Deposit Denied: UKSC Draws the Line in the King Crude Escrow Saga

Background

The dispute arose from the sale of three vessels under Memoranda of Agreement (“MOAs”) each based on the popular Norwegian Saleform 2012 (with amendments), which were terminated in 2021. The MOAs contained several key provisions relevant to the dispute:

• Clause 2 (as amended) required the Buyers to deposit 10% of the purchase price into an escrow account within three banking days of signing, once the account was confirmed open. Both parties were obliged to provide all necessary KYC documents to the Deposit Holder without delay.
• Clause 13 allowed the Sellers to cancel the agreements if the deposit was not placed as required by Clause 2, and to claim compensation for any losses and expenses incurred, including interest.

When the Buyers failed to provide the necessary KYC documents, the escrow accounts could not be opened and consequently the deposits were not lodged. The Sellers terminated the MOAs on the basis of the Buyers’ non-compliance and sought to recover the deposits as a claim in debt, rather than damages.

The Sellers argued that the Buyers' failure to provide the required documents amounted to a breach that prevented fulfilment of a condition precedent. On this basis, they contended that the condition should be treated as dispensed with or fulfilled, entitling them to recover the deposits as a debt, without the need to prove any loss. The Buyers, in contrast, maintained that the appropriate remedy was damages for breach of contract, not a debt claim.

Procedural History

The dispute was first referred to arbitration, where the Sellers’ claim for payment of the deposits as debts succeeded.

The Buyers challenged the tribunal’s award in the High Court under sections 68 and 69 of the Arbitration Act 1996. The High Court allowed the appeal, holding that the Sellers did not have a claim in debt.  

The High Court considered the Mackay v Dick principle, a doctrine originating from a Scottish case, that if a party wrongfully prevents the fulfilment of a condition precedent to a debt, that condition is treated as fulfilled. In other words, a party cannot rely on its own breach to avoid liability [MOA – The Escrow Showdown]. However, the High Court decided that the Mackay v Dick principle would not apply where the debt had not yet accrued. The opening of the escrow account was a true precondition to the Buyer’s obligation to pay the deposit. The Sellers subsequently appealed this decision.

The Court of Appeal overturned the High Court judgment and allowed the Sellers to recover the deposits as debts, on the basis that, but for the Buyers' breach, the escrow accounts would have been opened and the deposits would have become due and recoverable as a debt.  The Court of Appeal held that the Mackay v Dick principle forms part of English law, and set three conditions for its application:

1. An agreement capable of giving rise to a debt;
2. An agreement that the debt will accrue and/or be payable upon fulfilment of a condition precedent; and
3. An express or implied agreement that the obligor will not prevent the condition precedent from being fulfilled.

The Buyers then appealed to the Supreme Court.

Supreme Court’s Decision

The Supreme Court, in a unanimous judgment delivered by Lord Hamblen and Lord Burrows, allowed the Buyers’ appeal, confirming that the so-called principle of “deemed fulfilment”, as encapsulated by the Mackay v Dick principle, does not form part of English law.  

The Court provided six reasons for rejecting this doctrine, including its roots in civil law and inconsistency with established English authorities. Emphasising the importance of certainty and predictability for commercial parties, the Court made clear that the accrual of a debt depends on the express and implied terms of the contract.

The Court also rejected the Sellers’ alternative argument that the deposit obligation had accrued regardless of the escrow account’s status, and that the requirement to open the escrow account was merely a payment mechanism. It found that, under the MOAs, the opening of the escrow accounts was a true condition precedent to the accrual of the debt. As a result, the Sellers’ claim could only be for damages, not for the deposit as a debt.  In this case, the Sellers were unable to recover damages because the market value of the vessels at the date of termination exceeded the contract price, resulting in no loss being suffered.

Practical Implications

This decision is highly relevant for the Club’s Member shipowners and all parties involved in sale and purchase transactions. The Supreme Court’s judgment confirms that, in the absence of clear contractual wording, there is no general rule preventing a party from relying on its own breach to defeat a debt claim.  In such circumstances, remedies may be limited to damages.

The judgment underscores the importance of clear drafting in MOAs, particularly in relation to deposit arrangements and the consequences of non-compliance.  Notably, the Supreme Court also invited the business community to consider amending the standard form if dissatisfied with this outcome. While the case arose in the context of ship sale contracts, the Supreme Court’s reasoning is likely to influence the interpretation of conditions precedent in other commercial agreements.