The application of the English contract of contract of contract for the sale of ships is seen in the application of the English contract law terms and conditions of the rules

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The English Court of Appeal's decision on 27 June 2024 in King Crude Carriers SA & Ors v Ridgebury November LLC & Ors [2024] EWCA Civ 719 (King Crude) deals with an important contract law issue: whether there is a conditional preparation rule in English contract law and, if so, how it is applied. (The conditional formulation rule is clearly present in Chinese law.) The first sentence of Article 159 of the Civil Code stipulates that if a party improperly prevents the fulfillment of the conditions for the benefit of a conditional civil juristic act, the conditions shall be deemed to have been fulfilled. ）

The factual background and issues at issue in the King Crude case can be briefly described below.

The seller and the buyer entered into a contract for the sale and purchase of a ship based on the Norwegian Saleform, which is the most commonly used form in the international sale of ships. According to clause 2 of the contract, within three banking days after the contract is signed and the holder of the deposit (in this case, a Greek law firm) confirms in writing to the parties to the sale and purchase contract that the escrow account has been opened and can be collected, the buyer shall deposit 10% of the purchase price of the ship into the account; The parties shall provide the deposit holder without delay with all documents necessary to open and maintain an escrow account. According to article 13 of the contract, if the buyer fails to pay the deposit as agreed, the seller rescinds the contract and is entitled to claim all losses and expenses.

However, after the conclusion of the contract, the buyer violated article 2 of the contract by neither providing the required documents to the holder of the deposit nor signing the escrow agreement, which prevented the holder of the deposit from confirming that the deposit escrow account had been opened and that the payment could be received. In the end, the buyer failed to pay the deposit as agreed.

The seller rescinded the contract and requested the buyer to pay a deposit. The seller asserted that, according to the contract, the condition precedent for the buyer to deposit the deposit was that the deposit custodian confirmed that the deposit escrow account had been opened and could be collected, and the buyer's breach of contract by not providing the required documents and not signing the escrow agreement prevented the condition from being fulfilled, and the seller should be deemed to have fulfilled or did not need to be fulfilled, and the seller had the right to directly claim in debt to the buyer to pay the deposit.

In the international ship sale, the purpose and role of the deposit are well known. The deposit is a guarantee of performance or, rather, the buyer's ability and intention to complete the sale in due course. If the buyer performs the contract, the deposit will eventually be converted to part of the price; However, if the buyer breaches the contract and fails to perform the contract, the seller has the right to forfeit the deposit. Therefore, the deposit is a strong deterrent to the buyer and the buyer will not enter into the contract unless it has genuine intention and confidence to complete the sale; For a buyer who has entered into a contract, the deposit is a strong deterrent to default. On the other hand, for the seller, the deposit can be used both as a guarantee of the buyer's performance and as a fixed amount of money that the seller is entitled to retain in the event of a buyer's default, without having to prove the loss of the default. Giving the seller the right to forfeit the deposit is both a protection for the seller and a prudent allocation of the risks and consequences of the buyer's default.

According to the precedent The Griffon [2013] EWCA Civ 1567, when the buyer is required to pay a deposit under clause 2, the deposit will constitute a debt owed by the buyer to the seller, regardless of whether the deposit needs to be paid to the third party holder first. In addition, even if the contract is terminated, the deposit obligation still exists and needs to be performed: first, under the common law, the legal termination of the contract does not affect the accrued rights that arose before the termination; Second, article 13 does not limit or exclude the seller's right to claim a deposit, but provides for an additional right to claim damages on the basis of that right; Finally, in any event, the right to claim damages under article 13 includes the right to claim loss resulting from the non-payment of the deposit, the amount of which is equal to the amount of the deposit due.

However, the buyer argued that there was no conditional fiction rule in English contract law. Thus, the seller can claim damages only in accordance with the general rules of damages for breach of contract for its breach of contract. Given that the market value of the ship was rising at the time of the transaction, the buyer's default may not cause the seller to suffer losses, and the seller may not perform the contract in the event of an upward market, so the seller cannot claim losses from the buyer.

According to the respective claims of the parties, the focus of the dispute in King Crude can be expressed as whether the payment obligation in a contract is conditional on the fulfillment of a condition by a party who breaches the contract and fails to do so, whether the condition can be regarded as fulfilled or dispensed with, a condition precedent to accrual of a debt), thus enabling the other party to directly request payment in the form of a debt claim.

The English High Court of first instance upheld the buyer's claim, holding that there is no conditional fiction rule in English contract law. However, the High Court allowed the seller to appeal. The case came to the Court of Appeal.

First, Judge Popplewell, the Court of Appeal, explained the basic rule for debt claims: a debt is an amount that is due now or in the future as a result of an existing obligation. The former is known as debts having accrued, and the latter is known as debts having become payable. An accrued liability is a present debt that may not be paid until the future due to the passage of time or the occurrence of future events. A typical example is rent that accrues on a daily basis but is billed monthly. The accrued obligation relates to a legal right that has not yet met the requirements for enforcement. Debts payable are debts that have not only been incurred but are currently enforceable in the form of debt claims, because the conditions for payment have been fulfilled.

A claim for debt is different from a claim for damages for breach of contract. Taking the sales contract as an example, the fundamental difference between the two is that the debt claim is required by the obligee to perform the main payment obligation under the contract, that is, the payment obligation; The claim for damages is the secondary payment obligation that the obligee requires the obligor to perform after the obligor has violated the main payment obligation, that is, the obligation to compensate for losses.

Secondly, Popplewell J held that in order to resolve the aforementioned points of contention, it was necessary to carefully analyse the reasons for the judgment in the precedent Mackey v Dick & Stevenson (1881) 6 App Cas 251 (Mackey v Dick). In the seller's view, the precedent established the conditional formula rule; However, the buyer argued that the precedent did not establish this rule.

The facts of Mackey v Dick are as follows: Mackay, a contractor for the construction of the Carfin Cutting spur railway, entered into a contract for the sale and purchase of a steam excavator with an engineering firm, Dick & Stevenson. A clause in the contract required the seller to test the machine at Carfin and Mackay was obligated to pay the purchase price of the machine only after the test had been passed. But Mackay was not ready to test the machine after it was produced. Subsequently, Mackay refused to pay on the grounds that the machine's operating efficiency was not as agreed. Dick & Stevenson asserted that Mackay needed to complete some preparatory work to test the machine, but that this work was not done properly and prevented the machine from being tested as contractually agreed. Therefore, Mackay cannot refuse payment on the grounds that the machine is not operating as agreed.

The House of Lords Judiciary Committee upheld Dick & Stevenson's argument in a final ruling. The members of the collegial panel wrote different reasons for the decision. Among other things, Lord Watson argued that the passing of the test at Carfin was a prerequisite for the seller to claim the price. However, the buyer did not properly complete the preparations for the test, which prevented the condition from being fulfilled. At this point, the condition should be assumed, i.e. the machine has passed the test.

Lord Watson pointed out that there is a rule in civil law that goes back to Roman law: if a debtor bound by a condition prevents or prevents the condition from being fulfilled, the condition should be deemed to have been fulfilled. This rule has long been recognised in Scottish law and should apply to Mackey v Dick.

Although Scottish law was applied in Mackey v Dick, the development of case law suggests that the legal rules established in this case have been assimilated by English common law. For example, Lord Sumption of the UK Supreme Court pointed out in Geys v Société Générale [2013] AC 523 (para 131) that the Judiciary Committee of the House of Lords in Mackey v Dick endorsed the "deemed performance" rule, according to which a party's right to claim remuneration under a contract is subject to certain conditions, However, if the condition cannot be fulfilled due to the non-cooperation of the other party, the claimant may still be entitled to request payment from the other party because he has earned the remuneration notwithstanding the precedent of such condition.

Popplewell J held that the jurisprudence of the Mackey v Dick rule was based on the presumed intention of the parties. There are three prerequisites for the rule to apply: (1) the agreement between the parties must be capable of creating a debt; (2) the achievement of the obligation that, under the agreement, the creation and/or payment of the debt is subject to a condition precedent; (3) The agreement shall contain an express or implied agreement that the debtor shall not prevent the fulfillment of the conditions and thereby prevent the debt from being incurred and/or payable. The rule cannot be applied unless (3) exists. The presumption that arises from the combination of these three premises is that the parties are able to claim the debt if they intend to enable the creditor to benefit from their negotiated relationship in the circumstances. If the creditor is held to claim damages only for the debtor's breach of the express or implied agreement in premise (3), this ignores the advantage of a creditor directly pursuing a debt claim in certain circumstances, which is also the proper meaning of premises (1) and (2). In other words, an agreement that the debtor may not prevent the debt from being created and/or paid implies that the consequence of the debtor's obstruction should be the creation and payment of the debt.

There are also restrictions on the circumstances in which the Mackey v Dick rule applies. For example, in Colley v Overseas Exporters [1921] KB 302 (Colley), the seller of a consignment of unascertained goods brought the goods to the port of loading but was unable to load them because the buyer did not specify a valid vessel. The seller invoked Mackey v Dick for the price, which was not upheld by the court; The court held that the seller could only claim damages. The Court's reasoning was that, in Mackey v Dick, ownership of the machinery had been transferred and therefore the seller's only condition for claiming price was that the machine had passed the test. In the Colley case, however, there was no transfer of title to the goods (title to the goods could only be transferred once they had been determined) and the transfer of ownership of the goods by the seller was an essential condition for the seller to request payment of the price under section 49, paragraph 1, of the Sale of Goods Act 1893, which applied to the case.

In The Aello [1958] 2 QB 385, for example, the issue was whether the vessel had arrived so that demurrage could be accrued. The charterer first paid the demurrage after protesting and then sued for restitution, on the grounds that the vessel was not an arriving vessel. The lessor's assertion that the ship had arrived, or even if the ship had not arrived, was due to the charterer's breach of contract, and because the charterer's performance of its obligation to facilitate the arrival of the ship was a condition precedent to the arrival of the vessel, the vessel should be deemed to have arrived under Mackey v Dick, the charterer's failure to perform its obligations. The Court of Appeal held that the vessel had not arrived and that Mackey v Dick could not be applied and that the lessor could only claim damages in the form of a counterclaim for the charterer's breach of contract, and not as a defence to the charterer's claim for the return of demurrage. The Court of Appeal held that in Mackey v Dick, the machine had been delivered and title had been transferred, but that the buyer's acceptance of the machine and payment were conditional on the machine being tested to a specific performance standard. Because the buyer prevented the test from taking place, the buyer's legal position should be deemed to be the same as it had been at the time of the fulfillment of the conditions. In other words, the buyer is liable not because ownership is deemed to have been transferred, but because the terms of payment are considered fulfilled. In The Aello case, if the vessel had arrived, but the contract had made it conditional on the charterer fulfilling its obligation to cooperate, and the charterer refused or neglected to cooperate, that condition was likely to be deemed to have been fulfilled. However, in this case, the lessor did not fulfill its primary obligation to assign the vessel to the agreed geographical location, so the lessor could only file a counterclaim against the charterer's breach of contract.

Popplewell J held that the Mackey v Dick rule did not apply to Colley and The Aello for two reasons: first, as noted above, the jurisprudence of the Mackey v Dick rule was the parties' presumed intent, which could be excluded by a more explicit agreement of the parties or could not be applied in the particular case circumstances. The best explanation for the non-applicability of the rules in Mackey v Dick to Colley may be that there is no presumption of intent on the part of the parties to believe that, in the particular circumstances of that case, the seller could bring a claim for debt against the buyer when title had not yet been transferred. Secondly, the Mackey v Dick rule may apply only to the fictional achievements of the primary conditions precedent to the performance of the primary obligation of the contract, but not to the mutually dependent primary obligations (e.g. delivery of goods and payment of price) per se. Although payment by the buyer is conditional on the seller's transfer of title to the goods under the sale of goods law, this condition is not a "condition" for the Mackey v Dick rule, since the transfer of title is itself a primary obligation and an independent essential element of the cause of action (i.e. the basis of the plaintiff's action). However, the "conditions precedent" to payment and its performance under the Mackey v Dick rule are not elements of the cause of action, but can only be used as a defence. At the same time, this also explains The Aello's verdict. In this case, the lessor did not fulfill its primary obligation to assign the vessel to the agreed location, and demurrage would not accrue until the vessel arrived. Vessel arrival and demurrage payment are mutually conditional primary obligations.

In summary, Popplewell J restated the Mackey v Dick rule as follows: unless the parties have a clear intention to the contrary, or the nature of the condition or the circumstances of the case are deemed inappropriate, the debtor may not rely on the ground that the non-fulfillment of a condition precedent to the debtor's obligation to pay the debt as a result of the debtor's default has not been fulfilled, provided that the condition is at least not the primary obligation to be performed by the creditor and is not an element of the creditor's cause of action.

There is no conflict between the above rules and those applicable to damages (e.g. causation, remoteness of loss, derogation, etc.). This is because the rule applies where the parties agree on the payment of a debt rather than the payment of damages.

Eventually, in King Crude, the Court of Appeal reversed the High Court's judgment of first instance, holding that the buyer of the contract for the sale of the ship was liable to the seller for a deposit of US$4.94 million. The Court of Appeal explained that this did not mean that the seller had obtained a windfall, even in the context of a rising market. According to the agreement between the parties, the consequence of the buyer's breach of the contract is that the seller has the right to confiscate the deposit of 4.94 million yuan, instead of calculating the loss with reference to market trends. The law does not permit the buyer to attempt to deprive the seller of the benefit confiscatable in the contract of sale that is a forfeitable deposit through its breach of contract. In other words, the seller's benefit under the contract is a non-compensatory debt in the form of an agreed amount of money that can be forfeited, rather than compensatory damages. The law protects such interests of the seller.

Some scholars have argued that the Court of Appeal's decision in King Crude has given rise to some uncertainty about the application of law, and that the Court of Appeal's distinction between Mackey v Dick and Colley has not been persuasive enough. Whether there is a conditional pretense rule in English contract law and, if so, how it applies may require a final answer from the Supreme Court.