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A recent case has demonstrated the necessity of seeking proper legal advice when negotiating indemnity clauses in commercial contracts, according to a corporate lawyer.
“A party to a contract has a number of potential remedies in circumstances where the other party has indicated an intention to abandon performance of the contract, known as a repudiatory breach” says Philip Round, a partner at the Wolverhampton office of George Green LLP. “Some of these remedies may not, however, be available in certain circumstances.”
Mr Round continues, “this is illustrated by the Court of Appeal case of MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt which concerned an agreement by a carrier to ship containers of cotton to Bangladesh for Cottonex, a cotton merchant. The containers were supplied by the carrier. When the market price of cotton collapsed during transit, the buyer refused to collect the cotton, albeit that Cottonex had obtained payment through a letter of credit. The customs authorities refused to allow unloading of the cotton without a court order, which neither Cottonex nor the purchaser were in a position to obtain – the carrier was therefore unable to retrieve its containers.”
According to Mr Round, the contract imposed a charge for each additional day’s delay in returning the containers. “When Cottonex informed the carrier that it no longer had title to the cotton following payment under the letter of credit, and could not therefore facilitate the return of the containers, the carrier offered to purchase them from Cottonex, but no agreement was ever concluded. The carrier issued proceedings, claiming ongoing payment of the daily charge pending return of the containers. It was held, however, that in seeking to negotiate a sale of the containers, the parties evidenced an intention to abandon performance of the contract, a repudiatory breach. Whilst it is usually possible for the innocent party either to accept the breach and end the contract, or to affirm the contract and insist on performance by the other party, the Court of Appeal stressed that the option to affirm is only available where the innocent party has a legitimate interest in continuing to perform the contract. In this instance it was clear that the carrier only insisted on performance so as to receive the continuing daily charge, which by now was well in excess of the cost of the containers. It was therefore only permissible to recover such charge until the date of the repudiatory breach.”
Mr Round concludes, “the case indicates that in certain circumstances a party will only be entitled to obtain reimbursement under an agreed indemnity to the extent that it does so in good faith. It is crucial that in negotiating and seeking to enforce indemnity clauses, a party is properly advised on the likely legal effect of certain provisions – inserting an express indemnity into a written agreement does not always guarantee enforceability.”