In a significant decision clarifying the scope of the ‘Mackay v Dick' principle, the Court of Appeal has ruled that a party cannot rely on the non-fulfilment of a condition precedent to a debt to avoid its obligation to pay where the non-fulfilment is caused by its own breach of contract. The decision reflects the English contract law maxim that a person should not be permitted to take advantage of their own wrongdoing.
Background
A dispute arose out of three contracts for sale of second-hand oil tankers concluded on an amended 2012 Norwegian Saleform. Under the contract, the buyers were required to lodge a 10% deposit with a firm of solicitors, “HFW”, as deposit holders for the sellers.
Clause 2 of the contract stated that the deposit was only to be released to the sellers upon HFW writing to the parties to notify them that the deposit-holding accounts were open. The deposit then fell due to be paid 3 banking days after such notification. To enable HFW to confirm that the account was open, the parties were further required to provide the necessary documents to open and maintain the deposit account “without delay”.
In breach of Clause 2, the buyers failed to promptly provide the necessary documents for HFW to be able to confirm that the deposit accounts had been opened. Consequently, the deposits were not paid.
The sellers terminated the contracts and commenced arbitration to recover the amount of the deposits totalling $4.94 million. The claim was brought for recovery of the debt on grounds that the condition precedent to payment of the deposit, the notification of account opening, had been prevented from being fulfilled by the buyer's breach of contract. It was argued that, as a matter of law, the sellers were entitled to be put in the same position as if the condition had been fulfilled and that their claim, therefore, lay in debt, rather than damages.
The issue was whether the obligation to pay the deposit had fallen due despite HFW not having confirmed that the accounts were open.
The arbitral panel found that the deposit had fallen due and that the sellers were entitled to recover the amounts of the deposits in debt. The panel based its finding on the ‘the Abacha principle', that:
“where (i) a party breaches his contract and (ii) as a result of that breach, a pre-condition to the accrual of a debt that he would otherwise owe to his counterparty is left unsatisfied, then the relevant pre-condition is deemed to be either waived or satisfied” [15].
On appeal, the High Court held that English law did not recognise a doctrine of ‘deemed fulfilment' of a condition precedent as encapsulated by the Abacha principle. It concluded that the seller's claim did not lie in debt, but rather damages.
The Court of Appeal decision
The appellants contended that by operation of the Abacha principle, that their claim lay in debt i.e. recovery of the deposits.
The respondents sought to uphold the decision of the High Court that the principle is a legal fiction, instead contending that where a party prevents the fulfilment of a condition precedent to the accrual of a debt by its breach of contract, the remedy lies in damages.
The Court unanimously allowed the seller's appeal.
Setting out the difference between a claim for a debt as opposed to damages, the Court returned to basic principles:
“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” [26].
Mackay v Dick principle
The Court of Appeal traced the origins of the “Abacha” principle back to the speech of Lord Watson in Mackay v Dick & Stevenson (1881) 6 App Cas 251, preferring to refer to it as “the Mackay v Dick principle” which it set out as:
“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” [85].
Although expressed to be based on Scottish law, the Court held that the Mackay v Dick principle equally forms part of English Law. It referred to a consistent line of authority in support, including the decisions of the House of Lords and Court of Appeal in the cases of Panamena Europea Navigacion (Cia Lda) v Frederick Leyland & Co Ltd [1947] AC 428 and Wm Cory & Son Ltd v London Residuary Body & Western Riverside Waste Authority (unreported 5 November 1990) respectively, by which the Court was bound.
The Court viewed the Mackay v Dick principle to be similarly as grounded in principle as it is authority. It noted that its juridical basis was the longstanding maxim that a person should not be permitted to benefit from their own wrong. Contrary to submissions by the respondents, the Court held that the principle was not inconsistent with established tenets of contract law [78].
It further disagreed with the respondents that the principle interfered with freedom of contract or cut across contractual principles applicable to claims for damages such as causation, remoteness or mitigation [86]. Thereby in claiming the deposits as a debt, the sellers would not be required to prove their losses.
The rule is based upon the contractual intention of the parties. It was held not to apply to claims for damages because a claim for damages is not what the parties have bargained. The Court viewed this as its principled basis, as in order for the rule to apply there has to be:
- an agreement capable of giving rise to a debt;
- an agreement that the debt would accrue and/or be payable subject to fulfilment of a condition precedent; and
- an express or implied agreement that the obligor would not do anything which prevented the condition precedent being fulfilled (Cheall v Association of Professional, Executive, Clerical and Computer Staff (APEX) [1983] 2 A.C. 180, [1983] 3 WLUK 252applied) [81].
The purpose of a deposit is to protect the buyer against non-performance and to secure the seller, by forfeiture, an amount of money which could well exceed the amount of damages recoverable. That was the bargain of the parties to which the Mackay v Dick principle gave effect. The intention of the parties was that failure to pay would entitle the sellers to sue for the deposit. The Court concluded that the parties cannot have intended that the breach of contract by the buyers in failing to provide the relevant documents would allow the buyers to rely on the breach to escape their obligation to pay the deposits [89].
Recovery of the deposits by the sellers would not be, as put by counsel for the respondents, them acquiring a “windfall”, but to hold the buyers to their bargain. The remedy in non-compensatory debt, rather than compensatory damages, appropriately reflected the loss of bargain [90].
In a supplementary judgment, Nugee LJ viewed the answer as straightforward. Clearly, the buyer's failure to do what he has agreed to do to enable the account to be opened did not affect its liability to pay the deposit.
This is “precisely”, he remarked, “what the Mackay v Dick principle achieves… by precluding the buyer from relying on the non-fulfilment of the condition precedent that he has brought about by his own breach… this does not to my mind cut across ordinary contractual principles. Rather it gives effect to the parties' bargain” [107].
Significance of the decision
The decision provides clarity as to the application of the so-called doctrine of deemed fulfilment in English law supported by a meticulous and principled analysis of the caselaw. It is significant not just in the shipping context but as regards commercial contracts generally. The decision underscores the firm approach of the Court to the constructive presumption that parties do not intend to permit a party to benefit from his own breach of contract.
Read the full judgment here.
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