Good faith: MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789

Is a party that is entitled to terminate an agreement for breach required to exercise that right in good faith?

The facts

MSC and Cottonex agreed a contract for MSC to ship containers of cotton to Bangladesh, where a buyer had agreed to purchase the cotton from Cottonex. MSC owned the containers. The contract gave 14 days from the date the containers were put ashore in Bangladesh for the containers to be returned to MSC, after which Cottonex had to pay MSC “demurrage” charges (liquidated damages) at a daily rate, without limit in time.

While the cotton was in transit, its market price collapsed and the buyer paid for the cotton but refused to collect it. The port authority refused to let anyone unload the containers without a Court Order, which prevented Cottonex from returning the containers to MSC. Cottonex informed MSC in writing, but MSC insisted that the contract remained in place and that the liquidated damages would continue to accrue. MSC subsequently issued proceedings to claim the liquidated damages from the end of the 14 day period to continue until Cottonex returned the containers.

The High Court found MSC was not entitled to affrm the contract because: (i) Cottonex was unable to perform it; (ii) MSC should not be permitted to keep the contract alive for the sole purpose of claiming liquidated damages when no loss was being suffered; and (iii) a party that is entitled to choose whether to terminate or affrm a contract in response to a repudiatory breach should exercise that right in good faith.

The decision

The Court of Appeal agreed that MSC was not entitled to affrm the contract. However, the Court disagreed with the Judge’s reasoning and held that the contract had been frustrated, which prevented MSC from being able to exercise any right to terminate or affrm the contract. In particular, the Court did not support the Judge’s finding that there was increasing recognition of the need for good faith in contractual dealings. Instead, it held that:

• the law should develop along established lines rather than to encourage judges to look for a “general organising principle” drawn from cases of disparate kinds
• decisions on the exercise of options under different types of contract (which the Judge had relied upon) did not shed any light on the problem that arose in this case.

It further held that if a general principle of good faith were established, it would be invoked as often to undermine as to support the terms on which the parties have reached agreement. This risk was similar to an overly liberal approach as to contract interpretation (as recognised by the Supreme Court in Arnold v Britton).

Why is this important?

This decision further supports the Court of Appeal’s recent approach to good faith, ie there is no overriding principle of good faith under English law and they are resistant to developing such a principle. The approach also draw parallels with the Court’s approach to contract interpretation – the answer lies within what the parties have in fact agreed and the Court should be reluctant to interfere.

Any practical tips?

Clarity and certainty in drafting remains paramount. Do not assume that concepts of “good faith” or what is “commercially reasonable” can be relied upon to adjust the arrangement that has been documented.