A Party Cannot Rely on Own Wrongdoing to Avoid Debt Obligation

A recent decision from the English Court of Appeal has confirmed an important principle. A party cannot seek to take advantage of its own breach to avoid obligations it owes to a counterparty. The relevant parties in this case argued that their failure to comply with a particular condition absolved them from being obliged to pay the agreed deposits as a debt. The Court of Appeal disagreed. Gearoid Carey and Gerard Kelly from our Commercial Disputes team examine this decision.

The essential principle that a party cannot seek to take advantage of its own wrongdoing was confirmed by a recent decision of the English Court of Appeal.[1] In this case, the buyers had failed to provide documentation for opening bank accounts. These accounts were where they were supposed to pay deposits to the sellers. The sellers argued that the buyers breached express contractual obligations by failing to provide documentation to open bank accounts needed to pay the deposits. As a result, the sellers contended that this condition should be considered dispensed with or fulfilled. As a consequence, the sellers claimed that the deposits should be due as a debt. The High Court disagreed, finding that the sellers’ proper remedy was damages for the buyers’ failure to provide the documentation in breach of contract.[2] On appeal, and following a detailed review of the case law, the Court of Appeal reversed that decision.

Background

The dispute between the parties related to three contracts on broadly similar terms to purchase three vessels. Each of the contracts obliged the relevant buyer to pay a 10% non-refundable deposit into an escrow bank account. The deposit in each instance was payable within three banking days following the account opening. To open the accounts, the parties were contractually obliged to “provide … all necessary documentation to open and maintain the account without delay”. However, the buyers failed to do this in different ways. The sellers consequently terminated the contracts and brought proceedings seeking the payment of the non-refundable deposits. The buyers disputed there was any such obligation. Instead, they maintained that payment was conditional on the escrow accounts being opened, which had not happened. They claimed that the sellers’ remedy was damages and that this was subject to the normal principles of causation, mitigation and remoteness. That position prevailed in the High Court and the sellers appealed.

Court of Appeal decision

The English Court of Appeal reviewed the prior case law. Having done so, it was prepared to recognise the principle that “where the accrual of a party’s obligation to pay a debt is subject to a condition, and the putative debtor wrongfully prevents that condition from being fulfilled, the condition is treated as dispensed with or fulfilled, with the result that the debt accrues.”[3]

The very reason why the precondition regarding payment of the deposits had not been met arose from the buyers' failure to provide the documentation required to open the account. It was therefore the buyers’ own breaches of the relevant contractual obligations which meant that the condition could not be met. In those circumstances, by virtue of their own breaches of contract, the buyers were not entitled to excuse their failure to satisfy the condition.

In coming to this view, the appeal court considered the nature of the contractual arrangements. It determined that the presumed contractual intention of the parties must have been that the failure to meet the conditions by the buyers gave rise to a claim in debt for the amount of the deposits. Ultimately, for the principle to apply and entitle the wronged party to claim in debt, the following conditions are required:

• A contractual arrangement which by its nature is capable of giving rise to a debt, rather than simply a claim in damages
• The arrangement must provide that the debt obligation arises subject to fulfilment of a preliminary obligation, and
• An agreement, whether express or implied, that the party with the duty to do so will not act to prevent the obligation being fulfilled and as a result, prevent the debt becoming payable

However, the court recognised two scenarios where the principle will not apply:

• If the condition precedent involves the performance of a principal obligation by the recipient of the payment, or
• Is one which that party is required to plead and prove as an ingredient of its cause of action

Noting that the principle “gives effect to contractual intention, not one which frustrates it”, Lord Justice Popplewell concluded that if the parties “have bargained for a right in debt and impliedly agreed that in the circumstances … the principle applies, the obligee should have the benefit of that bargain, namely claim in debt.”

Conclusion

In certain respects, the decision can be said to be limited to its specific context and related to the fact that the buyers’ obligation involved the payment of specific sums. It was for that reason that the Court of Appeal concluded that the buyers had an obligation to pay a debt. Had there been some other or additional obligation to be performed, the same finding may not have arisen. In such circumstances, the decision could have been to recognise only a remedy in damages. That would necessarily have been less certain. This uncertainty applies not only to the amount of potential recoveries but also to the entitlement to damages at all. The principles of mitigation, causation and remoteness would all come into play.

Although deposits are usually used only in particular types of transactions, the decision demonstrates that where a non-refundable deposit is agreed upon, the paying party will not be allowed to rely on its own failure to meet a relevant condition precedent to avoid the payment obligation. However, in more general terms, the decision can be seen as reaffirming the general principle which also applies in Ireland that the law will not permit a party to benefit from its own wrongdoing. This, it is suggested, gives the decision broader relevance than the specific context in which it arises.

For more information and expert advice on commercial disputes, contact a member of our Commercial Disputes team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] King Crude Carriers SA and others v Ridgebury November LLC and others [2024] EWCA Civ 719

[2] [2023] EWHC 3220

[3] Panamena Eurpoea Navigacion (Cia Lda) v Frederick Leyland & Co Ltd [1947] AC 428, Wm Cory & Son Ltd v London Residuary Body & Western R8iverside Waste Authority (unreported, 5 November 1990) and Mackay v Dick [1881] 6 App Cas 251 (which was cited at length) were cited to it, although the Court ultimately concluded it was not necessary to identify the precise legal basis of the principle.