Debt, Damages, and The Griffon: Unpacking the Supreme Court decision in King Crude Carriers SA v Ridgebury November LLC

Executive summary

• The obligation to pay a deposit is an obligation to pay a debt.
• If there are conditions precedent to the accrual of that debt, the debt does not arise until the conditions precedent are satisfied.
• If it is up to a party to ensure that a precondition to the debt arising is satisfied, a debt will still only accrue if that condition is met, notwithstanding the party's breach of that obligation.
• The Court of Appeal's decision in The Griffon remains good law.

The Supreme Court’s judgment

The case concerned three Memoranda of Agreement (the "MOAs") on Norwegian Saleform 2012 ("NSF 2012") terms for the sale of second-hand tanker tonnage. Disputes under the MOAs were referred to arbitration in London. On appeal under section 69 of the Arbitration Act 1996, the Courts were asking to determine the following question of law arising out of Clause 2 of NSF 2012 (the payment of the deposit in advance of delivery):

"Where an obligation for payment within a contract is contingent upon the fulfilment by one party of a condition, and that party fails in breach of contract to fulfil that condition, is the condition deemed to be fulfilled with the result that the payment sum can be claimed by the other party in debt? Or must the claim be in damages?"

The question arose because the appellant buyers ("Buyers"), in breach of Clause 2 of NSF 2012, failed to provide the deposit holder with the necessary documentation to allow the accounts to be opened without delay. Consequently, the deposit holder did not confirm that the accounts had been opened and were ready to receive funds, and Buyers (by reason of their own conduct) could not, and did not, lodge the deposit. This meant that, as a matter of fact, the (standard form) condition at Clause 2(ii) of NSF 2012 (that the deposit holder confirms in writing to the parties that the deposit account had been opened) was not satisfied.

The respondent sellers' ("Sellers") argument was thematically in line with the equitable principle "equity regards as done that which ought to be done". Sellers said that there is a principle of law (termed in the judgment the "Mackay v Dick principle") that, where a party wrongfully prevents the fulfilment of a condition precedent to that party's debt obligation, that condition should be "deemed fulfilled".

Buyers succeeded in arguing that there is no such principle in English law. Moreover, Buyers successfully argued that, on the standard terms of NSF 2012, there is no implied term that payment of the deposit would otherwise be treated as a debt as a result of the buyer's own non-performance.

Sellers also argued that the opening of the account and lodgement of the deposit was merely machinery for payment of the debt, as distinguished from the accrual of the debt itself. The Supreme Court rejected this argument, stating that the contract ought to have distinguished between the accrual of the debt and the payment mechanism of the debt if the Supreme Court were to find such a meaning. The Supreme Court found for Buyers on this issue and held that the opening of the escrow holder's account was a condition precedent to the obligation to pay the deposit and therefore no debt accrued.

As the Supreme Court concluded that the claim in debt could not arise, it did not have to deal with the question of whether and when the deposit as security for the performance of the contract was forfeited by Buyers. The decision of Sir Brian Leveson and Tomlinson and McFarlane LLJ in Griffon Shipping LLC v Firodi Shipping Ltd ("The Griffon") [2013] EWCA Civ 1567 therefore remains good law. The Supreme Court left untouched the principle that, under NSF 2012, the seller was invested with an accrued right to receive and thus to sue for the deposit as an agreed sum forfeitable in the event of failure by the buyer to correctly fulfil the agreement. The Griffon held that the deposit is forfeited to the seller when the seller terminates the MOA both under Clause 13 (buyers' default) or for repudiation.

In the present case, Buyers accepted before the Court of Appeal that the Court was bound by The Griffon but reserved the right to argue that it was wrongly decided in the Supreme Court. Unfortunately, this means that further commentary on The Griffon is sparse, especially as argument in the Supreme Court is not published. However, The Griffon itself draws from the old chancery case of Hall v Burnell [1911] 2 Ch 551 wherein Eve J exclaimed at 554-555:

"Is there any sufficient reason why I should not, as against a purchaser who has receded from and persistently refused to perform the contract, declare that the deposit has been forfeited and belongs to the vendor, who has been in no way in default and has done everything in his power to force the purchaser to carry out his bargain? I think not."

Who cares? The innocent party can just sue for damages for breach of contract

The Supreme Court held that Sellers had a claim for damages for the loss of their bargain, but not for the deposit as claim in debt. Whilst that is true, an action for damages is often inferior to an action in debt for a variety of reasons:

1. It is not certain that damages would include the debt amount if it has yet to accrue (see Goff LJ in The Blankenstein).
2. Actions in debt usually arise alongside actions in damages, so they are not mutually exclusive. If a party has not paid an accrued debt, chances are they have also breached a term of the contract (as in this case) which gives rise to a claim in damages, too. In this way, most claims for debt are accompanied by a claim for damages, but not all claims for damages are accompanied by a claim in debt.
3. Proving a debt is far simpler than assessing damages. Debts rely on simple contractual interpretation: either it has accrued or it has not. Damages require an assessment of causation, proximate loss, and mitigation, (among other considerations such as proving quantum) and may be subject to contractual limitation provisions.
4. Unless otherwise agreed, interest on debt (usually) runs from the day after the date of the obligation to pay the debt. The Late Payment of Commercial Debts (Interest) Act 1998 s 6 provides that interest on debt should be at 8% above the Bank of England Base rate, which is quite generous. Interest on damages, however, is discretionary in arbitration per s 49(3) of the Arbitration Act 1996 as for court proceedings under s 35A of the Supreme Court Act 1981.
5. Proof of a debt can be used to wind up a company, whilst a claim in damages will not be sufficient until such damages are assessed in an arbitration award or judgment, at which point those sums become a claim in debt themselves.

Get the right advice

Whilst the Supreme Court's decision will be of particular interest to parties engaged in ship sale and purchase (S&P) transactions, the result has wide-ranging influence on the drafting of contracts beyond NSF 2012. A draftsman may insert conditions precedent relating to obligations which are entirely within the control of their client or principal so as to avoid the accrual of an action in debt. In addition to the S&P market, commodity traders and financing banks should be mindful of this decision when drafting and litigating over finance documentation, particularly repurchase (repo) financing facilities.

This case goes to show that, even on seemingly standard and uncontroversial wording, clever and novel arguments may be available with the right advice. Please get in touch if you have any questions.