02/07/2024

Parties cannot rely on their own wrongs: The Court of Appeal reconsiders conditions precedent

In his famous speech in Mackay v Dick (1881) 6 App Cas 251, Lord Watson said 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 that is a principle of Scottish law only, or whether it also reflects the law south of the border.

In a judgment handed down last week, the Court of Appeal has decided that Lord Watson’s speech does state a principle of English law, so that a party who, in breach of contract, prevents the fulfilment of a condition precedent to his obligation to pay a debt cannot rely on the unfulfilled condition to escape his liability to pay.

In King Crude Carriers SA and others v Ridgebury November LLC and others [2024] EWCA Civ 719, Popplewell, Nugee and Falk LJJ allowed an appeal against a judgment of Dias J who had held that, on the contrary, in such a case, the innocent party cannot recover the debt and is restricted to claiming damages for breach of contract.

Julian Kenny KC and Michal Hain acted for the successful appellant.

Background

The issue arose in the context of contracts for the sale of oil tankers in the midst of the Covid-19 pandemic. The contracts provided that the buyers of the tankers were each to pay a deposit. However, the clock on paying the deposits did not start ticking until the deposit holder, which was a firm of solicitors, had confirmed that the deposit-holding accounts were open. The buyers, in breach of contract, prevented the deposit holder from giving that confirmation by failing to provide the necessary KYC documents. In these circumstances, the question was whether the obligation to pay the deposit had fallen due, even though the deposit holder had not confirmed that the accounts were open.

In their awards, the arbitrators found that the obligation to pay the deposits had fallen due.

The buyers appealed under section 69 and Dias J reversed the arbitrators. The case then went to the Court of Appeal.

Decision of the Court of Appeal

The Court unanimously allowed the appeal. Popplewell LJ delivered the leading judgment, Nugee LJ concurred briefly, and Falk LJ agreed with both.

Popplewell LJ’s judgment contains a careful analysis of the caselaw, starting with Lord Watson’s speech in Mackay, which, Popplewell LJ holds, restates a long-established principle of English law, best characterised as a presumptive rule of construction and founded on the fundamental principle that a person should not be permitted to take advantage of their own wrong.

Therefore, unless in a particular case the parties must be taken to have intended otherwise, the rule is that a debtor cannot avoid its obligation to pay a debt by preventing the fulfilment of a condition precedent to the accrual of that debt.

Significance of the decision

This decision is of wider significance with regard to commercial contracts, which frequently contain obligations that (i) are expressed to be conditional, and (ii) depend upon the parties’ prior cooperation. 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 his own wrongdoing.

The same principle has found application in cases where a party has the right to cancel a contract if a certain event has or has not occurred. In that context, it has long been held that a party cannot wrongfully bring about the occurrence or non-occurrence of the event in question and then cancel the contract.

The decision of the Court of Appeal rationalises the caselaw in this area in a way that is clear and principled, and which confirms that the law – both north and south of the River Tweed – applies the same general rule against allowing a party to take advantage of its own breach of contract.

In the High Court, Julian Kenny KC and Michal Hain were instructed by Jamila Khan and Georgia Theakston (then of Parry Khan and Partners, now of WFW Greece) acting through Stephenson Harwood LLP.

In the Court of Appeal, they were instructed by Michael Volikas and Sophie Henniker-Major of Wikborg Rein.