The Court of Appeal recently held that a buyer could not rely on its own breach of contract to avoid payment, and that the deposit they had failed to pay was recoverable as a debt (rather than damages, which claim would require satisfaction of the normal principles of causation, mitigation and remoteness). In this briefing, we explain how the so-called "Mackay v Dick" principle works and what it means for parties to commercial contracts.
Profiting from own breach
There is a long-standing legal maxim that a person should not be permitted to take advantage of their own wrong. However, as the Court of Appeal noted in the recent case King Crude Carriers SA & Ors v Ridgebury November LLC & Ors [2024] EWCA Civ 719, that principle is not of universal application, and may conflict with other legal policy, such as the importance of party autonomy and freedom of contract. In the world of commerce, for example, it may often be profitable for one party to a contract to break a contract, without necessarily inflicting equivalent loss on the other party. Usually the wronged party's remedy in such circumstances will be to sue for damages to compensate it for the actual loss caused by the breach - but that claim requires the claimant to prove their loss by clearing the attendant legal hurdles of causation, mitigation and remoteness - rather than entitling the wronged party to seek a disgorgement of the wrongdoer's profits (a highly unusual remedy).
However, on the facts of this case, the claimant argued that they should not need to sue for damages for breach of contract, but should, instead, be able to recover an unpaid deposit as a debt. This was an important point in the case - both for reasons associated with the quantum of the claim, and also as it impacted on the right to lawfully terminate the underlying contract (see further below).
By way of reminder, as succinctly summarised by the Court of Appeal: "An action in debt is one of the oldest forms of action. It is a claim to enforce a primary obligation comprising the obligor's promise to pay a sum of money. By contrast, a claim for damages is a claim to compensation which arises as a secondary obligation upon breach of a primary contractual obligation. Damages are, with limited exceptions, compensatory. Debts are not."
The facts
The Buyers and Sellers contracted for the sale and purchase of a number of second-hand oil tankers. Under the contracts, the Buyers were required to lodge a 10% deposit (amounting to approximately US $4.9 million) with an escrow agent. In order to facilitate the opening of the escrow account, the Buyers needed, and were contractually obliged, to provide necessary documentation, including a signed escrow agreement and "know your client" documentation. The Buyers did not provide the necessary documentation, meaning the escrow account could not be opened. The deposit was never paid. The Sellers gave notice to terminate the contracts and sued for the deposit amount as a debt.
The competing arguments
The Buyers argued that the opening of the escrow account was a condition precedent to them paying the deposit; that since the account was not opened, no debt had accrued, and that the Sellers' remedy was, therefore, to sue the Buyers in damages for breach of the obligation to provide documentation instead.
The Sellers, on the other hand, contended that, where the accrual of a payment obligation is subject to a condition precedent - and the other party wrongfully prevents that condition from being fulfilled - the condition should be dispensed with, or treated as fulfilled, so that the debt accrues and the debtor does not benefit from their own breach. On the facts, they argued that the Buyers should not be able to rely on their own failure to provide documentation in order to avoid the payment obligation.
Whether the Sellers could bring a claim in debt, or would have to seek compensatory damages instead, was important for a number of reasons. First, if no debt had actually accrued, then the Sellers could be found to have wrongfully terminated the contract; leaving them with a potential liability to the Buyers. Second, damages are compensatory in nature, leaving the Sellers not only to prove that they had suffered loss, but also that they had mitigated their loss. Third, in a claim for damages, the Sellers would also have to give the Buyer credit for any price movement in the market, rather than simply claiming a pre-determined contractual deposit.
In the arbitrations where the dispute first arose, the arbitrators found in the Sellers' favour. The Buyers were given leave to appeal to the High Court on a point of law under s.69 of the Arbitration Act, where Dias J held that no debt had accrued, and the Sellers' remedy was therefore a claim in damages. The Sellers appealed to the Court of Appeal.
Court of Appeal confirms Mackay v Dick principle
In its judgment, the Court of Appeal confirmed that the so-called Mackay v Dick principle, although it arose in a Scottish case of that name, is part of the law of England & Wales, and enunciated it as follows:
"an obligor is not permitted to rely upon the non-fulfilment of a condition precedent to its debt obligation where it has caused such non-fulfilment by its own breach of contract".
That principle is, however, subject to certain caveats, including that the condition in question must not be a principal obligation by the obligee, and that the principle does not apply if there is a clear express or implied contrary intention.
Contrary to the Buyers' submissions, the Court held that this Mackay v Dick principle does not interfere with freedom of contract, but rather supports it - by holding a party to its contractual bargain and preventing it from relying on its own breach to avoid making a promised payment.
In the Court's judgment, the purpose of requiring a deposit is in "earnest of performance" or security for payment, to protect the Seller from the risk of the Buyer's non-performance. A deposit operates as part-payment, but if the Buyer defaults, then the deposit is forfeited. A deposit is, therefore, a powerful disincentive to a Buyer signing a contract he does not intend to fulfil, or to failing to complete. It also has the benefit for the Seller that if the Buyer defaults, there is an ascertained amount that is forfeited without the necessity of the Seller proving loss.
In the Court's view, parties who contract for the payment of a deposit in these terms have contracted to create a valuable right to a debt, not a claim in damages. Therefore, far from representing a windfall to the Sellers, requiring the Buyers to pay the $4.94 million deposit was simply holding them to their bargain to pay a forfeitable deposit - which they sought to deprive the Sellers of by their wrongful breach of contract. As Nugee LJ put it in his concurring judgment: "it cannot have been the parties' intention that the buyer could avoid his obligation to pay the deposit by the simple expedient of deliberately failing... to sign the forms to open the account."
Buyer beware - the significance of deposit payments as security for performance
The key takeaway from this case is the valuable nature of a deposit payment. Buyers should be aware that the Court sees the purpose of a deposit as a form of security for performance, which is intended to give the seller a valuable right over and above the right to sue for damages. On the basis of this judgment, it seems it will rarely be possible for a Buyer to renege on a bargain and avoid payment simply by wrongfully preventing fulfilment of a subsidiary condition in the contract. Buyers should beware, therefore, that the Court will view an agreement to pay a deposit as a deliberate choice by the parties in how they allocate risks, with the result that non-payment is likely to be enforceable as a debt.
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