The United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) recently recommended that the United States District Court for the Southern District of New York (the “District Court”) grant summary judgment in favor of shippers where the carrier discontinued the services for which the shippers had agreed to minimum quantity commitments (“MQC”) in exchange for reduced freight rates in a shipping service contract.
In In re: The Containership (TCC) A/S, 2016 WL 2341363 (Bankr. S.D.N.Y. Apr. 29, 2016), plaintiff TCC sued several shippers for breach of contract claiming the shippers were required to pay liquidated damages for failing to satisfy their MQCs. Between 2010 and 2011, TCC entered into approximately 110 shipping service contracts (the “Contracts”) pursuant to which the shippers agreed to certain MQCs on TCC’s trans-Pacific route between Taicang, China and Los Angeles, California in exchange for lower freight rates. After making 91 voyages, TCC voluntarily discontinued its Taicang-Los Angeles route on April 8, 2011 and canceled the last four scheduled sailings. Most of the Contracts would have expired by their terms on April 30, 2011.
Coincident with the route cancelation, TCC also filed a petition for reconstruction in the Bankruptcy Division of the Commercial and Maritime Court in Copenhagen, Denmark on April 8, 2011 (the “Danish Insolvency Proceeding”). By April 12, 2011, TCC’s corporate parent had withdrawn TCC’s five chartered vessels, leaving TCC without any operations or ability to operate. On May 31, 2011, TCC’s court appointed reconstructor sought recognition of the Danish Insolvency Proceeding as a foreign main proceeding under Chapter 15 of the U.S. Bankruptcy Code. The Bankruptcy Court granted recognition of the Danish Insolvency Proceeding on July 1, 2011. Recognition allowed TCC to bring seventy-six adversary proceedings against various shippers seeking payment of liquidated damages as a result of the shipper’s failure to satisfy its respective MQC. Additionally, TCC asserted that, even though the Taicang-Los Angeles route was “discontinued”, not terminated, the shipper-defendants (many of whom had not satisfied their MQC) remained liable for any MQC remaining on the “suspended” Contracts. TCC asserted that the shippers remained liable because: (1) each of the Contracts required that the shipper would use best efforts to ship cargo “evenly throughout the duration” of the Contracts, and (2) TCC already accounted for its cancellation of the four remaining voyages by providing each shipper with an offset to the MQC equal to a pro rata reduction of the MQC based on TCC’s calculation of the amount of cargo each shipper could have shipped on the last four canceled voyages had those voyages occurred. TCC subjected any remaining unfulfilled MQCs to the contractually agreed to liquidated damages rate.
The shipper-defendants sought summary judgment arguing they were: (1) fraudulently induced into the Contracts because TCC had superior knowledge that Shanghai International Port Group (“SIPG”) had threatened repercussions on any shipper using TCC; (2) excused from performing under the Contracts because of lack of consideration, TCC’s prior breaches, termination of the Taicang-Los Angeles route, and force majeure due to SIPG’s actions; and (3) not liable because TCC’s filing of the adversary proceeding violated the implied covenants of good faith and fair dealing.
In issuing its recommendation, the Bankruptcy Court construed that the Contracts as maritime contracts “because the primary objectives of the Contracts was the transportation of goods by sea” and concluded that federal law generally governs maritime contracts. Additionally, the Bankruptcy Court applied New York State law in its recommendations as needed because of the principle that state law should supplement any aspect of contract law for which Federal law is silent and because the Contracts contained a New York choice of law provision.
After analyzing a form of Contract and the parties fact statements, the Bankruptcy Court ultimately recommended that the District Court find the Contracts valid and enforceable because the Contracts contained the hallmarks of a contract and the specific terms required by 46 U.S.C. § 40502(c). The consideration for the Contracts was TCC’s agreement to ship at rates lower than published tariffs in exchange for the shipper’s agreement to MQCs. Contrary to the shippers’ argument, TCC’s ability to move, at its discretion, a shipper’s cargo to a later voyage, did not invalidate the Contracts or render them illusory. Further, force majeure did not excuse the shipper’s failure to satisfy the MQCs for two reasons. First, the shipper-defendants failed to provide the contract-required notice of a force majeure event. Second, New York does not recognize financial hardship – i.e., SIPG’s threat to do economic harm to shippers using TCC’s Taicang-Los Angeles service – as a valid ground for avoiding contracted-for performance.
The Bankruptcy Court also concluded that TCC did not breach the covenant of good faith and fair dealing by filing the adversary proceedings. Again turning to New York law, the Bankruptcy Court noted that the implied covenant “can only impose an obligation consistent with other mutually agreed upon terms in the contract.” Here, because the Contracts expressly provided TCC with the right to damages for a shipper’s failure to meet its MQC, the Bankruptcy Court could not imply the opposite – that TCC would not seek to recover the MQC shortfall from a shipper. Material facts also existed with respect to the shippers’ assertion that there was fraudulent inducement and that TCC breached the Contracts. The Bankruptcy Court recommended denial of summary judgment on these two defenses.
Nevertheless, in its other findings, the Bankruptcy Court did recommend granting summary judgment in favor of the shippers after concluding that TCC’s termination of the Taicang-Los Angeles route excused the shippers’ MQC requirement. The Bankruptcy Court wrote that TCC’s distinction between “suspended,” “discontinued,” and “terminated” was not meaningful and was, in fact, belied by fact that TCC had no operations following the withdrawal of chartered vessels by TCC’s parent. TCC’s inability to transport any goods or satisfy its obligations under the Contracts excused the shippers’ non-performance. In responding to TCC’s assertion that the Contracts were suspended, the Court noted that the Contracts’ terms provided that the MQCs would be reduced pro rata to the volumes already shipped if TCC chose to “restructure” its services. Therefore, the Contracts essentially provided that any remaining MQC under a “suspended” contract was effectively zero where TCC chose to restructure by completely eliminating service. Further, the Court did not find TCC’s pro rata crediting based on remaining as voyages, if they had occurred, to be a reasonable outcome. Unlike TCC’s other form contract which required even shipments, the Contracts here only required the shippers to use their best efforts to ship evenly throughout the term of the Contract. Under these terms, the shippers could have waited until the last voyage to satisfy their individual MQCs. In fact, as the Bankruptcy Court noted, the shippers’ MQCs would have been fulfilled even if TCC did not have space available for the entire MQC on the last voyage. According to the Contracts, as long as the shipper provided the proper notice to TCC, TCC was required to reduce the shipper’s MQC based on the amount of cargo tendered, not the amount of cargo TCC could accommodate on that particular voyage. Because TCC completely terminated the Taicang-Los Angeles route, and the shippers had no obligation to ship evenly throughout the term of the Contract, the Bankruptcy Court concluded that both TCC’s service termination and the Contracts’ very terms excused the shippers’ from satisfying any remaining MQCs.
The Bankruptcy Court’s recommendation is pending before District Judge Andrew L. Carter, Jr. under the caption The Containership Company (TCC) A/S et al. v. Apex Maritime Co., Inc. et al., Case No. 16-04913 (S.D.N.Y.).