In a complete reversal of the High Court's decision, the Court of Appeal ("CA") in King Crude Carriers SA and ors v Ridgebury November LLC and ors [2024] EWCA Civ 719 recently affirmed that a party cannot avoid liability in debt by relying on its own failure to fulfil a condition precedent.

Summary of facts

The dispute in this matter involves the buyers ("Buyers") and sellers ("Sellers") of three vessels. All three contracts contained identical terms which obliged the Buyers to make a deposit equal to 10% of the purchase price, totalling US$4.94 million. Before making payment, the Buyers would first need to furnish Know Your Client ("KYC") documents to the escrow agent. Thereafter, the escrow agent was responsible for opening the escrow accounts and confirming the same to the parties in writing. This sequence was set out in the contracts.

The Buyers did not make payment of the deposits. In two out of the three contracts, the Buyers had not provided the escrow agent with the requisite KYC documents. In the third contract, the Buyers did not even sign the escrow agreement. Consequently, the escrow accounts could not be opened, and the escrow agent was unable to confirm in writing that payment could be made forthwith.

The Sellers sought to terminate the contracts on the basis that the Buyers had breached their contractual obligations. The Sellers then lodged a claim in debt for the deposit (US$4.94 million). The Sellers argued that if payment of a debt is subject to a condition, and the debtor wrongfully prevented this condition from being satisfied, the condition should nonetheless be deemed fulfilled. Therefore, the Sellers argued that the debt accrued even when the condition precedent was not fulfilled, and the Buyers would be liable to pay the debt.

High Court's decision

The High Court ruled that the Sellers did not have a claim in debt.

The Court considered the Scottish case of Mackay v Dick, oft cited for the principle that a condition precedent to payment of a debt is treated as dispensed with where a debtor wrongly prevented its fulfilment (the "Mackay v Dick principle"), resulting in the debt accruing.

The High Court decided that the Mackay v Dick principle would not apply where the debt had not accrued. The court was of the view that the opening of the escrow account was a precondition to the accrual of the Buyer's obligation to pay the deposit. As the escrow account was never opened and the deposits were not paid, the Sellers could not recover the deposits in debt.

Court of Appeal's decision

The CA overturned the High Court judgment and allowed the Sellers to recover the deposits amounting to US$4.94 million in debt. The CA agreed that the Sellers were entitled to claim the deposit as a debt because, but for the Buyers' breach, the escrow accounts would have been opened and the deposits would have become due and recoverable as a debt. The Buyers cannot be allowed to take advantage of their wrongdoing and must be held to the contractual benefit they agreed to provide (the forfeitable deposit). It would be impermissible for the Buyers to renege on this agreement without any liability.

In its review of the body of case law, the CA made the following observations.

(a)    The Mackay v Dick principle is an expression of the wider principle that a party should not be allowed to take advantage of their own wrongdoing;

(b)    The Mackay v Dick principle gives effect to the bargain, where the purpose of the deposit is to protect the buyer against non-performance and to secure the seller from the risk of the buyer's non-performance; and

(c)    There is no basis for drawing a distinction between conditions precedent to the payment of an accrued debt and conditions precedent to the accrual of a debt.

The Court of Appeal recognised that the Mackay v Dick principle is not a freestanding one with universal application. Accordingly, the court set out three conditions that must be met before the principle can apply [1].  There must be:

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 upon fulfilment of a condition precedent; and
3. An agreement that the obligor will not prevent the condition precedent from being fulfilled to stop the debt accruing and/or becoming payable. Such agreement may take the form of an implied or express term of cooperation.

Key takeaways

This decision gives teeth to similar clauses and reinforces the purpose of deposits as protections. Absent express wording to the contrary, it is now clear that the courts may find that certain pre-conditions have been dispensed with or satisfied if the debtor has wrongfully prevented fulfilment of the same.

Contributor to this article were Yvette Fong.