The unpaid S&P deposit, debt and the Norwegian Saleform

The world of second-hand ship sale and purchase recently became the proving ground for the principle that a person should not be permitted in law to profit from their own wrongdoing. Stuart Plotnek outlines an important Court of Appeal decision in the case of King Crude Carriers SA v Ridgebury November LLC (2023).

The doctrine of deemed fulfilment, named after the Scottish case of Mackay v Dick of 1881, states that where the obligation to pay a debt is subject to a condition and the debtor wrongfully prevents the condition from being fulfilled, the condition is to be treated as dispensed with or fulfilled.

In King Crude Carriers SA v Ridgebury November LLC (2023) the Sellers and Buyers signed related memoranda of agreement on the Norwegian Saleform 2012 (MOA) in respect of three second-hand oil tankers. The slightly amended wording of Clause 2 of the MOAs required the deposits to be paid within three banking days after the Deposit Holder had confirmed in writing to the Parties that the deposit escrow accounts had been opened and were ready to receive funds. Each of the Clauses also contained the standard provision that the Parties were required to provide the Deposit Holder with all necessary documentation to open and maintain the deposit escrow accounts without delay.

In respect of two of the MOAs, the Buyers failed to provide the necessary Know Your Client (KYC) documentation to the Deposit Holder. In the case of the third MOA the Buyers failed to sign the Escrow Agreement. As a result, in all three instances, the Deposit Holder was unable to confirm that the escrow accounts were open and ready to receive the deposits. This resulted in none of the deposits being paid. In consequence of the Buyers’ breach under Clause 2 the Sellers terminated the contracts and commenced separate arbitrations in respect of all three MOAs.

The tribunals decided that Mackay v Dick applied as a general principle of English law and ruled in favour of the Sellers’ rights to claim the deposits in debt. The Buyers could not rely on their breaches of Clause 2 of the MOAs to prevent the fulfilment of a condition precedent and thus absolve themselves from paying the deposits.

On appeal by the Buyers, the Commercial Court ruled that the tribunals had been wrong to apply? Mackay, as the doctrine of deemed fulfilment was not an established tenet of English law. The Court further held that under the standard wording of the MOAs (as amended), unless and until the Deposit Holder had declared the accounts open and ready to receive funds, no debt had accrued and accordingly any claim that the Sellers might have sought to make should have been in damages accompanied by the evidential burden that entailed.

The Court held that whilst the Sellers’ rights to the deposits survived termination of the MOAs, (The Griffon, [2014] 1 Lloyd's Rep. 471), in the disputes under consideration the Deposit Holder was required to confirm in writing that the escrow accounts had been opened and were ready to receive the deposits. In the Court’s view this was a condition precedent to the accrual of the Buyers’ obligations to pay the deposits and the Sellers’ rights to sue for them.

In the Court’s opinion, even if Buyers had provided the required KYC documents to the Deposit Holder, they might have been rejected or queried or the Deposit Holder may have been unable to open the escrow accounts for some other reason and the Court could not ignore those possibilities when considering the application of a condition precedent. For that reason, the Sellers’ argument that the escrow arrangements were just a mechanism and that the debts accrued due three banking days after signature of the MOAs was rejected.

The Sellers appealed the decision of the Commercial Court. After setting out the facts and entering into a detailed consideration of the relevant authorities the Court of Appeal allowed the appeal and held that the doctrine of deemed fulfilment was not a standalone principle of universal application even in contract law and will apply where:

1. there is an agreement capable of giving rise to a debt rather than damages;
2. the debt would accrue and/or be payable subject to fulfilment of a condition precedent; and
3. whether an obligation to co-operate is express or implied, the obligor prevents the debt accruing or becoming payable.

To paraphrase Lord Popplewell, where there is a condition precedent relevant to either the accrual of a debt, or to its payability, it is necessary for the Mackay v Dick principle to apply in either case if a party is to be prevented from taking advantage of its own breach. The principle that a party to a contract is not permitted to rely upon the non-fulfilment of a condition precedent to avoid its debt obligation, where it has caused such non-fulfilment by its own breach of contract, is a principle which gives effect to contractual intention, not one which frustrates it.

Accordingly, the Buyers could not rely on the fact that the Deposit Holder could not confirm the opening of the escrow accounts as a result of the Buyers’ own failure to comply with the terms of the MOAs and the Sellers were consequently entitled to terminate the MOAs and claim the full amount of the deposits as debts in accordance with the decision of the Court of Appeal in the Griffon.

Comment

The decision of the Court of Appeal in King Crude Carriers SA v Ridgebury November LLC following on from the decision in The Griffon strengthens the rights of a seller under an MOA to claim the total amount of the deposit as a debt following a failure by the buyer to pay the deposit.

Whilst Clause 2 of Saleform 2012 has seen relatively little in the way of substantive amendment prior to the decision of the Court of Appeal in King Crude Carriers SA v Ridgebury November LLC, there will now be even less probability of parties agreeing to amend the Clause. Whereas a buyer might seek to amend the wording of Clause so as to try and better its position a prudent seller will wish to protect the rights afforded to him by the standard Clause 2 wording and possibly even seek to impose a time limit on production of KYC documents by a buyer seeking perhaps to also make the timing of that obligation of the essence so as to convert the obligation into a condition of the contract. Whilst that in itself would have no effect on Mackay v Dick it would make it easier to know when the non-defaulting party could terminate for non-performance. Needless to say, the outcome of any negotiations will depend on prevailing market conditions and the relative bargaining strengths of the parties and perhaps, now, buyers’ awareness of the current legal position in relation to this issue.

For further information, please contact:

Stuart Plotnek Director [email protected]

Campbell Johnston Clark offers unrivalled experience in all aspects of ship sale and purchase transactions, including second-hand sales, sale and charterback transactions and the resale of newly constructed vessels. Our services extend from expert guidance through the initial drafting and negotiation of memoranda of agreement, via production of delivery documentation and asset registration, to the closing meeting and the payment procedures inherent in multi-jurisdictional contracts.

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