Court of Appeal deters deliberate non-fulfilment of conditions: no way out of debt
The recent Court of Appeal judgment in King Crude Carriers SA & Ors v Ridgebury November LLC & Ors [2024] EWCA Civ 719, has analysed the situation where one party prevents another party from fulfilling a contractual obligation and then seeks to rely on that breach to avoid liability for a debt.
The key conclusion that the Court reached was that “an obligor is not permitted to rely upon the nonfulfillment of a condition precedent to its debt obligation where it has caused such non-fulfilment by its own breach of contract".
Background
The dispute determined by the High Court in King Crude Carriers SA & Ors v Ridgebury November LLC [2023] EWHC 3220 (Comm) arose out of contracts for the sale of three vessels, pursuant to three amended 2012 Norwegian Saleforms (MOAs). The MOAs stipulated that the buyers must place into escrow a 10% deposit and provide the necessary identification (“know-your-client”) documents to open the escrow account “without delay”. The relevant lawyers (escrow holders) were unable to open the escrow accounts because (i) the necessary documentation was not provided by the buyers (for two of the three MOAs) and (ii) the Escrow Agreement was not signed by the buyers (for the third MOA). As a result, the deposits were not paid.
The MOAs stipulated that the sellers had the right to cancel the MOAs in circumstances where the deposits were not lodged, in which case the sellers were also entitled to “claim compensation for their losses and for all expenses”. The sellers subsequently terminated the MOAs and claimed the deposit as a debt (as opposed to damages). Arbitration proceedings were commenced, and this question (among others) was determined as a preliminary issue in the sellers’ favour. This decision was then challenged by the buyers in the High Court under s69 of the Arbitration Act 1996, on the basis that there had been an error of law.
High Court decision
The High Court’s decision centred on whether the sellers were entitled to claim the deposit as a debt, or whether damages was more appropriate. The sellers relied on the Mackay v Dick principle of a “deemed fulfilment” of a condition precedent, which dates back to the judgment in the 19th century Scottish law decision of the House of Lords in Mackay v Dick (1881) 6 App Cas 251.
The Mackay v Dick principle provides that where a party has wrongfully prevented the fulfilment of a condition precedent to a debt, the condition will be deemed fulfilled and as a result the debt will accrue. The principle stems from the fundamental tenet that an individual should not be permitted to take advantage of their own wrong. Put simply, a party which deliberately prevents the fulfilment of a condition precedent to an obligation cannot then rely on the unfulfilled condition to escape liability to perform its own obligation.
The High Court held that the Mackay v Dick principle did not form part of English law and as a result the sellers’ appropriate remedy in this case was damages, for the failure on the part of the buyers to provide the documentation, which was an express requirement under the MOAs. The sellers then appealed to the Court of Appeal.
Court of Appeal decision
The Court of Appeal overturned the High Court’s decision, conducting a detailed analysis of the case law. It ruled that the Mackay v Dick principle does form part of English (as well as Scottish law). Accordingly, where a party breaches a contract and, in doing so, prevents another party from fulfilling a condition precedent, the breaching party cannot then rely on the non-fulfilment to excuse non-payment of a debt.
The Court of Appeal highlighted the circumstances in which the principle applies. This will be where there exists:
- an agreement capable of giving rise to a debt rather than damages;
- an agreement that the debt will accrue and/or be payable subject to fulfilment of a condition precedent; and
- an agreement (which may be implied) that the obligor will not do the thing which prevents the condition precedent being fulfilled so as to prevent the debt accruing and/or becoming payable.
Importantly, the Court highlighted that unless (3) above exists, the principle has no application.
In this case, the Court of Appeal held that the buyers were liable in debt for the deposit, as their conduct had prevented the placing of the deposit into escrow.
In reaching its decision, the Court also provided helpful guidance regarding the difference between a debt and damages:
- A claim in debt can be brought where a specific sum becomes due and payable under the contract but remains outstanding. The claimant can sue for the full amount and does not have to prove any loss.
- A claim in damages is brought where one party has failed to perform a primary obligation under the contract and the innocent party sues for any losses it has suffered as a result of the breach. The claimant will only recover damages to the extent that it proves its losses.
In this case the parties had agreed that part of the purchase price would be placed into escrow as a deposit. This arrangement was effectively a bargain for the sellers to have the right to bring a claim for that sum in debt, rather than in damages, and it was the conduct of the buyers that prevented the execution of the agreed arrangement
Comment
This is an important decision, providing helpful clarity on a common principle in commercial contracts. Unless the parties have indicated otherwise, a debtor cannot avoid its obligation to pay a debt by preventing the fulfilment of a condition precedent to the accrual of that debt.
The judgment is significant for claimants because claims in debt are typically more straightforward than claims in damages. This is because claims in damages are subject to rules of causation, mitigation and remoteness, which do not apply in claims for debt, where the claimant only needs to establish the liability to pay the debt and that the sum remains unpaid. Many commercial contracts include obligations which can only be satisfied if the other party cooperates and it is also common for contracts to include conditions precedent to the payment of debts, for example in relation to deposits, as in this case.
The application of the Mackay v Dick principle will depend on the factual circumstances of each case, but, this judgment is likely to be relied on by future claimants where similar, deliberate steps are taken by a party to a contract in order to prevent condition precedents being fulfilled.