A Supreme Court decision late last year concluded that the longstanding principle of “deemed fulfilment” does not form part of English law. The principle provides that a condition precedent is deemed to have been satisfied if its fulfilment has been prevented by the other party. Although the Supreme Court’s decision concerned a shipping contract, it has a number of implications for the interpretation and drafting of construction contracts. In this article, the first of two on the topic, we consider how the principle of deemed fulfilment has previously been applied to construction contracts and the implications of its absence for future cases. A second article will consider the impact of the Supreme Court’s decision on a related area of law: the prevention principle.
Mackay v Dick and the deemed fulfilment principle
Mackay v Dick concerned a contract for the purchase of a steam-operated digging machine for use in railway construction in Scotland. The machine was to be delivered and a trial of its digging capacity held on a “properly opened-up” face at a railway cutting. If the trial was successful, the buyer was to keep the machine and pay the agreed price.
The machine was delivered, but the buyer failed to provide a properly opened-up face for the trial. The seller sued for the price. The House of Lords (the UK’s highest court at the time) decided in favour of the seller for two separate reasons. Lord Blackburn treated the requirement for a trial as a condition subsequent, which if it failed, would deprive the seller of its right to the agreed price. He also concluded that the buyer had an implied duty of co-operation to ensure the trial took place. He considered there to be a general rule that:
“where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.”
As the trial did not take place due to the buyer’s breach of this implied duty, the condition subsequent did not apply and the seller remained entitled to the price.
Lord Watson decided the case on a different ground. He treated the requirement for a trial as a condition precedent. In his view, the buyer’s conduct in preventing the fulfilment of that condition meant that it could be taken as being fulfilled:
“The passage … from Bell's Principles … to the effect that, 'If the debtor bound under a certain condition have impeded or prevented the event, it is held as accomplished. If the creditor had done all that he can to fulfil a condition which is incumbent on himself, it is held sufficient implement,' expresses a doctrine, borrowed from the civil law, which has long been recognised in the law of Scotland, and I think it ought to be applied to the present case.”
Lord Blackburn’s findings as to an implied duty of co-operation have long since been held to form part of English law. Lord Watson’s principle of “deemed fulfilment” has been more controversial and has now been rejected by the UK Supreme Court insofar as English law is concerned (the Court explicitly reserved the position under Scottish law).
King Crude Carriers SA v Ridgebury November LLC
This case concerned three contracts for the sale of oil tankers by Ridgebury November LLC and others (as sellers) to King Crude Carriers SA and others (as buyers). Each contract required the buyers to pay a 10% deposit into an escrow account after the account had been opened, with both parties obliged to provide the documentation needed for that process. The deposit clause read as follows:
“As security for the correct fulfilment of this Agreement the Buyers shall lodge a deposit of 10% … of the Purchase Price (the "Deposit") in an account for the Parties with the Deposit Holder within three (3) Banking Days after the date that:
(i) this Agreement has been signed by the Parties and exchanged in original or by email or telefax; and
(ii) the Deposit Holder has confirmed in writing to the Parties that the account has been fully opened and ready to receive funds.
… The Parties shall provide to the Deposit Holder all necessary documentation to open and maintain the account without delay.”
In breach of contract, the buyers failed to provide the necessary documentation to allow the deposit account to be opened. The sellers terminated the three contracts and claimed the deposits in debt, relying on Mackay v Dick. The buyers contended that the sellers' sole remedy was in damages and that no loss had been suffered.
The Supreme Court concluded that Lord Watson’s principle of deemed fulfilment from Mackay v Dick was not part of English law. Among other reasons:
- The doctrine appears to have been borrowed from the civil law and was not a creation of the common law.
- The rule produces significant anomalies in cases involving the sale of goods or land. For example, if the purchaser prevents the transfer of property in breach of contract, the seller would be entitled to the price despite retaining title to the property. See, for example, Colley v Overseas Exporters where the buyer failed to nominate an effective ship so that the seller was prevented from loading goods under an FOB contract.
- The rule promotes legal fictions (such as deemed performance or deemed waiver) without any convincing explanation or justification for doing so. Such fictions “tend to obscure transparent reasoning and, wherever possible, should be removed”.
- The correct approach under English law was to proceed on the basis of the terms of the contract, express and implied, and their proper interpretation rather than by way of fictional fulfilment of a condition precedent. This “is consistent with the importance which English law attaches to freedom of contract” and “promotes certainty and predictability, which are important considerations, especially in the commercial law context.”
- The rejection of the Mackay v Dick principle would not lead to injustice. Where a failure to fulfil a condition precedent had been caused by a breach of contract, “that breach is appropriately and adequately dealt with in English law through the claimant's remedy in damages.” In those previous cases where the principle had been applied to permit a debt claim, the same financial result could have been achieved through a damages claim. In the case before it, allowing the sellers to recover the deposit could, in contrast to damages, result in them recovering more than their net loss.
The Supreme Court also rejected an alternative argument that the deemed fulfilment principle could be supported by way of contractual interpretation on the basis that the presumed intention of the parties should be to prevent a party from taking advantage of its own wrong. The argument was summarised by the Court of Appeal as follows:
“It cannot have been the parties' intention that the buyer could avoid his obligation to pay the deposit by the simple expedient of deliberately failing to comply with what is on any view a subsidiary obligation to sign the necessary forms to open the account.”
However, the problem with this argument is that it would mean the parties cannot have intended what they clearly stated and agreed to. In this case, it would mean that the deposit obligation was not in fact conditional upon confirmation that the deposit account was “fully opened and ready to receive funds”.
The Supreme Court also cast doubt on the value of any general principle that a party cannot profit from its own wrong. Previous cases which had suggested such a principle were best rationalised as ones where such a conclusion reflected the proper interpretation of the contract in question based on the objective intention of the parties set against any relevant factual background. Those cases did not:
“support any wider presumption that a party may not take advantage of its own wrong. There are many contractual circumstances in which a party may do so. This is most obviously illustrated by the principle that damages for breach of contract are to compensate the claimant and not to punish the defendant and, subject to rare exceptions, damages or an account of profits are not awarded to strip profits made by the defendant's breach. Contract law permits efficient breach and the defendant may therefore profit from its wrong.”
A further alternative case as to implied terms was also rejected by the court.
Implications for construction contracts
The Supreme Court’s judgment affects what had previously been thought to be a fundamental principle of English law and will have wide ranging implications for many different contractual scenarios.
One of the more obvious implications for construction contracts relates to approval conditions. For example, in Bennett (Construction) Ltd v CMC MBS Ltd a domestic English construction contract included bespoke provisions for milestone payments which referred to “sign-off” of certain key construction phases. The English Court of Appeal considered various meanings of the word “sign-off”, but on the assumption that the phrase required approval by the employer, the court held that such a condition would make no difference to the contractor’s entitlement to be paid once the relevant work had been completed: “If [the work] was in a state where it could be signed off, Bennett could not avoid their liability to pay Milestone 2 simply because the document had not in fact been signed off”. The justification for that conclusion was said to be that, “if the employer prevents the issue of a certificate, which should otherwise have been issued, he cannot rely on its absence, because ‘no person can take advantage of the non-fulfilment of a condition the performance of which has been hindered by himself’”.
This reasoning would appear to run directly contrary to the Supreme Court’s comments in King Crude Carriers. Whilst the contractor in such a case would still be able to bring a damages claim, important differences may arise between such a claim and a simple debt claim. Contractual interest provisions are unlikely to apply to a damages claim, for example. Compliance with the Housing Grants Construction and Regeneration Act 1996 (as amended) may also be called into question if the employer’s refusal to certify means that no claim in debt arises (i.e. the contract would not provide for payment in such circumstances).
Similar issues might arise where a certificate from a third party, such as an architect, engineer or a contract administrator, is a condition precedent to payment (or the recovery of liquidated damages or the release of retention). For example, in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd the Court of Appeal found that interim payment certificates by an Engineer under the ICE standard form were conditions precedent to the contractor’s right to payment. However, the court noted that:
“If the arbitrator or the court decides that the Engineer ought to have issued a certificate which he refused to issue, or to have included a larger sum in a certificate which he did issue, they can, and ordinarily will, hold that the Contractor is entitled to payment as if such certificate had been issued and award or give judgment for the appropriate sum.”
This conclusion is supported by the power frequently given to arbitrators and adjudicators to open up, review and revise such certificates. However, in the absence of such a power or where court proceedings are involved, the proposition that a contractor will be entitled to payment “as if such a certificate had been issued” may need to be reconsidered in light of the decision in King Crude Carriers.
These considerations raise the possibility that parties may need to pursue claims affected by unfulfilled conditions precedent by way of damages. This in turn raises the prospect that exclusion and limitation clauses may apply in unanticipated ways. Exclusion clauses for “loss of profit” and “loss of revenue” have been held to apply to damages claims for loss of the contract price. For example, in EE Ltd v Virgin Mobile Telecoms Ltd, EE claimed for breach of an exclusivity arrangement whereby Virgin Mobile had agreed not to provide mobile phone services to its customers using any other non-EE networks. EE claimed damages in the amount of the contractually specified sums which would have been payable to it by Virgin Mobile had Virgin Mobile not diverted its customers to an alternative network. The English Court of Appeal held that the claim was precluded by an exclusion of liability in respect of “anticipated profits”, which was held by the court to have the same meaning as an exclusion for “loss of profits”.
An analogous situation might arise under a construction contract were an employer to prevent the attainment of pre-conditions to payment. For example, a contract for the construction of a power plant might specify a bonus payment of £5 million in the event that commercial operation or the commencement of testing is achieved by a specified date. The employer might be responsible for the supply of fuel to the plant and delays in supply may cause the contractor to miss the bonus milestone date. In light of King Crude Carriers, the contractor may struggle to bring a claim for the bonus payment directly, but would need to claim in damages for loss of the bonus. Such a claim might then be said to be one for “loss of profit” or “loss of revenue” in the same way as the sums claimed in Virgin Mobile were held to be “anticipated profits”.
There is, of course, no reason why the consequences of the court’s decision cannot be reversed by the parties. As the Supreme Court itself noted:
“it is always open to the parties to include a term in the contract making clear that a condition precedent to a debt obligation does not apply where the failure of the condition precedent is caused by the debtor's breach.”
Contractors in particular may wish to ensure that such a clause is included as a matter of course when negotiating future construction contracts.
The King Crude Carriers decision may also have knock-on effects on other areas of law where similar deeming principles apply without reference to the contractual terms. As noted above, a subsequent article will consider whether the decision may give cause to reassess the operation of the prevention principle.
References:
Mackay v Dick (1881) 6 App Cas 251
Colley v Overseas Exporters [1921] 3 KB 302
Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] EWCA Civ 814
Bennett (Construction) Ltd v CMC MBS Ltd [2019] EWCA Civ 1515
EE Ltd v Virgin Mobile Telecoms Ltd [2025] EWCA Civ 70
King Crude Carriers SA v Ridgebury November LLC [2025] UKSC 39
