The Supreme Court of Canada’s decision in Bhasin v. Hrynew[1] – on which this blog has commented – marked a sea change in Canadian contract law. In Bhasin, the Court recognized an “organizing principle of good faith” in contractual relations that underpins numerous specific doctrines, including, for example, unconscionability and the treatment of discretionary contractual powers.

Canadian appellate courts have been dealing with the implications of Bhasin since it was decided in the fall of 2014 – this blog has considered those decisions several times. Courts in other Commonwealth common law jurisdictions such as New Zealand[2] and Australia[3] have also considered the impact of the Supreme Court’s decision. This summer, the English Court of Appeal had its first opportunity to consider whether to recognize the general organizing principle of good faith in MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt.[4] The Court explicitly and categorically refused.

The raw cotton sits at the Bangladeshi port

Because it is a significant English case, MSC Mediterranean is, of course, about a shipping contract, specifically, an action in respect of demurrage.

A transportation company, MSC, contracted with Cottonex to ship raw cotton from Iran and the United Arab Emirates to Bangladesh under five bills of lading. Each bill of lading provided for a period of free time for the use of the containers upon arrival in Bangladesh. After the free use period ended, demurrage (that is, payment for lost ability to use the containers for another purpose) became payable at a daily rate specified in the agreement. Cottonex contracted to sell the raw cotton to a Bangladeshi company (the “consignee”) by means of a letter of credit.

Once MSC’s vessel arrived at the port in Chittagong, the price of raw cotton collapsed. Cottonex and the consignee became embroiled in a dispute over the dates of the bills of lading. That dispute led to proceedings in the High Court of Dhaka where the consignee obtained an injunction to prevent the bank from taking up the documents and thereby Cottonex’s being paid. As a consequence of its judicial victory, the consignee refused to take delivery of the raw cotton. However, Cottonex nonetheless presented documents to the bank and they were accepted. As a result, Cottonex refused to accept a return of the goods – its position was that property had passed to the consignee once the payment was rendered. Accordingly, the containers of raw cotton were sitting with customs authorities at the port with neither Cottonex nor the consignee willing to take the goods. MSC was stuck with the cotton in its containers.

The trial judge relies on Bhasin

MSC commenced an action against Cottonex for the daily rate (still accruing) for its inability to dispose of the raw cotton. After initially pleading specific failures under the parties’ agreement and a failure to mitigate by MSC, at trial, Cottonex’s primary submission was that the inability to redeliver the goods for the foreseeable future amounted to a repudiation of the parties’ agreement that MSC was obliged to accept. That repudiation, it argued, ended the demurrage payment obligation.[5]

The trial judge concluded that although the demurrage clause had been appropriately triggered for a period of months, Cottonex repudiated the parties’ contract when it informed MSC that there was no realistic prospect of delivery because Cottonex did not have title to the goods. At that point, the trial judge held, the commercial purpose of the agreement was frustrated, and, importantly, MSC had no legitimate interest in affirming the contract and insisting on Cottonex’s further performance.[6] He concluded that MSC engaged in “wholly unreasonable” conduct of attempting to keep the demurrage clause alive “to generate an unending stream of free income” rather than for its commercial purpose.[7]

For the proposition that MSC Mediterranean could not affirm the contract because it had no legitimate interest in doing so, the trial judge relied, among other things, on an “increasing recognition in the common law world of the need for good faith in contractual dealings” and in particular upon the Supreme Court of Canada’s recognition in Bhasin of good faith as “a general organizing principle of the common law of contract which underpins and informs more specific rules and doctrines”.[8] MSC appealed the trial judge’s decision.

The Court of Appeal rejects Bhasin

On appeal, among other issues,[9] MSC challenged the trial judge’s conclusion that MSC was not permitted to affirm the contract after Cottonex’s repudiation. In general, a repudiatory breach does not automatically discharge the parties from performing their remaining obligations under the agreement, but rather gives the innocent party a choice; it can either (a) accept the repudiation and sue for damages, or (b) affirm the contract and insist that the counterparty perform when its obligations fall due. However, the innocent party is not entitled to choose to affirm the contract in all circumstances. It may not where it has no legitimate interest in performance; as Lord Reid stated in White & Carter (Councils) Ltd. v. McGregor:

It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If a party has no interest to enforce a stipulation, he cannot in general enforce it: so it might be said that, if a party has no interest to insist on a particular remedy, he ought not to be allowed to insist on it.[10]

Lord Justice Moore-Bick, writing the primary opinion of the Court in MSC Mediterranean, explained that the White & Carter principle is generally applied in situations where the innocent party is able to perform its continuing obligations under the agreement without the cooperation of the repudiating party. In those cases, it makes sense to look to whether the innocent party has a legitimate interest in performance of the obligation. Here, in contrast, both MSC and Cottonex had performed all of their principal obligations under the agreement with the only remaining step Cottonex’s delivery obligation, which had been rendered impossible the circumstances.[11] Lord Justice Moore-Bick reasoned that it was not open to MSC to affirm the contract and demand that Cottonex perform an impossible obligation. As such, the principle of requiring a legitimate interest in affirming the contract did not apply.

Although he concluded that the legitimate interest doctrine was inapplicable on the facts, Moore-Bick L.J. nonetheless considered the trial judge’s reliance on the “general organising principle” of good faith in contractual dealings he adopted from Bhasin. Lord Justice Moore-Bick expressly rejected such a principle in English law, preferring instead the “piecemeal solutions” approach English courts have traditionally applied:

The judge drew support for his conclusion from what he described as an increasing recognition in the common law world of the need for good faith in contractual dealings. The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences and I do not think it is necessary or desirable to resort to it in order to decide the outcome of the present case. It is interesting to note that in the case to which the judge referred as providing support for his view, Bhasin v Hrynew, 2014 SCC 71, [2014] 3 S.C.R.494, the Supreme Court of Canada recognised that in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland [2013] EWCA Civ 200 this court had recently reiterated that English law does not recognise any general duty of good faith in matters of contract. It has, in the words of Bingham L.J. in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439, preferred to develop “piecemeal solutions in response to demonstrated problems of unfairness”, although it is well-recognised that broad concepts of fair dealing may be reflected in the court’s response to questions of construction and the implication of terms. In my view the better course is for the law to develop along established lines rather than to encourage judges to look for what the judge in this case called some “general organising principle” drawn from cases of disparate kinds. For example, I do not think that decisions on the exercise of options under contracts of different kinds, on which he also relied, shed any real light on the kind of problem that arises in this case. There is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement.[12] [Emphasis added.]

In short, Moore-Bick L.J. rejected Bhasin on the basis that it would inject unnecessary uncertainty into the interpretation of parties’ contractual obligations.

Bhasin into the future

MSC Mediterranean and Bhasin represent a sharp divide between English and Canadian contract law. The Supreme Court of Canada was prepared to break with over a century of common law precedent to recognize a general organizing principle of good faith permeating existing contract doctrines and as a basis upon which to identify new ones, including the “duty of honest performance” recognized in Bhasin itself. Australia’s and New Zealand’s courts too have been open to that approach.

In MSC Mediterranean, the English Court of Appeal proved less adventurous. The law, it held, should continue along “established lines” rather than chart an uncertain new course. Nonetheless, the specific doctrines that the Supreme Court identified as manifestations of the organizing principle remain rooted in English precedent. Indeed, most aspects of the Canadian common law of contract will continue to draw upon English jurisprudence.[13] However, the English Court of Appeal’s divergence in principle gives Canadian courts an opportunity to evaluate English developments critically and to borrow approaches from jurisdictions that also recognize good faith, including Canadian civil law, U.S. states and other Commonwealth countries, such as Australia and New Zealand.