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Damages for breach / repudiation: where are we now?

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The Rt Hon Lord Justice Tomlinson (third from hte left) summing-up the event; to his left are Luke Pearce and Belinda McRae and to his right  Peter Daniel

The Rt Hon Lord Justice Tomlinson (third from the left) summing-up the event; to his left are Luke Pearce and Belinda McRae. To his right Peter Daniel

Damages for Breach/Repudiation of Contract, viewed in the context of international trade were the subject of a seminar and debate on April 12th.  The event was organised by the London Shipping Law Centre and hosted by international accountants Moore Stephens at their Aldersgate offices.

Luke Pearce of 20 Essex Street Chambers summarised the recent Commercial Court decision of Leggatt J. in the MSC v. Cottonex case. It concerned a claim by owners, MSC for demurrage on 35 containers of raw cotton, which they carried to Bangladesh for shippers/traders Cottonex. The latter would be liable for demurrage, at a daily rate per individual container, if the containers were not returned to MSC within 14 days of discharge.  No limit on the period for which demurrage would be due and payable was expressed in the contract of carriage. The cotton was rejected by the consignees. The market price had fallen considerably and they no longer regarded the particular consignment as a commercial proposition.

A full house - the right side of the Moore Stephens auditorium

A full house – the right side of the Moore Stephens auditorium

In spite of local court action brought by the consignees, the banks concerned honoured a letter of credit opened in favour of Cottonex, who were paid the sale price in full. However, the consignment remained under a Bangladeshi court order prohibiting any devanning of the containers without the court’s permission.  MSC then brought proceedings in London against Cottonex for the demurrage. As three and a half years had elapsed, the amount of accrued demurrage stood at over US$1 million. (The market value of the containers was only US$114, 000, US$3, 300 per container—about one-tenth of the demurrage claimed).

Luke Pearce delivering his speech

Luke Pearce delivering his speech

Cottonex did not dispute the daily rate of demurrage but challenged MSC’s period of entitlement to so claim.

This raised the question of the legitimate interest principle, confirmed by the House of Lords in 1961 in White & Carter v McGregor. Would it deprive a claimant of the right to affirm a contract following a repudiatory breach, where there was no duty at law on MSC to mitigate their losses, because the demurrage provision was a liquidated damages clause which excluded the duty to mitigate altogether?

Belinda MacRae at the podium

Belinda MacRae at the podium

Leggatt J. considered the relationship between the doctrine of penalty clauses and the legitimate interest principle, and the relevance of good faith.

The judge held that the final repudiation of the contract by Cottonex had occurred by September 2011 at the latest—a few months after discharge of the loaded containers in Bangladesh. Thereafter, MSC’s entitlement to demurrage could not be justified.  They had no legitimate interest in affirming the contract beyond that date as they had not suffered any loss thereafter. It would be wholly unreasonable for MSC to keep the contract of carriage terms alive simply to generate unending free income.

Moore Stephens Peter Daniel

Moore Stephens Peter Daniel

The judgment was handed down on January 12th 2015 but apparently the containers remain uncollected!    Leggatt J’s decision is currently under appeal to the Court of Appeal.

Belinda McRae, in her review of the law of causation and mitigation in relation to the Court of Appeal’s judgment in the New Flamenco case, covered the circumstances in which a benefit or credit accruing to the claimant, arising out of the time charter breach, ought be taken into account in assessing damages; the types of benefit or credit concerned; and the relevance of an available market or otherwise.

The New Flamenco  was a small cruise ship on charter to the defendants who prematurely terminated the charterparty, entitling the owners/claimants to damages. The owner’s losses amounted to the balance of hire due under the remaining two years of the charter. The market for such vessels had collapsed but rather than waiting for the market to improve, the owners prudently sold the New Flamenco for US$23, 765, 000.   By the time the charter would have ended but for the defendants’ breach, the market value of the vessel would have been a mere US$7, 000, 000.  In their claim for loss of hire, should owners should give credit for their avoided loss of US$16, 765, 000?

From the networking drinks and dips reception

From the networking drinks and dips reception

Ms McRae pointed out that defendants were only liable for such part of the claimants’ loss as they had caused by their breach of duty to perform the contract.

In the High Court, Popplewell J held that ”a shipowner claiming damages for charterers’ repudiation of a time charter need not give credit for the capital value of having sold the ship on repudiation for a greater sum than the value of the ship at the contractual date for redelivery under the charter.”

In the Court of Appeal, Longmore J held that “it is notoriously difficult to lay down principles of law in the realm of mitigation of loss particularly when it is said that a benefit received by a claimant is to be brought into account as avoiding the loss……   If a claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant’s loss.”

It is understood the decision is being appealed to the Supreme Court.

Peter Daniel discussed the key features of assessing quantum in “available” and “no available” market situations; the credit owners should recognise for actual earnings, costs and mitigation; discounting for the time value of money; the basis of capital value and its relevance to quantum and mitigation; wasting assets and their depreciation and their relevance to liquidated damages such as demurrage; and new issues presented by option periods and purchase options.

Mr. Daniel’s starting point for financial calculations was the Net Present Value of future earnings. In deploying Discounted Cash Flow, it was necessary to look many years ahead to account for the effects of interest, likely cash flows and changing capital values.

A further consideration was the extent which assets depreciated over time which involved both depreciation based on historic cost and influences on assets’ long term economic lifespan. He concluded: “In practice, there are very real difficulties in modelling and producing solutions which the courts will accept.”

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