Conditions precedent: own wrongdoing cannot be used to escape debt

Summary

In King Crude Carriers SA & Ors v Ridgebury November LLC & Ors¹, handed down last month, the English Court of Appeal considered the principle in Mackay v Dick & Stevenson². The principle, famously expounded by Lord Watson, can be stated as follows: where a party has wrongfully prevented the fulfilment of a condition precedent to a debt, that condition is deemed fulfilled, with the result that the debt accrues.

The Court of Appeal decided that this principle is a principle of English law (notwithstanding that Mackay v Dick is a Scottish case) and that it is broad enough to cover conditions precedent to the accrual of debts as well as conditions precedent to payment.

Background facts

The dispute was between the parties to three materially identical contracts for the sale of three vessels (the "Contracts"). Pursuant to the Contracts:

1. The buyers were obliged to lodge a 10% deposit in an escrow account with a firm of solicitors acting as escrow agent for the sellers. Crucially, both the buyers and the sellers were to "…provide to [the escrow agent] all necessary documentation to open and maintain the [escrow] account without delay"³; and
2. The sellers had a right to cancel the Contracts if:

• The 10% deposit was not lodged, in which case the sellers were also entitled "to claim compensation for their losses and for all expenses"⁴; or
• The 90% balance of the purchase price was not paid in accordance with clause 3, in which case the deposit "shall be released to the Sellers"⁵.

The Contracts were signed but the escrow agent was unable to confirm that the escrow accounts were open and ready to receive the deposits because the buyers had failed to provide the necessary documentation to open the accounts, in breach of their obligations. The deposits were not paid by the buyers to the escrow agent.

The sellers terminated the Contracts and claimed the deposits, totalling US$4.94m, as a debt rather than damages.

The parties' arguments

At first instance, the court had held that the Mackay v Dick principle was not a principle of English law and did not apply. The sellers appealed and argued that the Mackay v Dick principle is a principle of English law and did apply to the present facts. The sellers contended that although the comments made by Lord Watson in Mackay v Dick were based on Scottish law and made in the context of a Scottish appeal, they nevertheless formed part of English law because they (i) were grounded in the existing law that a party is not allowed to take advantage of its own wrong, (ii) had already been applied as ratio as a matter of English law⁶, and (iii) had previously been treated as a principle of English law in authoritative dicta⁷. The principle was expressed as follows: "where the accrual of a party's obligation to pay a debt is subject to a condition, and the putative debtor wrongfully prevents that condition from being fulfilled, the condition is treated as dispensed with or fulfilled, with the result that the debt accrues"⁸. Crucially, the sellers argued that the Mackay v Dick principle applies where the condition is as to the accrual of a debt, not only where it is a condition in the machinery of payment for an accrued debt.

The respondent buyers argued that what Lord Watson said in Mackay v Dick was a statement of Scottish, not English, law and in any event was being applied to a case concerned with a condition to the right to payment of an accrued debt, not a condition to the accrual of a debt. Additionally, the buyers contended that the sellers' case (i) interfered with the freedom of contract and (ii) cut across well-established principles of contract law governing remedies for breach of contract such as causation, remoteness and mitigation. Where a party prevents the fulfilment of a condition precedent to the accrual of a debt by its breach of contract, the buyers argued, the remedy lies in a contractual claim for breach of contract and the usual principles (including causation, mitigation and remoteness) apply.

The Court of Appeal's Decision

The Court of Appeal (Popplewell, Nugee and Falk LJJ) unanimously agreed with the sellers and allowed the appeal.

The court was of the view that, in line with the authorities⁹, "the principle expressed by Lord Watson in Mackay v Dick is a principle of English law and applies to conditions precedent to the accrual of debts, not merely conditions precedent to the payment of accrued debts, with the result that non-fulfilment of the condition forms no defence to the claim in debt"¹⁰. Popplewell LJ explained that the principle is best characterised as a presumptive rule of construction.

The court went on to say that for the principle to apply, there must be:

1. An agreement capable of giving rise to a debt rather than damages claim;
2. An agreement that the debt will accrue and/or be payable subject to fulfilment of a condition precedent; and
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 or an express term (as in this case).

The Court of Appeal emphasised that the principle in McKay v Dick is grounded in the statement of policy that a party is not permitted to take advantage of its own wrong. As Nugee LJ explained, "[i]t 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"¹¹.

The court stressed that the principle does not cut across well-established principles of contract law governing remedies for breach of contract such as causation, remoteness and mitigation. The principle does not apply those principles, because the parties did not bargain for a claim in damages. Rather, the parties bargained for a claim 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. Therefore, the court concluded, the principle gives effect to the parties' contractual bargain.

Significance

The decision provides some much needed clarity on the force and applicability of the principle in Mackay v Dick, which has been the subject of some uncertainty and criticism in the past. The Court of Appeal confirmed that the principle is a part of English law and also provided an authoritative statement as to the scope of the principle and the conditions for its application.

The decision also reaffirms the principle that the courts will give effect to a strong presumption that parties do not intend to permit a contract-breaker to benefit from his own wrongdoing. The decision will be of interest to parties in contracts that contain conditions precedent to the payment of a debt, such as deposits, earnest money or liquidated damages.

The decision is of wider significance with regard to commercial contracts, which frequently contain obligations that (i) are expressed to be conditional, and (ii) depend upon the parties' prior cooperation.