Closing the door on the Mackay v Dick principle but opening the door to a duty of cooperation in English law? - King Crude Carriers SA v Ridgebury November LLC

The question at issue is what happens where there is a condition precedent to a contract taking effect - which often takes the form of one of the contracting parties needing to sign documents, approve steps taken, obtain “satisfactory” reports or documents etc. and often involves steps involving discretion and judgement – but the party required to take these steps then deliberately and wrongfully undermines what appears to be the common intention of the parties and fails to complete such steps so that the contractual pre-condition is never met. Can the wronged party in such circumstances treat the condition as fulfilled, so that they can sue to recover the purchase price?

In this article, in addition to analysing the Supreme Court’s decision, we also critique aspects of it, in particular in relation to the Supreme Court’s seeming recognition of an unqualified implied duty of cooperation in a commercial context.

Mackay v Dick¹

Mackay v Dick was about the delivery of a steam-operated machine that could excavate railway tunnels. The contract specified it should be able to dig 350 cubic yards of clay per day. That capacity was to be tested on a specified railway cutting. If the test was successful, the buyer would keep the machine and pay the price; if not, the seller would take it back. However, although the machine was delivered, the test never happened, since the buyer failed to provide the facilities to allow the test. The seller sued for the price and the House of Lords decided the seller was indeed entitled to recover the price.

However, the two lead judgments in the case arrived at this conclusion via two different paths of reasoning:

• Lord Watson chose to proceed with a logic based on a legal fiction - that since the test did not go ahead and since this was the fault of the buyer, the test should be deemed to have been satisfied, and therefore the price was payable. The principle established by his speech - that where a party wrongfully prevents the fulfilment of a condition precedent to that party’s debt obligation, that condition is treated as being fulfilled - is often referred to as the “Mackay v Dick principle”.
• In contrast, Lord Blackburn proceeded on the basis that a contract should generally be construed as including an implied duty on each party to do what is necessary on its part in order for the contract to be carried out – a so-called “duty of cooperation” - and that therefore the buyer had breached the contract and should pay damages – here, being equal to the price.

King Crude Carriers SA v Ridgebury November LLC²

In the instant case, the buyers agreed to purchase three vessels from the sellers under three Memoranda of Agreement (based on the Norwegian Saleform 2012 contract, with amendments) (the “MOAs”). The MOAs required the buyers to lodge deposits of 10% of the purchase price for the vessels with a third party deposit holder in deposit accounts shortly after they were opened and to provide all the necessary documentation for this purpose. In breach of contract, the buyers did not provide the documentation. As a result, the deposit accounts could neither be opened nor could the deposits be paid into them.

The sellers terminated the MOAs and argued that the Mackay v Dick principle applies such that they could claim the deposit amounts in debt. In contrast, the buyers contended that the sellers’ sole remedy was in damages for breach of contract, but they had suffered no loss because, on the assumed facts, the market price for each of the vessels was higher at the date of termination than the purchase price.

The sellers’ claim succeeded in arbitration, failed on appeal to the Commercial Court, but succeeded before the Court of Appeal. The buyers appealed to the Supreme Court.

Does the Mackay v Dick principle exist in English law?

In the very opening paragraph of their leading Supreme Court judgment, Lord Hamblen and Lord Burrows commented that the Mackay v Dick principle “has long been a matter of debate”, and described the speech of Lord Watson which gave rise to the principle as being “controversial”. The appeal raised the question of whether there is such a principle at all in English law.

In conclusion, the Supreme Court held there is not, basing this on six reasons:

1. Lord Watson did not cite or rely on any English law authorities in support of the principle, but rather relied on a doctrine borrowed from the civil law.
2. English law authorities, where they do exist, “do not speak with one voice”.
3. The principle fundamentally undermines the law on contracts for the sale of goods and land. Under such contracts, debt for the price arises on the passing of the property (i.e. the transfer of title). However, the application of the Mackay v Dick principle would mean that the debt for the price arises upon the failure of the buyer to fulfil a condition precedent, irrespective of the passing of property. This would have “extraordinary” consequences. The principle would therefore need to be cut back in some way but “it is unclear how one would achieve such a cut back in a principled manner and without resorting…to the particular intentions of the parties”.
4. The rationale of deemed fulfilment which underpins the principle is fictional and “[f]ictions tend to obscure transparent reasoning and, wherever possible, should be removed”.
5. The English law of contract proceeds on the basis of the terms of the contract, express and implied, and the contract’s proper interpretation – rather than by way of fictional fulfilment.
6. The consequence of rejecting the Mackay v Dick principle does not lead to injustice. Subject to terms to the contrary, where a condition precedent has not been fulfilled because of the debtor’s breach of contract, that breach is appropriately and adequately dealt with in English law through the claimant’s remedy in damages.

Can Mackay v Dick be relied on as an aid to contractual interpretation?

A related question was whether the Mackay v Dick principle could be employed, not as a principle of law in itself, but as an aid to contractual interpretation, on the basis that – unless the contract provides to the contrary – it is a general presumption of contractual interpretation that it was not the intention of the parties that either party should be entitled to benefit from their own wrong.

The Supreme Court held that, as a matter of authority, cases on such a presumption are all concerned with a claimed entitlement to treat the contract as being at an end or to obtain a benefit under it, but they do not support a wider presumption that a party may not take advantage of their own wrong. In the present case, the buyers did not rely on their own breach to treat the contract as being at an end or to claim a benefit under it. On the contrary, they acknowledged that their breach exposed them to liability in damages. Nor would they be rid of the contract, since that depended on the sellers terminating it. The buyers’ case was that, in order to succeed in their debt claim, the sellers must show that the condition precedent in the contract had been satisfied, but that they could not show this. The sellers’ case was that the contract should be interpreted as requiring the 10% deposit to be paid irrespective of the condition precedent being fulfilled but, applying the modern objective and contextual approach to contractual construction, this was not what the contract said, nor what the parties intended. The Supreme Court was of the view that the sellers’ case “effectively strikes out the condition and rewrites the terms of the contract”.

Can Mackay v Dick be relied on as giving rise to an implied term?

In light of the Supreme Court’s rejection of Mackay v Dick as a principle of law or as an aid to contractual interpretation, the Supreme Court moved on to consider whether it could be relied on by the sellers as an implied term to the effect that the condition precedent could not be insisted upon in circumstances where the buyers had made it impossible to carry out. Counsel for the sellers put forward various formulations of an implied term which had this effect.

However, the Supreme Court was of the view that they made the contract unworkable. Without the requirement on the buyers to open an account with a third party in which to pay the deposit, there was no means for the buyers to pay it. There “can be no justification for implying a term which makes a key part of the buyers’ obligations…impossible”; such a term cannot be necessary for business efficacy or be obvious, as per the required common law test for implication of terms³. Further, some of the sellers’ proposed terms went as far as to rewrite the contract.

A duty of cooperation?

In conclusion the Supreme Court, rejecting the fiction of deemed fulfilment of conditions precedent, decided that the Mackay v Dick principle is not part of English law and also held that, in this case, the same outcome could not be achieved by contractual interpretation or an implied term.

The Supreme Court did not, however, question the notion of an implied duty of cooperation, as expressed in Lord Blackburn’s judgment in Mackay v Dick as follows:

“…as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect”.

Referring to this speech, the Supreme Court said that it stood for “an uncontroversial authority for there being an implied duty to cooperate whereby contracting parties are obliged to cooperate to ensure the performance of their bargains” and that “there is nothing controversial about Lord Blackburn’s reasoning in Mackay v Dick. Instead, his judgment is well known for its path-breaking recognition of an implied duty of cooperation”.

On the basis of Lord Blackburn’s speech, the Supreme Court said that that a “contract should generally be construed as including a duty on each party to do what is necessary on its part in order for the contract to be carried out. In modern parlance this is the implied duty of cooperation”.

Whilst the judgment itself is, on its facts, focused on the satisfaction or otherwise of conditions precedent, the above obiter comments as quoted appear to go much wider and are entirely unqualified. They appear to give recognition to a wide and unlimited “duty of cooperation”, with unspecified scope or apparent limits.

This is something that previously English law has resisted. The decision of Leggatt J (as he then was) in Yam Seng Pte Limited v International Trading Corporation Limited⁴ was at the time regarded as ground-breaking in recognising an implied duty of good faith in certain types of so-called long-term relational contract. His description of the duty of good faith has, at its heart, this duty of cooperation and “fidelity to the agreement”; in addition to the duty on the parties to act honestly towards each other, the second aspect of the duty - which Leggatt J described as “the essence of contracting” - was “that the parties bind themselves in order to cooperate to their mutual benefit”. In describing the duty in these terms, he did indeed refer to and rely on the case of Mackay v Dick.

But whilst this approach has been upheld in certain subsequent cases, the English courts have, both before and afterwards, seemed reluctant to expand this principle further to recognise a wider obligation of good faith in contracts more generally, in contrast to many civil and some other common law jurisdictions.

How then does the Supreme Court’s seemingly unqualified acceptance of the existence of a duty of cooperation sit with the present state of the law relating to an overarching duty of good faith to be implied into all contracts?

More specifically, the following questions arise:

• To which contractual terms does such a duty of cooperation apply? This case itself involves conditions precedent and therefore cooperation between the parties to ensure compliance with these are not undermined. Should we read this judgment as limited to such circumstances? But in principle there seems to be no reason to limit the logic in such a way. Why should it not apply to any provision of any contract where some degree of cooperation is required?
• To which types of contracts does this duty apply? As noted above, English law so far has only recognised a more general implied term of good faith in certain classes and types of contract where it is appropriate to imply such a term, and has rejected a wider application of such principles to all contracts. But the unqualified way in which the Supreme Court expresses the duty of cooperation in the present judgment seems to depart from that narrow approach and encourage a wider interpretation.
• What is the extent and content of the duty? In other words, how far do parties have to go and what do they have to do to fulfil the duty? Lord Blackburn himself expresses the content of the duty as being to do “all that is necessary” in order for the contract to be carried out. Is the “necessary” test the real test now? How far does the requirement for cooperation actually go? How far does it require the contractual counterparty to expend their own resources or put their interests aside in order to cooperate for the contract to be carried out?
• Further, where the requirement in the contract depends on discretionary matters, as is often the case, to what extent does the duty of cooperation impact? It is often the case that the pre-condition may require, for example, reports or situations to be “to the satisfaction” of one or other party. Or it is common for some prior consent to be required to be given by one of the parties before the contract takes effect. How does a duty of cooperation sit in these circumstances? Does it operate to constrain the ability of the consenting party to exercise their judgment in these circumstances? Such decisions may or may not (depending on the circumstances) engage the Braganza⁵ line of cases, and require that such decisions be exercised rationally and for the purpose for which they are given in the contract. But does this requirement for cooperation go even further and provide a further restraint to the decision making in such cases?

On one view, this judgment can be taken as a wider endorsement of the views of Leggatt J (as he then was) in Yam Seng, who would clearly have liked to see English law develop in the direction of a wider duty of good faith in all contracts. There is no express commentary or indication in this new Supreme Court judgment that this is the intention of the Supreme Court judges. However, their approach leaves open that question, and clearly opens the door to expand this theme in suitable cases in the future.

Authored by Philip Parish and Daniela Vella.