By Eleni Konstantinidou (LLB Hons, BTC)
The Court of Appeal recently clarified the importance of a deposit in Memorandum of Agreement (“MOA”) contracts, and the protection available to the seller from the risk of the buyer’s non-performance.
Lord Watson’s famous speech in Mackay v Dick (1881) 6 App Cas 251, stated that where a party wrongfully prevented the fulfilment of a condition precedent to a debt, the condition would be deemed fulfilled. It has long been debated whether the so-called “Mackay V Dick” principle arising from Scottish law also reflects the law south of the river Tweed.
In King Crude Carriers SA and others v Ridgebury November LLC and others [2024] EWCA Civ 719, the court upheld the MOA seller’s claims for unpaid MOA deposits, deciding that Lord Watson’s speech does state a principle of English law. It was held that a party could not rely on its own breach of contract to avoid payment, and that the deposit they had failed to pay was recoverable as a debt.
The dispute arose in the context of contracts for the sale of three second-hand oil tankers. Under the contracts, the Buyers were required to lodge a safety deposit of 10% of the purchase price (amounting to approximately US $4.9 million) with an escrow agent. However, the time on paying the deposits did not start running until the escrow agent, which was a firm of solicitors, had confirmed that the escrow account was open. The lawyers were unable to confirm that the account was ready to receive funds, because the Buyers, in breach of contract, had failed to provide the necessary “know your customer” (KYC) documents. In these circumstances, the question was whether the obligation to pay the deposit had fallen due, even though the escrow agents had not confirmed that the account was open.
The Buyers argued that the opening of the escrow account was a condition precedent to paying the deposit, and that since the account was not opened, no debt had accrued. They thus argued that the Sellers’ remedy was to sue the Buyers in damages for breach of the obligation to provide the necessary KYC documents instead.
On the other side, the Sellers relied on a somewhat obscure legal principle of deemed fulfilment as established in the case of Mackay V Dick, that they should be put in the same position as if the escrow agent had confirmed the account opening, as the Buyers had prevented this by breaching their separate obligation to provide all necessary documentation without delay. On the facts, they argued that the Buyers should not be able to rely on their own failure to provide documentation, and therefore avoid the deposit payment obligation.
Whether the Sellers could bring a claim in debt, or would have to seek compensatory damages instead, was important for a number of reasons. First, if no debt had actually accrued, then the Sellers could be found liable to the Buyers for wrongfully terminating the contract. Second, as damages are compensatory in nature, the Sellers would have to prove causation, remoteness, and mitigation. Finally, by claiming damages the Sellers would also have to give the Buyers credit for any price movement in the market, rather than simply claiming a pre-determined contractual deposit.
The Court of Appeal concluded that in regard to commercial contracts which frequently contain obligations that are (i) expressed to be conditional, and (2) depend upon the parties’ prior cooperation, the Buyers could not rely on the non-fulfilment of a condition precedent to their debt obligation, where such non-fulfilment was because of their own breach. Accordingly, the Sellers were entitled to cancel the MOAs on the basis that the condition precedent was deemed to have been waived or satisfied. As a result, the MOA deposits fell due as debts.
The principle reflects the maxim that a person should not be permitted to take advantage of their own wrong, this being applicable under English law where:
- there is an agreement capable of giving rise to a debt rather than damages;
- the debt accrues and/or becomes payable upon fulfilment of a condition precedent; and
- the obligor prevents the condition precedent from being fulfilled, preventing the debt accruing and/or becoming payable.
If the above conditions arise, it is presumed that the parties intended for the Sellers to have the benefit of the debt. Therefore, on the facts, far from representing a windfall to the Sellers, requiring the Buyers to pay the $4.9 million deposit was simply holding them to their bargain to pay a forfeitable deposit, of which they had sought to deprive the Sellers by their wrongful breach of contract.
The significance of this case rests on the valuable nature of a deposit payment. It 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 its wrongdoing.
This is good news to sellers in circumstances where the deposit is likely to be more than any damage that has been suffered as a result of the breach of contract, as they can elect to pursue the remedy that returns the most value to them. The parties are of course free to contract out of the Mackay V Dick principle if desired.
