MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789

1. Summary

Absent a contractual entitlement to terminate a contract, the right to terminate will only arise where a party has committed a "repudiatory" breach of contract. In that event, the innocent party may elect to either:

  • Treat the contract as continuing but claim damages as a consequence of the breach of contract complained of (in other words "affirm" the contract); or

  • Rescind the contract and bring the contract to an end.

Often the entitlement of an innocent party to rescind a contract for repudiatory breach is hotly contested. For that reason, those seeking to do so often run the risk of themselves being found being held to be in repudiatory breach of contract (and thus liable for consequent damages) if their entitlement to rescind is not upheld by the courts. However, in the case of MSC Mediterranean Shipping Co SA v Cottenex Anstalt [2016] the court has also placed limits on the ability of an innocent party to affirm a contract and insist upon future performance by the other party. Although a shipping case, this decision will impact parties to construction contracts who wish to terminate their contract as a consequence of a breach by the other party.

2. The facts

Put simply, the seller concluded a contract for the sale of 35 containers of cotton to the purchaser. The seller subsequently contracted with the owner of a ship ("the carrier") to ship the cotton in five consignments to its ultimate destination. By June 2011, all five consignments had arrived at the destination port and the seller sought and obtained payment under letters of credit. The seller maintained that title in the cotton had passed to the purchaser. However, due to a drop in the price of cotton the purchaser refused to take delivery of the shipment. The carrier's contract with the seller gave the seller the right in certain circumstances to unpack the goods and dispose of them but the customs authority refused to allow the carrier or any anyone else to deal with them without the permission of the court. As a consequence, the seller was unable to return the containers in which the cotton was shipped to the carrier within 14 days after delivery.

Pursuant to the terms of the contract between the seller and the carrier, the carrier was entitled to levy liquidated damages against the seller should the seller fail to return the containers within 14 days of the consignments being delivered. By 27 September 2011, the goods had been at port for between 2½ - 4 months. The seller advised the carrier that title in the goods had passed to the purchaser, that there was a dispute with the purchasers which prevented the containers from being returned and that it was not in a position to pay liquidated damages. The situation continued until 2 February 2012. In order to resolve matters the carrier offered to sell the containers to the seller. However, negotiations for the sale of the containers were ultimately unsuccessful. The carrier therefore sought a levy liquidated damages from the end of the 14 day "free period" and continuing until the containers were returned.

Rather unusually the seller contended that it was in repudiatory breach of contract on 27 September 2011 (when it effectively informed the carrier that it no longer owned the goods and was not in a position to perform the contract) and argued that the carrier was obliged to accept their repudiation thereby terminating the contract and bringing to an end any continuing obligation to pay liquidated damages under the contract (although the seller agreed that it would be liable to pay damages equal to the value of the containers, which was for a lesser amount).

3. Decision

The Court of Appeal rejected the argument that the seller had repudiated the contract on 27 September 2011. The delay was too short to justify the conclusion the commercial purpose of the contract had been frustrated. The seller was making attempts to resolve the dispute with the purchaser and to return the containers. However, by 2 February 2012, following the unsuccessful negotiations for the sale of the containers, it was clear that the commercial purpose of the adventure had become frustrated. The seller was at that stage unable to return the containers and the unsuccessful attempt to purchase the containers, which would have discharged the seller's obligation to redeliver them, made it clear that the seller could not perform its obligation to return the containers. Accordingly, the seller was in repudiatory breach of contract as of 2 February 2012.

Controversially perhaps the Court of Appeal went on to decide that the carrier did not have the option of affirming the contract as further performance had at that stage become impossible. The court went on to state that even if it had been open for the carrier to affirm the contract, as replacement containers were readily available in the market and as the carrier had no interest in keeping the contract alive other than earning liquidated damages, this was a case where to have allowed the contract to continue would have been wholly unreasonable.

4. Conclusions

In the current construction climate issues of termination are of considerable relevance. However, the decision as to whether to terminate may be fraught with difficulty, with considerable repercussions if wrong. Employers, contractors and sub-contractors are becoming more frequently faced with choosing between whether to affirm a contract following what is thought to be a repudiatory breach by the other party or whether to terminate the contract. In the Construction context the process is ordinarily subject to the provisions of one of the industry contract standard forms. That is not always the case. A decision to terminate may bring with it the risk that the innocent party themselves may be pursued for wrongfully terminating the agreement.

The decision in the MSC case (which relates to shipping containers and was where there was no further contract to perform) may now give rise to broader uncertainties for parties wishing to affirm, including in Construction. There are circumstances where it appears that an innocent party's right to rescind a contract may not be unfettered. They may be unable to do so in circumstances where they have no further obligations to perform or where the only unperformed obligations have become impossible to carry out. In those circumstances, the law may regard the contract as discharged with the innocent party confined to a claim in damages. However, the court also indicated that even in situations where it is possible for the innocent party to perform its contractual obligations, its entitlement to do so will depend upon whether it can be shown that he has a legitimate interest (financial or otherwise) in performing the contract rather than claiming damages.

This MSC decision introduces further uncertainties and financial risks for contracting parties and disputes are likely to arise as to whether a party has lost its right to affirm in any given case and, if so, what the consequences of that are. Further guidance from the courts would be helpful.