators.

Facts in MSC v Cottonex
In early 2011 the claimant shipping line MSC contracted with the defendant, Cottonex Anstalt, to carry 35 containers of cotton to Chittagong, Bangladesh. The consignments arrived in Chittagong between May and June 2011. However, the Bangladeshi consignee refused to take delivery and instead commenced proceedings in Bangladesh with a view to restraining payment to Cottonex under letters of credit, albeit payment had already been effected.

Meanwhile, due to the failure to collect, the customs authorities detained the containers and refused to release them for delivery. The containers were still in storage at the port at the Containerstime of trial, some 3.5 years after they had first been discharged. MSC brought proceedings for outstanding container demurrage, contending entitlement to recover demurrage accruing until the containers were returned even though that meant claiming a daily running tariff for a number of years. It will be appreciated that such accumulated demurrage would far exceed the value of a new container, perhaps many times over, which was the basic commercial objection of Cottonex i.e. that the tariff was in the nature of a penalty which was not a true measure of the carrier’s loss, and was therefore unenforceable.

English Court Decisions
The Court of Appeal has recently affirmed the previous Commercial Court decision that MSC could not claim demurrage indefinitely. Both Courts agreed with MSC that at the point the containers were not returned within the free time, Cottonex were in breach of contract and that the demurrage charge provisions which thereafter became enforceable, amounted to a form of liquidated damages. So far, so good. However the Courts reasoned that the charges would continue only to a certain point, but not indefinitely. The right to continue to charge would be brought to an end by the acceptance of a repudiatory breach by MSC (the repudiatory breach being the clear failure to comply with the obligation to take delivery), or the point where the innocent party affirming the contract (i.e. the carrier) no longer had a legitimate interest in doing so.

On the facts, the Court of Appeal decided that the date of frustration of the contract/repudiation arose after six to seven months, in February 2012, when MSC offered to sell the containers to Cottonex as a solution, which “was the clearest indication that the commercial purpose of the adventure had been frustrated. Such as sale would have discharged the shipper’s obligation to redeliver the containers and with it the final obligations under the contracts of carriage which still remained to be performed”.

In commercial terms, by this later date the containers had been effectively lost and could no longer be redelivered in the context of the original maritime adventure. Therefore, MSC could not, post repudiation/frustration, seek to maintain the contract and insist on a performance that was radically different from the bill of lading contract obligations, and in respect of which its only interest would be to “generate an unending stream of free income”. Further, MSC had a surplus stock of containers in the region to cover any new bookings that the subject containers may have been used to satisfy. Accordingly, MSC’s remedy was to recover demurrage at the contract rate up to February 2012 and to recover as damages the value of the containers.

The effect of this appeal decision now reinforces the message that container lines cannot be complacent in assuming they can simply ring up the demurrage tariff indefinitely when containers are not collected and returned. There will come a point in time when continuing to affirm a bill of lading contract which has obviously been repudiated will be of no effect in terms of keeping the demurrage clock running. Conversely, shippers or NVOCCs faced with a claim will be advised, if it is clear containers have been abandoned and they have little effective control over the situation, to expressly terminate the bill of lading contract so as to oblige the Line at an early stage to mitigate its loss.

Further, whilst MSC was able to recover 6-7 months’ demurrage, it will always be a question of fact as to when delays are such as to amount to repudiation, and for what period a Line can legitimately recover. However this will almost certainly be measured in months rather than years. Carriers may now need to look to other protective measures in their contracts, e.g. refundable container deposits, incentivised freight rebates for prompt return, increased daily demurrage rates, or simply to be smarter as to the customers they do business with. Alternatively, there may be grudging acceptance of the commercial logic of the English Courts that in cases of unreturned containers, a carrier’s reasonable compensation should be in keeping with the value of the container, and its loss of profit (if any) for a finite period, rather than being a windfall opportunity

Mike Burns is Partner in the Marine team at national law firm Weightmans LLP.

Weightmans is a UK top 45 law firm with over 1400 people across ten locations in the country. The firm prides itself on its full service offering, with a reputation as a leading national player in the insurance sector. The firm has a specialist marine team acting in commercial matters and disputes for clients and their insurers across the marine and shipping sector.