Court of Appeal confirms that preventing a condition from being fulfilled will not assist a debtor

Overview  

The Court of Appeal has confirmed in the case of King Crude Carriers SA & Ors v Ridgebury November LLC & Ors [2024] EWCA Civ 719 (27 June 2024) (bailii.org) that the “Mackay v Dick Principle”, a principle that originates from the speech of Lord Watson in the Scottish case of Mackay v Dick & Stevenson (1881) 6 App Cas 251, forms part of English law. In accordance with this principle, if a party’s obligation to pay a debt is subject to a condition and the debtor wrongfully prevents that condition from being fulfilled, the condition is treated as either dispensed with or fulfilled, with the result that the debt accrues.

The opposing view advanced in this case, and the view accepted by the Commercial Court at first instance, was that the only remedy for the other party in this scenario is by way of damages for breach of contract.

The distinction between a claim in debt and a claim in damages is an important one. In a claim for damages, one must prove loss and satisfy the principles of causation, mitigation and remoteness. In a claim for debt, the claimant must only show that a sum under a contract is due and has become payable and does not have to prove loss. In addition, damages are compensatory; debts are not.

Background

The case concerns contracts for the sale of four vessels under the 2012 Norwegian Saleform. The sales were governed by four separate contracts, but the material terms of the underlying contracts were identical. The buyers were obliged to put down a deposit of10% of the purchase price with escrow holders. It was a condition precedent to this payment obligation that the parties would provide all documentation necessary to open and maintain the escrow accounts to the escrow holders without delay.

In breach of this obligation, the buyers did not provide all necessary documentation, meaning that the escrow holders could not open the escrow accounts to receive the deposits.

The contracts gave the sellers the right to cancel the contracts if the deposits were not lodged. They therefore gave notice to terminate, relying on the contractual right of cancellation and on repudiatory breach at common law.

The arbitration

The sellers then commenced arbitration against the buyers for the amount of the deposits, contending that because the buyers had breached a condition precedent to the obligation to lodge the deposits, the condition should be treated as if it had been fulfilled or waived, and the buyers were, therefore, indebted to them in the amount of the deposits. In the alternative, the sellers claimed for damages for breach of contract in the amount of the deposits.

The majority of the arbitrators found that the sellers were entitled to recover the amount of the deposits in debt because the buyers could not rely on their own breach of contract to prevent the fulfilment of a condition precedent to payment. The buyers appealed to the Commercial Court, pursuant to section 69 of the Arbitration Act 1996 (appeal on a question of law).

The Commercial Court decision

The Commercial Court found in favour of the buyers and concluded that the deposits were only recoverable in damages. This decision was based on the contention that the Mackay v Dick Principle was inconsistent with well-established principles of contract law. Dias J also found that although there was a maxim in English law that one could not derive a benefit from their own wrongdoing (such as failure to fulfil a condition precedent in breach of contract), it was necessary for there to be a mechanism which could give effect to this maxim. She found that a condition precedent could be dispensed with if a debt had already accrued but not, as in this case, where the condition was as to the accrual of the debt.

The Court of Appeal decision

The Court of Appeal judges were unanimous in their findings in favour of the sellers that the Mackay v Dick Principle should apply where there is: 

“(1) an agreement capable of giving rise to a debt rather than damages;

(2) an agreement that the debt will accrue and/or be payable subject to fulfilment of a condition precedent; and (crucially)

(3) 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 takes the form of the implied term of cooperation identified by Lord Blackburn in Mackay v Dick, or an express term, as in this case.”

Notably, it was also found that:

• Although the Mackay v Dick Principle was formulated in a Scottish appeal and was based on Scottish law, which is founded on Roman civil law, there exists a general principle at English common law that one should not be entitled to take advantage of their own wrongdoing.
• There has previously been clear adoption and application of the Mackay v Dick Principle in English law, notably in the Court of Appeal decisions in Wm Cory & Son Ltd v London Residuary Body & Western Riverside Waste Authority (unreported 5 November 1990) and Panamena Europea Navigacion (Cia Lda) v Frederick Leyland & Co Ltd [1947] AC 428.
• The Mackay v Dick Principle applies to conditions precedent to the accrual of debts and not merely to the payment of accrued debts. Accordingly, non-fulfilment of a condition precedent to a debt cannot be used as a defence to the obligation to pay a debt.
• The Mackay v Dick Principle is not inconsistent with established rules of contract law and does not interfere with the parties’ freedom of contract, since it is open to the parties to contract out of it should they choose to do so.

Comment

Parties should be aware that the Mackay v Dick Principle can be invoked where a party wrongfully prevents a condition precedent from being fulfilled. Such tactics are not viewed favourably by the English courts. That said, the principle is sensitive to the particular circumstances of the case, and parties can contract out of it by a clearly expressed or implied contrary intention. Parties should take care to ensure that their contracts reflect the intended allocation of risks and benefits between the parties in this regard.

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