King Crude Carriers SA and others -v- Ridgebury November LLC and others (Agathonissos) [2024] EWCA Civ 719
Six months after the Commercial Court found that the principle originating in the Scottish case of Mackay -v- Dick does not form part of English law, a unanimous Court of Appeal has disagreed and held that it does. The same general rule applies against allowing a party to take advantage of its own breach of contract. Parties who breach their obligations in order to frustrate the fulfilment of a condition precedent to pay a debt will be found to have fulfilled that condition precedent or dispensed with it, so that the debt accrues.
Whilst the issue arose in this case in the context of a ship sale and purchase dispute, the Court of Appeal's decision will be of wider relevance to commercial contracts generally.
The background facts
In brief terms, each of the three appellants (Sellers) agreed to sell to each of the three respondents (Buyers) a vessel on memoranda of agreement on amended NSF 2012 terms (MOAs). The MOAs were made in the middle of the COVID-19 pandemic.
Under the MOAs, the Buyers had to pre-position with the escrow holder the deposit three banking days from the date when they had been notified that the escrow account had been opened. The MOAs also provided that "The Parties shall provide to the Deposit Holder all necessary documentation to open and maintain the account without delay." In this case, however, the escrow account could not be opened because two of the Buyers did not provide the necessary KYC documentation to the escrow holder and the third Buyer did not sign the escrow agreement at all. As a result, the three-day deadline could not be triggered.
The Sellers terminated the MOAs because of the Buyers' failure to lodge the deposit and claimed the deposit as a debt, rather than as damages. As highlighted in our earlier article on the Commercial Court decision, the distinction is an important one in terms of recoverability.
In simple terms, 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 its loss. A claim in damages is brought where one party has failed to perform a primary obligation under the contract (e.g. non-delivery) and the innocent party sues for any losses it has suffered as a result of the breach. The claimant will, however, only recover damages to the extent that it proves its losses.
Earlier decisions
The matter first went to arbitration, where the tribunals found for the Sellers on the basis of the principle set out by the House of Lords in the Scottish case of Mackay -v- Dick (which dates back to 1881) and held that that, since it was the Buyers' breach of their contractual obligation to provide "all necessary documentation" to the escrow holder that prevented the obligation to pre-position the deposit from arising, the condition was deemed to be fulfilled.
On appeal, the Commercial Court disagreed and found that the principle in Mackay -v- Dick did not exist as a matter of English law. The Court concluded that, if the Sellers had a claim for the deposit, it was one for damages.
The Court of Appeal decision
The Court of Appeal has overturned the Commercial Court decision and found for the Sellers on three bases:
- Mackay- v- Dick has traditionally been treated by the English courts as applicable as a matter of English law.
- An identical principle has subsequently been laid down by both the House of Lords and the Court of Appeal in two cases binding on this Court of Appeal.
- In any event, Mackay -v- Dick reflects a principle entrenched in English common law at the time and still applicable, namely the principle that a party cannot be entitled to take advantage of a state of affairs which it has itself wrongly brought about.
The Court of Appeal added that, in circumstances in which there was:
- 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 (crucially)
- an implied or express agreement 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;
the natural presumption is that the parties intend that the obligee will have the benefit of the debt for which it has bargained.
Popplewell LJ formulated the Mackay -v- Dick principle, as this applies under English law:
"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, at least where such condition is not the performance of a principal obligation by the obligee, nor one which it is necessary for the obligee to plead and prove as an ingredient of its cause of action, and save insofar as a contrary intention is sufficiently clearly expressed, or is implicit because the nature of the condition or the circumstances of the case make it inappropriate."
Within the wider context of commercial contracts, the decision reaffirms the principle that the Courts will give effect to the presumption that parties do not intend to permit a party in breach of contract to benefit from its own wrongdoing.
Comment
To be continued? This matter could well go to the Supreme Court. Popplewell LJ's formulation of the principle is somewhat technical and may require further clarification.
Outside the legal community, the way in which Nugee LJ put it very simply may be clearer: a buyer agrees to buy a ship and signs a contract that requires him to pay a 10% deposit. An account has to be opened and the buyer has to provide the documents for that to happen without delay. The buyer does not do so and is in breach of contract. The deposit cannot be paid into the account. Should the buyer remain liable for the deposit anyway? Yes.
If the Buyers do find themselves in the Supreme Court, it will be interesting to see whether they seek to challenge the principle in The Griffon (Firodi Shipping Ltd -v- Griffon Shipping LLC [2013] EWCA Civ 1567) that the seller can claim the deposit as a debt even if the MOA is terminated before the deposit is actually lodged.
In the meantime, the Court of Appeal's formulations seeks to preserve the bargain of the contracting parties. This means that it will be affected by the contractual terms that the parties have agreed. The decision is authority for the proposition that: (a) the Mackay -v- Dick principle applies in the context of an unamended NSF 2012; and (b) it was not displaced by the parties' amendments in this case. However, different amendments could have led to a different result.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.