Deemed fulfilment of a condition precedent? An unbelievable fiction!

Where a would-be debtor has breached a condition precedent to a debt, that condition precedent cannot be “deemed fulfilled” under English law, according to the UK Supreme Court. The appropriate remedy is a damages claim.  This may seem an obscure point, but the judgment was all about endorsing certainty and freedom of contract.

A claim in debt

Ridgebury agreed to sell three second-hand tankers to King Crude. A condition precedent to the sale was the payment of a 10% deposit in an escrow account. The buyer failed to provide the documentation needed to open the account, so the account could not be opened and the deposit was not paid by the buyer. The seller terminated and sued for the deposit in debt, relying on the doctrine of “deemed fulfilment”. This says that a condition precedent to a debt is treated as satisfied if the debtor’s breach prevents fulfilment. Its origins lie in a 19th century House of Lords decision in Mackay v Dick. The reason the seller wanted to make a debt claim was that the market price of the tankers had risen, so there was no actual loss and only nominal damages would be available. A debt claim entitles the creditor to the payment of the sum promised (irrespective of loss).

Rationale for rejection of “deemed fulfilment”

The Supreme Court rejected the idea that “deemed fulfilment” is part of English law for the following reasons:

1. The analysis in Mackay v Dick relies on a doctrine borrowed from civil law.
2. The English authorities are inconsistent.
3. It would disrupt settled areas of law like the sale of goods or land.
4. It is a fiction and, as Jeremy Bentham said, “in English law, fiction is a syphilis, which runs in every vein, and carries into every part of the system, the principle of rottenness.”
5. English law is premised on freedom of contract and the terms that are agreed (expressly or impliedly).
6. There is no injustice since there is a claim in damages.

A party may benefit from its wrong

The Supreme Court rejected any general presumption that a party may not take advantage of its own wrong. The cases, it said, are best rationalised as ones where that presumption arose as a matter of interpretation: “Contract law permits efficient breach and the defendant may therefore profit from its wrong.” 

No implied term to save the day

The sellers put forward three potential implied terms to the effect that the deposit mechanics could not be insisted upon in circumstances where the buyers had made them impossible to carry out. However, they either rendered the provisions unworkable or amounted to re-writing the contract.

With the benefit of hindsight

There are clear advantages to a debt claim over one for damages. To make sure that is what you have, you want to think carefully about the drafting and the mechanics of payment, including checking that there are no pesky preconditions getting in the way.

Judgment: King Crude v Ridgebury