In “The Agathonissos”1, when the Buyer of the vessel failed to pay the deposit under the MOA the Seller claimed the deposit as a debt. The Buyer disagreed arguing the claim was in damages for breach of contract. To date the dispute has been arbitrated and appealed to the Commercial Court and Court of Appeal, with a score 2:1 in favour of the Seller, and the latest decision also siding with the Seller.
Whether the parties had bargained for a claim in damages or a straightforward debt matters because the former requires proof of loss.
Can a party rely on it's breach of contract to its benefit?
The Court of Appeal addressed this important issue concerning the accrual of debts and the application of the Mackay v Dick principle of "deemed fulfilment." The case focused on whether the Sellers of the vessels could claim the deposits payable under the Memoranda of Agreement (MOA) as a debt or as damages, after the buyers failed to fulfil a specific condition: providing the necessary Know Your Client (KYC) documents needed to open escrow accounts for the deposits.
Key Clauses in the MOA
Clause 2: Required the Buyers to deposit 10% of the purchase price into escrow accounts, with both parties obligated to provide all necessary documents to the deposit holder to open and maintain the account without delay.
Clause 13: Allowed the Sellers to cancel the agreements if deposits were not placed as required by Clause 2 and claim compensation for losses and expenses incurred, including interest.
The Buyers did not provide KYC documents, resulting in the deposits not being paid. As a result, the Sellers terminated the MOAs and sought to recover losses as per Clause 13.
Court of Appeal Decision
Mackay v Dick Principle: The Court reaffirmed that a party cannot benefit from its own breach of contract. If a breach prevents the fulfilment of a condition precedent to a debt, the condition is deemed fulfilled or waived, allowing the debt to accrue. This prevents parties from avoiding payment obligations through their own wrongdoing
Debt vs. Damages: The Sellers argued that the Buyers’ failure to provide necessary KYC documents prevented the opening of escrow accounts and subsequent payment of deposits. The Court held that the sellers were entitled to claim the deposits as a debt rather than just damages. This is crucial because a debt claim does not require proving losses, unlike a damages claim which requires evidence of loss and could be reduced by any market gains made by the sellers upon termination of the agreement.
Court’s Analysis: Lord Justice Popplewell allowed the Sellers’ appeal, emphasising the Mackay v Dick principles. The Court identified three essential elements for applying this principle:
Debt Obligation: The agreement must be capable of giving rise to a debt rather than just damages.
Condition Precedent: The debt should accrue and/or be payable subject to the fulfilment of a condition precedent.
Prevention by Obligor: There must be an agreement, either implied or explicit, that the obligor (here the buyers of the vessel) will not take actions that prevent the condition precedent from being fulfilled, thereby hindering the debt from accruing and/or becoming payable. Without this third element, the principle does not apply.
In this case, the MOAs included explicit and implied terms of cooperation, meaning the Buyers were obliged not to hinder the conditions necessary for the debt to accrue. Whilst different contractual terms might lead to a different result, this decision highlights the importance of the implied duty of cooperation in contracts and clarifies that parties cannot evade their financial obligations through breaches that prevent the fulfilment of conditions precedent to those obligations. Whether the decision is appealed to the Supreme Court remains to be seen.
1 King Crude Carriers SA and others v Ridgebury November LLC and others [2024] EWCA Civ 719
