Deposits, conditions precedent and the doctrine of deemed fulfilment

The ruling has confirmed that where a party prevents a condition precedent to its obligation to pay from being met, there is an English law principle which provides that the condition precedent will be deemed fulfilled or dispensed with and as a result the debt will accrue. In essence it gives effect to a legal maxim that a person should not be permitted to take advantage of their own wrong.

Background

The case concerned the sale of three secondhand oil tankers all under agreements concluded with materially identical terms on an (amended) Norwegian Saleform 2012 (the ‘MOAs’).

Clause 2 of the MOAs required each buyer to lodge a deposit of 10% of the purchase price in an account for the parties with the agreed deposit holder ‘as security for the correct fulfillment’ of the agreement. The deposit was to be lodged within three banking days of the agreement being signed and the deposit holder having confirmed, in writing, that the account had been opened and was ready to receive funds. Crucially, the clause also provided that the parties were, without delay, to provide the deposit holder with all the necessary documentation to open and maintain the account. Pursuant to this, the buyers were required to provide know-your-client documents, and to sign the escrow agreement.

After the parties had signed the MOAs, the buyers failed to provide the documentation required to open the deposit accounts and to lodge the deposits. The sellers, after tendering notices of readiness for two of the vessels, gave notice cancelling the two relevant MOAs because the buyers had failed to lodge the deposits. In respect of the third MOA, the buyers purported to terminate before the notice of readiness had been tendered. The sellers then commenced arbitration.

Arbitration award

In the arbitration, the sellers sought to recover the amount of the non-lodged deposits from the buyers of US$4.94 million as a debt, and in the alternative by a claim for damages for breach of clause 2, for failing to supply the necessary documentation to the deposit holder.

The reason the sellers wished to recover the deposit as a debt rather than damages was because when it was not paid, they could sue for the full amount of the deposit, which would become immediately due and payable under the contract, without having to prove any loss. However, if the sellers were only entitled to damages, the normal principles governing a contractual claim, including causation, mitigation and remoteness, would apply and they would need to prove their loss.

The majority of the tribunal found that the sellers were entitled to recover the amount of the deposits in debt. The buyers were liable as they had failed to provide the know-your-client documentation, preventing the deposit account from being opened and precluding the deposit holder from giving notice that the account had been opened and was ready to receive funds.

The tribunal determined that the buyers were not entitled to rely on their own breach of contract in preventing the fulfilment of a condition precedent to lodge the deposit. In its conclusion, the tribunal relied on the ‘Abacha principle’ originating from the decision of Lord Justice Rix at first instance in Compagnie Noga d’Importation et d’Exportation SA v Abacha (No 3) [2002] CLC 207. The principle was summarised by the tribunal as ‘where (i) a party breaches his contract and (ii) as a result of that breach, a pre-condition to the accrual of a debt that he would otherwise owe to his counterparty is left unsatisfied, then the relevant pre-condition is deemed to be either waived or satisfied.’

The Commercial Court’s decision

The buyers appealed the decision to the Commercial Court, where the sellers argued that the doctrine of deemed fulfilment, established under the Scottish case of Mackay v Dick & Stevenson (1881) 6 App Cas 251, applied. In that case it had been held that where a debt is subject to a condition and the debtor wrongfully prevents that condition from being fulfilled, the condition is treated as dispensed with or fulfilled, with the result that the debt accrues, and in turn, there is no need to prove a loss when recovering the debt.

However, Mrs Justice Dias, disagreed and held that no doctrine of deemed fulfilment existed in English law, and instead found that although the sellers did not have a right to recover the deposits that had not been lodged as a debt after they terminated the MOAs, they did have an entitlement in damages. The judge acknowledged that clause 13 of the MOAs provided for the buyer’s default in these circumstances and entitled the seller to ‘claim compensation for their losses and for all expenses incurred together with interest’. Even if the sellers were successful in pursuing such a claim, the buyers were unlikely to recover the full amount of the deposits that should have been paid.

The Court of Appeal’s decision

The sellers appealed and the Court of Appeal unanimously allowed the appeal. In the leading judgment from Lord Justice Popplewell, the court found that the deemed fulfilment principle in Mackay v Dick was valid English law notwithstanding that it was a Scottish case, as there was a subsequent body of case law confirming this including the House of Lords in Panamena Europea Navigacion (Cia Lda) v Frederick Leyland & Co Ltd [1947] AC 428, and the Court of Appeal in Wm Cory & Son Ltd v London Residuary Body & Western Riverside Waste Authority (unreported 5 November 1990).

Popplewell LJ conducted an extensive review of the existing case law and set out his interpretation of the principle in Mackay v Dick as to when an obligor is not permitted to rely upon the non-fulfilment of a condition precedent to its debt obligation where it has caused such non-fulfilment by its own breach of contract, at least where such condition is not the performance of a principal obligation by the obligee nor one which it is necessary for the obligee to plead and prove as an ingredient of its cause of action, and save insofar as a contrary intention is sufficiently clearly expressed, or is implicit because the nature of the condition or the circumstances of the case make it inappropriate.

In setting out the principle, the court acknowledged that the parties can expressly or implicitly contract out of the principle and that it would not apply to mutually dependent obligations themselves, such as the delivery of the goods and payment of the price.

In reaching its conclusion, the court considered the established legal maxim in English law, that ‘a person should not be permitted to take advantage of their own wrong’. It held that there was no inconsistency between Mackay v Dick and the legal maxim. The court also found that the principle ‘cut across contractual principles applicable to claims for damages such as causation, remoteness or mitigation’.

In order for the principle to apply, it must represent the presumed contractual intentions of the parties and would apply when 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 the 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.

Lord Justice Nugee in his concurring judgment summarised the relevant facts from the case as ‘A buyer agrees to buy a ship, and signs a contract. This requires him to pay a 10% deposit. In order to do that an account has to be opened. The buyer agrees to provide the documentation necessary to open the account without delay […]. The buyer fails to do so […]. That means the deposit cannot be paid.’

He then went onto insist that the ‘answer was straightforward’ and that ‘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.’ Instead, he concluded that the Mackay v Dick principle precludes a buyer from relying on the non-fulfilment of the condition precedent brought about by his own breach of failing to perform its contractual obligation, i.e., for the buyers to provide the necessary documents to enable the deposit account to be opened and the relevant notice given to trigger payment of the deposit.

Commentary

The Court of Appeal’s judgment has confirmed that the principle in Mackay v Dick (despite being a Scottish case) and the doctrine of deemed fulfilment apply under English law, and that this is consistent with the legal maxim that contracting parties do not intend for a party to be able to benefit from its own breach.

It is interesting to note that throughout the case references were made to the need for clarity from a higher court. Firstly, in a quote from the arbitration award, the arbitrators had commented that it was a matter of speculation as to whether the Abacha principle may, in the future, be reviewed by the Supreme Court. It would also be helpful if the Supreme Court were to provide its views on the formulation of the principle in Mackay v Dick set out by Lord Justice Popplewell. Secondly, the buyers reserved the right to argue that the decision in Griffon Shipping LLC v Firodi Shipping Ltd [2013] EWCA Civ 1567, which concerned a ship sale and purchase on a previous edition of the Norwegian Saleform, had been wrongly decided but accepted that they were bound by it. In that case, the Court of Appeal had found that a buyer’s failure to lodge a deposit in time gave a seller the right to terminate the sale agreement and to claim the full amount of the deposit whether or not it exceeded the seller’s actual losses.

At the time of writing there is no indication that permission to appeal to the Supreme Court has been sought in respect of this case, but it is possible that the parties will seek a further appeal and the Supreme Court may welcome the opportunity to provide clarity on these issues.

Glossary

Condition precedent: a specific condition in a contract that must be satisfied before a contract, or specific obligations within a contract, need to be performed.

Norwegian Saleform 2012: a standard form memorandum of agreement produced by the Norwegian Shipbroker’s Association and used for a large proportion of vessel sale and purchase transactions, despite the introduction of SHIPSALE 2022 by BIMCO.

Notice of Readiness: a written notice given by a seller to a buyer confirming that a vessel is physically ready for delivery in accordance with the terms of the memorandum of agreement.

Obligee: the person to whom a legal obligation is owed.

Obligor: the person who owes a legal obligation to another person.