July, 2024 - Mackay v Dick decision defeats deposit defaulters

  • Date: 04/07/2024
July, 2024 - Mackay v Dick decision defeats deposit defaulters

In King Crude Carriers SA and others v Ridgebury November LLC and others [2024] EWCA Civ 719 the Court of Appeal confirmed the principle that where a party wrongfully prevents the fulfilment of a condition precedent to the accrual of a debt, the condition would be deemed to be fulfilled or waived; put simply, a party cannot benefit from its own breach of contract

The facts

The defendant sellers (“the Sellers”) entered into three Memoranda of Agreement (“MOAs”)  with the claimant buyers (“the Buyers”) for the sale of three second hand tankers. The MOAs were based on the Saleform 2012. 

Clause 2 of the MOAs required the Buyers to lodge 10% deposits of the purchase prices into escrow accounts in the joint names of the Sellers and the Buyers. The deposit holder was, as is usual, an international law firm, who required, as is customary, KYC documentation to be provided by both the Sellers and the Buyers before it could confirm that the deposit account was open and ready to accept payment of the deposits.

Clause 13 of the MOAs gave the Sellers a right to cancel if the deposits were not lodged in accordance with clause 2, which would entitle the Sellers to claim compensation for its losses and expenses. 

The Buyers did not provide the required KYC documents and thus did not pay the deposits, and the Sellers gave notices to terminate the MOAs.

The Sellers commenced arbitration proceedings seeking to recover the total amount of the deposits. The claim was advanced in debt, primarily on the basis that the conditions precedent to the obligation to lodge the deposits had been prevented from being fulfilled by the Buyers’ breach of clause 2 – i.e.  in failing to promptly supply the KYC documents so as to enable the opening of the escrow accounts, with the consequence that the Sellers were to be put in the same position as if the conditions had been fulfilled, or did not need to be fulfilled. 

Alternatively, the Sellers advanced a claim for damages in the same amount for the breach of clause 2 for the failure to supply the necessary documentation. 

The arbitration and appeal to the Commercial Court 

The arbitral tribunal determined on two preliminary issues that (i) applying the principle in the case of Mackay v Dick [1881] 6 App Cas 251 the Buyers were liable because they could not rely on their own breach of the agreements preventing the fulfilment of a condition precedent to payment, and (ii) the Sellers were entitled to recover the full amount of the deposits in debt.

The Buyers appealed under section 69 of the Arbitration Act 1996 on the question of law as to whether, in circumstances where a party failed in breach of contract to fulfil a condition on which an obligation for payment was contingent, the payment sum could be claimed by the wronged party in debt or whether it should be claimed in damages. 

The judge allowed the appeal holding that the claim was in damages (i.e. in principle the difference between the contract price and the market value of the ships at the date of termination) rather than debt because the Mackay v Dick principle allowed a condition to be dispensed with where it was a precondition to payment of a debt which had already accrued, but not where the condition was to the accrual of the debt, by which the remedy was confined to damages. The judge granted the Sellers leave to appeal. 

Court of Appeal judgment

The Court of Appeal (leading judgment by Popplewell LJ) allowed the Sellers’ appeal. Finding, in summary: 

1.  The Mackay v Dick principle arose from the concept that a person should not, generally speaking, be permitted in law to take advantage of their own wrong and keep the profit. It was not however a freestanding principle of universal application even in contract law. 

Damages were generally compensatory. The legal basis of the rule was that it represents the presumed contractual intention of the parties. In order for it to apply there should be an agreement:

(i) capable of giving rise to a debt rather than damages; 

(ii) that the debt would accrue and/or be payable subject to fulfilment of a condition precedent; and, crucially, 

(iii) an agreement that the obligor (here the Buyers) would not do the thing which prevented the condition precedent being fulfilled so as to  prevent the debt accruing and/or becoming payable, whether in the form of the implied term of cooperation or an express term. The principle had no application if point (iii) did not exist. 

The natural presumption arising out of that combination of ingredients was that the parties in this case intended the Sellers to have the benefit of the debt for which they had bargained. The presumption was not merely that the breach of element (iii) should give rise to a claim in damages because that ignored the bargain that the Sellers should have the benefit of a right in debt, as recognised by elements (i) and (ii). It was a principle which had been regularly applied by the courts as a matter of construction to give effect to contractual intention rather than frustrate it. The principle would not apply where a contrary intention was sufficiently clearly expressed or could be implied from the circumstances of the case. 

2.  Such a principle did not cut across contractual principles applicable to claims for damages such as causation, remoteness or mitigation because a claim for damages was not what the parties bargained for, which was for a right in debt and an implied agreement that the Sellers should have the benefit of that bargain, namely a claim in debt. 

It was enough for the Sellers in the present case to prove that but for the breach the escrow accounts would have been opened, and the deposits would have become due and been recoverable as a debt following non-payment of them. The purpose of such a deposit was to protect the Buyers against non-performance, and to secure the Sellers, by forfeiture of the deposit, by an amount of money which could well exceed the amount of damages recoverable for failure to take delivery and pay the purchase price. That was the bargain and the Mackay v Dick principle gave effect to it. 

The parties in the present case could not have intended that the Buyers should be able to rely on a deliberate breach of contract. To require payment of the deposit was not a windfall but rather holding the Buyers to their bargain by requiring them to provide the contractual benefit they agreed to provide, of which they had sought to deprive the Sellers by their wrongful breach of contract.

The Buyers were refused leave to appeal by the Court of Appeal. It remains to be seen whether they will petition the Supreme Court for leave to appeal. 

Prior to joining the Club, the Club’s Legal Director Paul Herring was heavily involved in this case for the successful Sellers.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.

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