Paying the Price: Supreme Court rejects “deemed fulfilment”

Background

The Buyers entered into three similar memoranda of agreement ("MOAs") with the Sellers for the sale of three ships under the Norwegian Saleform 2012 (the "Saleform"). Clause 2 of the MOAs 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 and the deposits were not paid. 

The Sellers terminated pursuant to the express cancellation right, and claimed the deposits as debts, relying on the Mackay principle. In Scottish law, this enables a condition to be treated as fulfilled when its performance is prevented by the other party’s breach. On this set of facts, it would have enabled the pre-conditions to the deposit to be “deemed fulfilled” due to the Buyers' failure to provide the documents, thereby allowing the Sellers to recover the deposits as debts. Had the deposit become payable (i.e. the account had been opened), it would have been owed to the Sellers by the Buyers in debt, pursuant to English law. 

The matter went to arbitration and the Tribunal found that the Sellers could recover the sum in debt. This has now been overturned by the Supreme Court. For a summary of the decisions made in the arbitration, High Court and Court of Appeal, you can read our article here.

The Supreme Court's decision

Overturning the Court of Appeal, the Supreme Court found for the Buyers on each issue and concluded that the Sellers had no claim in debt. Their only route was in damages for the Buyers’ breach of contract and, therefore, subject to the rules on mitigation and remoteness. 

The Mackay principle

The Supreme Court held that the principle of “deemed fulfilment” established in the Scottish case of Mackay v Dick & Stevenson (1881) 6 App Cas 251 is not a valid principle in English law, for six main reasons:

1. The Mackay judgment did not cite or rely on any English legal authority. Instead, it was justified as “a doctrine borrowed from the civil law”.
2. English law authorities which discuss the Mackay principle are inconsistent. The Supreme Court noted that, in the main cases relied upon to support the Mackay principle, the same outcome could have been reached by awarding damages for breach of contract, rather than recognising a debt. 
3. The Mackay principle conflicts with the law on contracts for the sale of goods. For example, in a sale of goods, the buyer’s obligation to pay typically arises when property has passed or the goods have been accepted. Deeming a condition satisfied because the buyer prevented it would permit recovery of the price without property passing. The Supreme Court therefore cautioned that applying the “deemed fulfilment” principle would have “extraordinary” and “far reaching” consequences in situations such as this. The only way to avoid this, it said, would be to cut back the Mackay principle, which the Supreme Court concluded would be undesirable.  
4. The Supreme Court placed strong emphasis on the idea that the various formulations used to support the Mackay principle are legal fictions, such as “deemed performance”, “deemed waiver” and “quasi-estoppel”. The Supreme Court held that, in these circumstances, there has been no performance and so the elements of a true waiver or estoppel are not satisfied. Modern English law seeks to avoid fictions, and the Supreme Court concluded that “there is no convincing explanation for Mackay v Dick as a principle of law”.
5. English contract law is premised on applying and interpreting the agreed terms (including any necessary implied terms), not by treating conditions precedent as fictionally satisfied. The Supreme Court noted that this aligns with freedom of contract emphasised in English law, and promotes certainty and predictability in commercial contexts. 
6. The rejection of the Mackay principle does not lead to injustice, even if the claimant suffers no loss (as in a rising market). The Supreme Court held that where a breach of contract prevents fulfilment of a condition precedent, the law provides an adequate remedy in damages, which puts the claimant in as good position as if the contract had been performed (subject to mitigation and remoteness). The Supreme Court highlighted that there is no good reason to uphold a debt claim that could let a claimant recover more than its net loss, as would have happened here. 

Contractual interpretation

The Supreme Court made plain that the authorities show there is no general presumption that a party may not take advantage of its own wrong. It noted that the maxim may only apply in certain circumstances, such as where a party seeks to rely on its own breach to terminate a contract or obtain a benefit under it. Here, the Buyers admitted that they were in breach and did not seek to claim a benefit or otherwise enforce a right under the MOAs. If anything, they exposed themselves to damages. The Supreme Court noted that this reflects the principle in English law that damages for breach of contract are to compensate the claimant, not punish the defendant. 

The Supreme Court dismissed the Sellers’ argument that the parties had a presumed intention that a party entitled to payment should have the benefit of the debt, despite non-fulfilment of the agreed preconditions. If the parties intended the Sellers to be paid regardless, they would not have made payment of the deposit conditional. Instead, the wording of clause 2 is clear: the obligation to lodge the deposit arises only when the MOAs have been signed and exchanged, the parties have provided the necessary documentation for the escrow account, and the deposit holder has confirmed in writing that the account is open and ready to receive funds. Accepting the Sellers’ case would essentially strike out the conditions and rewrite the contract. 

The Supreme Court stressed that terms are taken to mean what they say and that, if payment was intended regardless of the conditions, the contract would say so. Here, the clause 2 pre-conditions apply according to their terms and are not disapplied because the Buyers defaulted.

Implied terms

The Sellers contended that the MOAs contained three implied terms requiring the Buyers to pay the deposit directly to the Sellers if the Buyers prevented the escrow account from being opened. The Supreme Court rejected each of these on the basis that any such implied term was neither necessary nor obvious, and was inconsistent with the express wording of clause 2. The Supreme Court explained that treating the deposit holder’s account as unnecessary would make clause 2 unworkable. Without the Buyers' documentation, the escrow account cannot be opened and so there is no account to pay into. Requiring payment straight to the Sellers would rewrite the terms by removing the escrow protection built into the Saleform. The Supreme Court recognised that escrow arrangements are an important part of the Saleform in that they provide protection for buyers, and are not merely payment machinery. Thus, the Supreme Court found that imposing such an obligation would fundamentally alter the risk allocation and security structure of the Saleform. 

The Supreme Court also noted that the MOAs already deal expressly with the consequences of failing to lodge the deposit in clause 13. This stated that the Sellers may cancel and claim compensation. For these reasons, the Supreme Court dismissed the implied term route. 

Accrual of debt

Finally, the Sellers had argued that the debt accrued on signing the MOAs. Therefore, the Supreme Court considered whether the right to the deposit accrued when the MOAs were concluded, with the result being that the clause 2 requirements are only pre-conditions to the timing of payment rather than to the existence of debt. The significance of this point is that the right to a debt can accrue before it becomes payable, so the payment date may be later.

In this case, the Supreme Court held that the MOAs do not make any such distinction. Under clause 2, the Buyers’ obligation to lodge the deposit within three banking days arises only after the pre-conditions are satisfied, including the provision of documents to open the escrow account. Therefore, the Supreme Court concluded that such pre-conditions relate to the accrual of the right to the deposit, not to it becoming payable. 

As the MOAs were based on the standard Saleform, the Supreme Court emphasised the need for certainty in commercial drafting. It was reluctant to disturb settled commercial practice and noted: “if the business community is not satisfied with a decision, the form can be altered”. 

Key takeaways

The judgment conclusively establishes that there is no English law doctrine of “deemed fulfilment”. If a condition is not fulfilled because of a party’s breach, the innocent party’s remedy is in damages, unless the contract expressly states otherwise.  

If a seller wants payment of a deposit to be due in the event of non-fulfilment of a condition precedent caused by the payer, that intention must be stated expressly in the contract. Otherwise, the seller’s remedy is damages for breach of contract, with proof of loss required (subject to mitigation and remoteness). In rising markets, as was the case here, it may be difficult to prove such losses. 

A practical drafting solution may be to state expressly that the deposit accrues as a debt on signing of the relevant contract. Parties might also consider stating expressly that a failure to provide documentation, or to open an escrow account, does not postpone nor negate the buyer’s liability to pay the deposit. 

Parties should not rely on the Court to “fill the gaps” and should ensure that they draft terms clearly, for example ensuring the timing of the accrual of a debt is expressly dealt with. This reflects the approach of the English courts that they are generally unwilling to rewrite contracts through interpretation or implied terms to avoid perceived unfairness.

With thanks to James Nicholls for his assistance in preparing this post.