No more deemed fulfilment: The Supreme Court decision in King Crude Carriers SA v Ridgebury November LLC

The recent Supreme Court judgment in King Crude Carriers SA and others v Ridgebury November LLC marks a significant development in English contract law.

The decision arose from an appeal against an arbitration award and addresses the fundamental question of whether the so called “deemed fulfilment” principle established by the 1881 Scottish Appeal case of Mackay v Dick exists in English Law.

Background

The dispute arose from Memoranda of Agreements (the “MoAs”) for the sale of three tanker vessels executed on the Norwegian Saleform 2012 standard form (with amendments and additions).

The sellers were Ridgebury November LLC, Ridgebury Sierra LLC, and Makronissos Special Maritime Enterprise (the “Sellers”), while the buyers were King Crude Carriers SA, Prince Crude Carriers SA, and Zenon Crude Carriers SA (the “Buyers”).

Under the MoAs, the Buyers were required to pay a deposit equal to 10% of the purchase price with a third-party deposit holder within three banking days of written confirmation from the deposit holder that an escrow account had been opened to hold the funds. Both parties were further obliged to provide all necessary documentation to the deposit holder to enable the escrow account to be opened.

However, the Buyers failed to supply the required documentation, therefore preventing the escrow account from being opened. The Sellers subsequently cancelled the MoAs and commenced arbitration to recover the deposits as accrued debts based on the deemed fulfilment rule.  The Buyers’ position was that the Sellers’ sole remedy was in damages and that no loss had been suffered given that the market price for the vessels was assumed to be higher upon termination than the purchase price under the MOAs.

What is the deemed fulfilment rule?

The Sellers relied on the House of Lords decision in Mackay v Dick, arguing that where a party wrongfully prevents the fulfilment of a condition precedent to a debt obligation, the condition should be treated as fulfilled and the victim could claim the debt. As such, the Sellers treated the conditions for the deposit to be “deemed fulfilled” as the Buyers had failed to provide the documents. The Sellers argued that they should therefore be allowed to recover the deposits as debts.

An arbitral tribunal upheld the Sellers’ claim and ordered the buyers to pay $4.94million, but the Commercial Court reversed that decision, holding there was no such Mackay v Dick principle in English law. Under section 68 and 69 of the Arbitration Act 1996 the Sellers thereafter appealed to the Court of Appeal. The Court of Appeal reinstated the award, reasoning that an obligor could not rely on the non-fulfilment of a condition precedent where it had itself caused such non-fulfilment. However, the matter proceeded to the Supreme Court.

Supreme Court’s Decision

The Supreme Court unanimously rejected the Court of Appeal’s decision and held that Lord Watson’s statement in Mackay v Dick does not form part of English law. Instead, English law should proceed on the basis of the express and implied terms of the contract and their proper interpretation, not on fictional fulfilment of conditions precedent.

The key reasons the Court gave for rejecting the Mackay v Dick principle were:

1. Lord Watson derived the principle from civil law, not English common law.
2. English authorities “do not speak with one voice”; similar outcomes can be achieved through damages for breach of contract as opposed to the law of debt.
3. The principle would “fundamentally undermine the law on contracts” (especially regarding the sale of goods) and create uncertainty.
4. The principle relies on fictional legal formulations and explanations, which modern law avoids.
5. Contract law prioritises freedom of contract and interpretation of agreed terms rather than the fictional fulfilment of a condition precedent.
6. No injustice arises from rejecting the principle and remedies in damages suffice.

Key takeaways

The Supreme Court’s judgment in King Crude has significant implications for both arbitrations and commercial contract drafting. It confirms that the so-called Mackay v Dick principle has no place in English law. When a condition is not fulfilled due to breach of contract, the only remedy available is damages, not a debt claim on the basis of “deemed fulfilment”.

It further confirms that a party cannot take advantage of their own breach to treat the contract as being at an end or to claim a benefit from it. As such, parties should exercise care when drafting conditions precedent and consider the Supreme Court’s observation that it is open to the parties to include a term in the contract: “making clear that a condition precedent to a debt obligation does not apply where the failure of the condition precedent is caused by the debtor’s breach”.