King Crude Carriers SA & Ors v Ridgebury November LLC & Ors

[2024] EWCA Civ 719

There is an old legal principle arising out of the Scottish case of Mackay v Dick & Stevenson (1881) 6 App Cas 251, which says that where a party wrongfully prevented the fulfilment of a condition precedent to a debt, the condition would be deemed fulfilled, with the result that the debt accrues. In other words, a party which, in breach of contract, prevents the fulfilment of a condition precedent to their obligation to pay a debt cannot rely on the unfulfilled condition to escape their liability to pay.

The issue arose here in a dispute about the ship purchases. The buyers were supposed to provide certain documents to enable lawyers to open an escrow account ready to receive deposit payments. The lawyers could not do this because, in two cases, the buyers failed to provide them with the necessary Know Your Client documents, and, in the third case, the buyers failed to sign the Escrow Agreement. The deposits were not paid. The sellers terminated the agreement, and claimed the deposit as a debt, rather than as damages.

As to the difference between a claim for a debt and one in damages, Popplewell LJ went back 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.”

Where a claim is made under a debt, a claimant can sue for the full amount and, unlike with a claim for damages, does not have to prove its losses. Here, a claim for damages would have faced a no loss argument, and the damages would also have had to give credit for any market gain benefit made by the sellers on termination. The buyers argued that the principle interfered with freedom of contract and cut across the principles governing remedies for breach of contract such as causation, remoteness, and mitigation.

Popplewell LJ noted that there was a juridical basis for the basic principle, which arose from the concept that a person should not be permitted to take advantage of their own wrong. This was another long-standing principle which had regularly been applied as a matter of construction since at least the early 18th century. However, it is a principle of construction, not of law, and so is subject to a sufficiently clearly expressed contrary intention. If that contrary intention is sufficiently clearly expressed, or can be implied from the circumstances of the case, the principle will not apply.

The legal basis of the rule is that it represents the presumed contractual intention of the parties. In order for it to apply, there must be, firstly, an agreement capable of giving rise to a debt rather than damages; and, secondly, an agreement that the debt will accrue and/or be payable subject to fulfilment of a condition precedent. Finally, and in the view of Popplewell LJ, “crucially”, there must be an 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, whether that agreement is an implied or, here, express term of cooperation.

Popplewell LJ, therefore, formulated the basic principle in this way: 

“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.”

This does not apply to claims for damages because, the judge said, a claim for damages is not what the parties have bargained for. The parties have bargained for a right in debt and impliedly agreed that in the circumstances in which the principle applies, the obligee should have the benefit of that bargain, namely a claim in debt.

The result in the case here was not that the Sellers obtained a “windfall” US$4.94 million on the assumption that their loss caused by the buyers' breach of contract in a damages claim would be nothing. The effect of the buyers’ breach of contract was to avoid a liability to pay US$4.94 million in circumstances where it was contractually agreed to be payable as a forfeitable deposit, irrespective of any damages claim or loss quantified by reference to market movement. To require such payment is not a windfall but rather holding the buyers to their bargain by requiring the buyers to provide the contractual benefit they agreed to provide, of which they have sought to deprive the sellers by their wrongful breach of contract. 

Nugee LJ considered the position to be straightforward: 

“A buyer agrees to buy a ship, and signs a contract. This requires him to pay a 10% deposit. In order to do that an account has to be opened. The buyer agrees to provide the documentation necessary to open the account without delay. This would, I think, be implicit anyway, but in the Norwegian Saleform is an express obligation. The buyer fails to do so. It is not now disputed that that was a breach of contract – indeed, it seems to me a plain and egregious breach. That means the deposit cannot be paid. Is the buyer in those circumstances liable for the unpaid deposit? Or can he say that because in breach of contract he failed to co-operate in opening the account the deposit never became due and hence he only has to pay such damages as the seller can prove?”.

In other words, the principle in Mackay v Dick prevents a buyer from relying on the non-fulfilment of the condition precedent that they have brought about by their own breach. Nugee LJ concluded that this did not cut across ordinary contractual principles. Rather, it gave effect to the parties’ bargain.

PS

You may also recall that the Mackay case is well known for comments made by Lord Blackburn about the existence of an implied term of cooperation: 

“as a general rule where parties to a contract agree that something should be done which cannot effectually be done unless both parties concur in doing it, the contract is to be construed as requiring each to do all that is necessary to be done on his part for the thing to be carried out.”

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