Ruling confirms English contract law governs debt claims

Whether a debt arises in those circumstances, the court said, will depend on the contents of the contract between the parties and how those provisions should be interpreted.

The ruling, issued in the context of a dispute over contracts for the purchase of three vessels, has settled a long-standing legal question – whether or not there is a so-called ‘Mackay v Dick’ principle in English law.

According to the Supreme Court’s characterisation, the Mackay v Dick principle is that, where a party wrongfully prevents the fulfilment of a pre-condition to that party’s debt obligation, that condition is treated as being fulfilled.

The principle derives from an 1881 Scottish case ruled on by the House of Lords, which was the highest civil court in the UK at the time. In that case, a company that entered into a contract to purchase a machine, where the sale was conditional on the machine passing a trial, was held to owe the seller the agreed price even though the trial never took place – since it had not provided the conditions for the trial to happen.

In the case before the Supreme Court, similar factual circumstances arose: companies that agreed to buy three vessels under three separate contracts with sellers were required to provide documentation to enable the payment of deposits against the purchase price. When they failed to provide the documentation, the question arose as to whether the buyers were liable for the full purchase price even though the vessels had never been supplied to them.

The dispute over the buyers’ liability for the claimed debt was considered first in arbitration proceedings, where the sellers’ claims were successful. However, the case was then considered by the Commercial Court, which sided with the buyers. Its decision, though, was overturned by the Court of Appeal.

The question of whether the Mackay v Dick principle applies in English law was then considered by the Supreme Court, which has now issued a binding judgment on the point, confirming that there is no such principle in English law.

Part of the court’s reasoning centred on its reading of case law relating to the application of English contract law. It endorsed the view that the law “proceeds on the basis of the terms of the contract, express and implied, and their proper interpretation rather than by way of fictional fulfilment of a condition precedent”.

The court said favouring that position “is consistent with the importance which English law attaches to freedom of contract, and to the application and enforcement of the terms of the bargain which the parties have made”, adding that it “promotes certainty and predictability, which are important considerations, especially in the commercial law context”.

The court went on to consider – notwithstanding the fact that the Mackay v Dick principle was ruled not to apply – whether the contract between the buyers and sellers in this case gave rise to the accrual of debt on behalf of the buyers. It reviewed the contract’s express provisions and considered arguments from the sellers that further implied terms should apply.

The Supreme Court confirmed that there is no general presumption in English contract law “that a party may not take advantage of its own wrong”, adding that there are in fact “many contractual circumstances in which a party may do so”. It went on to reject the sellers’ debt claims based on its reading of the relevant contract terms and its interpretation of them.

Litigation expert Richard Dickman of Pinsent Masons said that the case is relevant to all businesses operating in England and Wales under English contract law.

“The fact that the ‘deemed fulfilment’ doctrine established in the Scottish case of Mackay v Dick was not upheld has confirmed that it is not part of English law – it is a civil law concept,” said Dickman. “As this unanimous ruling makes clear, the well-established principles of English contract law prevail, and it confirms that the courts are primarily concerned with the express and implied terms of the contract.”

“The decision confirmed that the party in breach of contract can legitimately defend a claim based on the non-fulfilment of a condition precedent, but this does not deprive the innocent party of seeking a remedy in damages for the breach,” he said.

Dickman said that there are lessons for businesses to learn from the ruling.    

“This judgment is a warning to businesses to ensure that the contract is drafted in such a way that it sets out an agreed sum and, crucially, a trigger for payment to allow the innocent party to bring a debt claim within the express or implied terms of the contract,” Dickman said.

“In this case, there was no express or implied trigger for payment, which precluded the sellers from bringing a debt claim. The deposit was owed but not paid, nor could it be paid, which amounted to a breach of contract claim for damages, providing no adequate remedy for the sellers as they had suffered no loss,” he added.