Court of Appeal finds party cannot avoid paying debt by relying on non-fulfilment of condition precedent caused by its own breach of contract

The Court of Appeal has held that the sellers of second-hand tanker vessels were entitled to claim as a debt the deposits promised by the buyers, despite the non-fulfilment of a condition precedent to the payment of the deposits under the sale contracts, where that non-fulfilment was caused by the buyers' own breach of contract: King Crude Carriers SA v Ridgebury November LLC [2024] EWCA Civ 719.

The court's decision was based on the principle in Mackay v Dick & Stevenson (1881) 6 App Cas 251, that a party cannot rely on its own breach to claim that a condition precedent has not been met. While that was a Scottish case, the court confirmed that the principle is part of English law and aligns with the maxim that no one can benefit from their own wrong.

The court found that the legal basis for this principle is the presumed contractual intention of the parties, in that they have implicitly or explicitly agreed that the obligor will not prevent the debt from accruing and/or becoming payable. Accordingly, the parties can contract out of this principle, either expressly or implicitly.

The court rejected the buyers' contention that their breach should not entitle the sellers to claim the deposits as a debt, and that any remedy lay in damages – but in fact the sellers had not suffered any damage since the market had risen by the time of the breach. The parties' bargain was that, if the deposit was not paid, the sellers were entitled to recover it in full, regardless of any actual loss incurred. In the court's judgment, they could not have intended that the buyer should be able to rely on its own breach to avoid that obligation becoming due.

The clear message from this decision is that, unless the contrary intention is clear from the contract or the surrounding circumstances, a party will not be able to rely on its own breach to avoid incurring liability for a debt by preventing fulfilment of a condition precedent to the accrual or payment of that debt.

Background

The dispute arose from three materially identical contracts for the sale of second-hand tanker vessels between the claimants (the "Sellers") and the defendants (the "Buyers"). The contracts stipulated that the Buyers were to lodge a 10% deposit in an escrow account managed by Holman Fenwick & Willan Greece (HFW) within three banking days after certain conditions were met, including that HFW had confirmed that the account was ready to receive funds.

The parties were required to provide all documentation necessary to open and maintain the escrow account to HFW "without delay". However, the Buyers failed to provide the necessary documentation to open the escrow account, and therefore HFW was unable to confirm that the escrow accounts were ready to receive the deposits. Consequently, the deposits were not lodged. The Sellers terminated the contracts on the basis of the Buyers’ non-compliance and commenced arbitration, claiming the deposits totalling USD 4.94 million as a debt.

The Sellers argued that the Buyers' failure to provide the required documents constituted a breach that prevented the fulfilment of a condition precedent. They contended that under the principle laid down in Mackay v Dick, this wrongful prevention entitled them to treat the condition as dispensed with or fulfilled and to recover the deposits as a debt. The Buyers, however, contended that the proper remedy lay in damages for breach of contract, not in debt.

The arbitration tribunal ruled in favour of the Sellers, applying the Mackay v Dick principle. The High Court (Dias J) overturned this decision, holding that the claim should lie in damages, not debt, but granted the Sellers permission to appeal.

Decision

The Court of Appeal allowed the appeal and overturned the High Court's decision.Popplewell LJ gave the leading judgment, with which Nugee and Falk LJJ agreed. Applying Mackay v Dick, the court ruled that the Sellers were entitled to recover the deposits as debts because the Buyers wrongfully prevented the escrow conditions from being fulfilled.

Is the Mackay v Dick principle part of English Law?

The Buyers argued that, since Mackay v Dick was a Scottish appeal based on Scottish law with civil law origins, the principle is not part of English law. The court rejected this argument following an extensive review of the historical and jurisprudential foundations of the Mackay v Dick principle. The principle in Mackay v Dick reflected English common law at the time and was aligned with the maxim "nullus commodum capere potest de injuria sua propria" (no one can benefit from their own wrong), which had been regularly applied by the English courts to aid in the construction of contracts.

The Buyers also contended that the Mackay v Dick principle had limited application, asserting that it only applied to cases involving condition precedents to the machinery of payment of an accrued debt, rather than condition precedents to the accrual of a debt. However, the court rejected this submission, citing Panamena Europea Navigacion (Cia Lda) v Frederick Leyland & Co Ltd [1947] AC 428 and the unreported Court of Appeal case Wm Cory & Son Ltd v London Residuary Body & Western Riverside Waste Authority (5 November 1990), both of which were binding on the court and which supported the application of the Mackay v Dick principle to both scenarios.

The legal basis of the Mackay v Dick principle

The court recognised that various authorities use different terms to describe how the Mackay v Dick principle operates. In some instances, the language suggests that the condition is deemed fulfilled. In other cases, it is expressed that the condition is dispensed with. Other authorities use the language of estoppel, quasi-estoppel, or waiver to describe the principle.

However, these terms explained how the principle functions in practice rather than establishing a definitive legal doctrine. In the court's view, the legal basis for the Mackay v Dick principle is the presumed contractual intention of the parties "that the obligee will have the benefit of the debt for which it has bargained."

The court found that the principle is only applicable where there is:

1. An agreement capable of giving rise to a debt.
2. A condition precedent for the debt's accrual or payment (which condition should not be the performance of a principal obligation by the obligee, nor one that the obligee must prove as part of its cause of action).
3. An implicit or explicit agreement that the obligor will not prevent the debt from accruing and/or becoming payable.

The court rejected the argument that the principle interferes with the freedom of contract, emphasising that it aims to give effect to contractual intention, not to frustrate it. It also applies only in the absence of a contrary agreement, respecting the parties' autonomy to disapply it if they choose.

In the court's view, the principle does not conflict with contractual principles applicable to claims for damages, such as causation, remoteness, or mitigation. These principles do not apply when 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."

Application of the Mackay v Dick principle

The Buyers argued that, since the market had risen by the time of the breach, the Sellers had not suffered any loss and in fact terminating the contract had resulted in a market gain. Allowing the Sellers to recover the deposit as a debt, they contended, would provide a windfall on a rising market and enable the Sellers to recover more than any amount recoverable in damages.

The court rejected these arguments. It held that the deposits served as a security measure to protect the Sellers from the Buyers' failure to perform the contract. The parties had agreed that, if the Buyers failed to pay the deposit, the Sellers were entitled to recover it in full, regardless of any actual loss incurred. The parties could not have intended that they should be able to rely on that breach of contract to avoid the obligation to pay the deposits.

The court noted that some commentators had suggested the Mackay v Dick principle dispensed with the requirement of causation but in fact, it said, the concept of a causative link is inherent in the principle itself. The obligor's conduct must have prevented the condition precedent from being fulfilled. Here, the Buyers' conduct had caused the accounts not to be opened by HFW. It was enough for the Sellers to prove that, but for the breach, the accounts would have been opened, in which case the deposits would have become due and recoverable as a debt.