Paying the Price: Court of Appeal holds debt still due when non-fulfilment of a condition precedent is caused by the buyer’s own breach

Background

The Buyers entered into three similar contracts with the Sellers for the sale of three ships. The contracts required the Buyers to pay a 10% deposit into an escrow account once the escrow account holder confirmed it was open and ready to receive funds. This was a condition precedent to the deposits becoming due. The Buyers were required to provide the documentation necessary to open the account to the escrow account holder “without delay”. The Buyers failed to provide this documentation and, as such, the bank account could not be opened. The deposits were not paid. 

The Sellers gave notice to terminate the contracts and commenced arbitration proceedings, claiming the deposits as a debt owed to the Sellers. 

Arbitration and High Court

In the arbitration, the Sellers successfully argued that the condition precedent to lodging the deposits was deemed to be satisfied, allowing them to recover the deposits as debts accrued due under the contracts’ terms. 

The Buyers appealed the award to the High Court, arguing that under English law there was no such principle as “deemed fulfilment” of a condition precedent, and that therefore the Sellers’ remedy lay in damages for breach of contract. The Sellers relied upon the principle established in Mackay v Dick & Stevenson (1881) 6 App Cas 251, where the Scottish court held that a condition precedent was deemed satisfied when the buyer prevented the condition from being completed. 

The High Court overturned the arbitrators’ decision, finding that, as a Scottish law case, Mackay was not binding on the English courts, and there was no authority for a doctrine of deemed fulfilment under English law. The Sellers’ remedy was for damages.

The Sellers were granted leave to appeal to the Court of Appeal.

The Court of Appeal’s decision

Overturning the High Court’s decision, the Court of Appeal allowed the appeal and held that the Sellers could recover the deposits as debts.  

After a detailed analysis of Mackay and other later English authorities, Popplewell LJ concluded that the correct English law principle is that an obligor cannot rely on the non-fulfilment of a condition precedent to its debt obligation when it has caused such non-fulfilment by its own breach of contract. The Court held that this principle applies to conditions to “the machinery of payment of an accrued debt” and to conditions to the accrual of a debt.

The principle reflects the maxim that a person should not be permitted to take advantage of their own wrongdoing, and the Court held that its legal basis is the presumed contractual intention of the parties that the obligee should have the benefit of the debt. 

In order for the principle to apply, there must be:

1. an agreement capable of giving rise to a debt rather than damages;
2. an agreement that the debt that will accrue and/or be payable subject to fulfilment of a condition precedent (provided that the condition should not be the performance of a principal obligation by the obligee, nor one that the obligee must prove in its cause of action); and
3. an agreement (express or implied) 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.

Where these ingredients are present, the natural presumption is that the parties intend the obligee will have the benefit of the debt for which it has bargained: “Put another way, the agreement that the obligor will not engage in the conduct which prevents the debt accruing and/or becoming payable implicitly carries with it an agreement that the consequence should be that the debt accrues and is payable” (unless a contrary intention is established).

The parties can therefore contract out of the principle, expressly or implicitly – i.e. where a contrary intention is “sufficiently clearly expressed or can be implied from the circumstances of the case”, the principle will not apply and the obligation will only come into existence once the condition is fulfilled.

The Court was not swayed by the Buyers’ argument that, since the market had risen, allowing the Sellers to recover the deposits as a debt would enable them to recover significantly more than they could recover in a damages claim. The Court considered that the deposits were to be paid as an “earnest of performance of the contract” to protect the Sellers from the Buyers’ non-performance. The purpose of a deposit is to secure a seller an amount of money which may exceed the amount of damages that could be recovered following a breach of the contract, but that is the nature of the bargain. The Court concluded that it could not have been the parties’ intention that the Buyers were able to avoid their obligation to pay the deposits by failing to comply with the subsidiary obligation to do what they needed to get the bank account opened. 

As Popplewell LJ concluded:

“The result in this case is not that the Sellers obtain a "windfall" US$4.94 million on the assumption that their loss caused by the Buyers' breach of contract in a damages claim would be nothing. The effect of the Buyers' breach of contract was to avoid a liability to pay US$4.94 million in circumstances where it was contractually agreed to be payable as a forfeitable deposit, irrespective of any damages claim or loss quantified by reference to market movement. To require such payment is not a windfall but rather holding the Buyers to their bargain by requiring the Buyers to provide the contractual benefit they agreed to provide, of which they have sought to deprive the Sellers by their wrongful breach of contract. In other words the bargain was for non-compensatory debt in the form of a liquidated forfeitable sum, and a remedy in non-compensatory debt, rather than compensatory damages, reflects the loss of bargain.”

Permission to appeal to the Supreme Court was granted in October of this year. 

Key takeaways

The Court of Appeal confirmed it is a principle of English law that an obligor cannot rely on the non-fulfilment of a condition precedent to its debt obligation where it has caused such non-fulfilment by its own breach of contract. This principle is subject to the contrary intention of the parties.

On a practical note, the judgment also highlights the importance of KYC requirements for buyers. An MOA may be signed by the buyer and seller in circumstances where the buyer is unaware of the documentation and KYC requirements to set up the relevant bank account, or even where these may change during this period. There could be cases where the agreement is signed but a buyer is unable to provide the KYC documents necessary to set up the bank account, breaching the contract. It is important that, before they sign the main agreement, buyers are aware of this risk and of any documentation requirements to set up the bank account.

While the Court of Appeal’s judgment should bring comfort to sellers, permission to appeal to the Supreme Court has now been granted. Therefore, to avoid ambiguity as to the status of a deposit in similar circumstances, parties could consider: (i) including a provision that if, due to the non-fulfilment of a condition by the buyer, the bank account for the deposit is not opened and/or the deposit is not paid, the deposit will remain outstanding as a debt owed by the buyer to the seller; and/or (ii) including a definition  of ‘deposit’, which expressly provides that the deposit is to be treated as a debt, which accrues on signing of the agreement. 

With special thanks to Lauren Marshall for her assistance in preparation of this article.