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Bankruptcy and the voluntary termination of Maritime Service Contracts

On October 8, 2020, the United States Court of Appeals for the Second Circuit issued an unpublished opinion affirming judgment of the United States District Court for the Southern District of New York, that a vessel operator’s bankruptcy and voluntary termination of various service contracts relieved the shippers of any obligation to pay liquidated damages under the contract.  In re: The Containership Company (TCC) A/S, 19-3394 (2d Cir. Oct. 8, 2020).  Plaintiff, The Containership Company (TCC), provided trans-Pacific container-shipping services between Los Angeles, California and various ports in China.  TCC entered into several service contracts with shippers who agreed to ship a “minimum quantity commitment of cargo” on board vessels chartered by TCC for the period of April 2010 – April 2011. The contracts between TCC and the shippers provided for liquidated damages for any shortfall in the minimum quantity commitment. On or about April 7, 2011, TCC announced that it would discontinue its trans-Pacific shipping services and cancelled the remaining scheduled sailings. After withdrawing the previously chartered vessels and terminating all employees, TCC sent demand letters to Defendants alleging they had failed to meet the minimum quantity commitment.

TCC initiated bankruptcy proceedings in Copenhagen, Denmark and obtained Chapter 15 recognition of the foreign bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of New York. Shortly thereafter, TCC commenced seventy-six (76) adversary proceedings against Defendants, each containing a single claim for breach of the service contracts. The Bankruptcy Court recommended that judgment be entered in favor of the Defendant shippers on the basis that TCC’s discontinuation of the trans-Pacific service constituted voluntary termination of the service contracts and relieved Defendants of their remaining minimum quantity commitments.  The District Court affirmed the Bankruptcy Court’s order.

On appeal, the Second Circuit agreed that under the plain language of the contracts, TCC’s discontinuance of service constituted termination of the contracts which excused all parties from penalty or further contractual obligations. The Second Circuit further concluded that TCC’s discontinuance of its trans-Pacific service deprived Defendants of the opportunity to fulfill their minimum quantity commitments under the contracts and excused Defendants from complying with any other contractual obligations. TCC’s alternative argument that the contracts had been breached before the voluntary discontinuance because the shippers had not “shipped the goods evenly” over the contract term was rejected out of hand by the Court on the basis that the contracts did not contain any objective or clear guidelines against which to measure such efforts. Accordingly, the Second Circuit affirmed the judgment in favor of the shippers.

To read the full opinion, please click here.

Source: Chalos & Co, P.C.