King Crude Carriers SA & Ors v Ridgebury November LLC & Ors (The “Ridgebury Alina L”, “Ridgebury Astari” and “Makronissos”)

DMC/SandT/25/02

England

King Crude Carriers SA & Ors v Ridgebury November LLC & Ors (The “Ridgebury Alina L”, “Ridgebury Astari” and “Makronissos”)

English Court of Appeal: Popplewell, Nugee and Falk [2024] EWCA Civ 719: 27 June 2024

Judgment available on BAILII @

https://www.bailii.org/ew/cases/EWCA/Civ/2024/719.html [1]

Julian Kenny KC and Michal Hain, instructed by Wikborg Rein LLP, for the sellers

Nigel Eaton KC and David Barnard, instructed by Reed Smith LLP, for the buyers

SHIP SALE & PURCHASE: NON-FULFILMENT OF CONDITION: DOES BREACH OF A DEPOSIT PAYMENT OBLIGATION IN AN MOA (MEMORANDUM OF AGREEMENT)  GIVE RISE TO A CLAIM IN DEBT OR DAMAGES?

Note: Leave has been granted for this decision to be heard by the UK Supreme Court - DMC, 11 April 2025

Summary

In reversing the High Court judgment, the Court of Appeal held that, under contracts for the sale of three vessels concluded on the Norwegian Saleform 2012 (“MOAs”), where the buyers had failed to pay the deposits under clause 2, as a result of which the sellers cancelled the contracts under clause 13, the sellers were entitled to sue for the deposits as debts. The Court ruled that the pre-conditions to the obligation to pay the deposits, which the buyers, in breach of contract, had not fulfilled , were to be treated as if they had been fulfilled or dispensed with, following the principle established in the case of Mackay v Dick.

The Court of Appeal's decision is significant because a claim brought in debt did not require the sellers to prove that they had suffered an actual loss in the sense of proving the various elements of compensatory damages. On the facts of the case, the issue of actual loss was open to doubt, because the buyers alleged that the MOAs would have been frustrated or cancelled and the deposits returned in any event.

Case note contributed by Elizabeth Sloane, Solicitor of England & Wales, Hong Kong and Australia, FCIArb, Partner at Stephenson Harwood and International Contributor to DMC’s CaseNotes.

Background

In April 2022, the parties concluded three substantially identical memorandums of agreement (“MOAs”) on an amended 2012 Norwegian Saleform for the sale of the second-hand tanker vessels "Ridgebury Alina L", "Ridgebury Astari" and "Makronissos".

Under the MOAs, the buyers were required to deposit 10% of the purchase price into the escrow account ("Account") of the sellers’ law firm (“HFW”), acting in the capacity of escrow holders, within three banking days upon: (i) the signing of each of the MOAs, and (ii) written confirmation by HFW that the Account was "fully opened and ready" to receive funds.  The MOAs were signed, but the buyers failed to provide the necessary ‘Know-your-Client’ documents in respect of the first two MOAs, and failed to provide the signed escrow agreement for the third MOA.  As a result, HFW could not give the written confirmation that the escrow account was open and ready to receive the funds.   The buyers therefore did not/could not lodge any deposit for the three vessels, and the sellers terminated the MOAs.

In these circumstances, the sellers argued that the buyers' failure to provide the required documents constituted a breach of contract, such that the relevant condition precedent was deemed as dispensed with or fulfilled, meaning that the sellers were entitled to the sum of the deposits as a debt.  The buyers contended that sellers could only claim for damages for breach of contract.

The dispute was referred to arbitration in three separate references, heard together. Applying the principle established in Mackay v Dick (fn.1), a Scots law case where the House of Lords ruled that a condition precedent was deemed satisfied if the buyer obstructed its completion, the sellers were awarded the amounts of the deposits as a debt accrued due under the terms of the MOAs.

The buyers challenged the awards in the High Court, asserting that English law did not recognise the Scots law Mackay v Dick principle of "deemed fulfilment" of a condition precedent, and that the sellers' remedy should be in the form of damages for breach of contract, which on the facts alleged by the buyers would have been nil.

The High Court allowed the appeal and overturned the arbitrators' decision, holding that Mackay v Dick was not binding under English law.  As a consequence, the sellers' remedy was limited to compensatory damages and, as such, was subject to the sellers meeting the legal tests of causation, mitigation and remoteness.  

The sellers were granted leave to appeal to the English Court of Appeal.

Court of Appeal judgment

The Court of Appeal overturned the High Court’s decision.  Popplewell LJ, with whom Nugee and Falk LJJ agreed, formulated the Mackay v Dick principle as it applies under English law as follows: an obligor (a party under a contractual obligation) 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.

The Court of Appeal held that the principle is in line with the wider maxim that one cannot derive a benefit from one's own wrong.   For the principle to apply, the following three conditions were necessary:

a) the agreement was capable of giving rise to a debt rather than damages;

b) the debt must have accrued and/or been payable subject to fulfilment of a condition precedent; and

c) there must have been agreement that the obligor would not prevent the condition precedent from being fulfilled such as to mean that the debt had not accrued and/or become payable.

Where the above requirements were satisfied, the presumed contractual intention was that the obligee (a party with a contractual entitlement) would enjoy the benefit of the debt for which it had bargained.  As such, the usual rules of damages including causation, mitigation and remoteness were not applicable.

As a separate comment, the Court of Appeal considered that the purpose of a deposit is to provide security to a seller against a buyer's non-performance.  Clause 2 of the MOAs expressly provided that the deposit was to be paid as "security for the correct fulfilment of the agreement".  This was to secure for the sellers an amount of money which could (possibly) exceed the sum of damages recoverable as a result of a breach of the contract.   It was the buyers’ duty to fulfil the obligation to provide the documentation that the escrow agent needed to open the account for payment of the deposit.  The consequences of breaching such duty were not for the sellers to bear.

Nugee LJ added that it could not have been the parties’ intention that the buyers would be able to avoid their payment obligation by deliberately failing to comply with their subsidiary obligation to take all necessary steps to open the account without delay.  The right to forfeit the deposit under the MOAs represented a careful allocation of risks and consequences of the buyers' potential default on the purchase, operating as protection for the sellers without their having to prove the damages that they had suffered.

Comment

This is an important decision insofar as it provides clarification on the application of the doctrine of "deemed fulfilment" under English law.  An obligor cannot rely on its own breach or non-compliance with a condition precedent in order to avoid the accrual of a debt.  In such circumstances, the principles of compensatory damages will not be applicable, meaning that the party attempting to recover will not need to prove that they have suffered an actual loss as a result of the breach and non-fulfilment of the condition.  The decision will likely be welcomed insofar as it provides certainty in the context of ship sale and purchase contracts, both on the Norwegian Saleform and more generally.

Footnote 1 : (1881) 6 App Cas 251