Partner London
"The court held that the buyers could not rely on their breach of an obligation to provide documentation to prevent the deposit falling due."
Background
The usual sequence of events on sale of a second-hand ship is for the buyer to pay a deposit (typically 10-20%) shortly after the sale contract is entered into and the 80%/90% balance on later delivery. There may be several months between contracting and delivery to allow the ship to complete its employment/cargo commitments. Payment of the deposit therefore provides valuable security to sellers because, until paid, the seller may only have recourse against a buyer of little or no substance. That may leave the seller to absorb hefty losses if it later re-sells the ship at a loss in a falling market. To add to the seller’s armoury, English law treats deposits as ‘earnests of performance’ that a buyer will forfeit should it fail to perform, even if the seller re-sells the ship for a better price and suffers no loss (The Griffon [2013] EWCA Civ 1567).
As recently as 1993, BIMCO’s ship sale contract, the MOA on Norwegian Saleform (“NSF”), provided for the buyer to pay the deposit into a joint account within an agreed number of banking days after the date of the MOA. In those days, parties could still open joint accounts quickly and easily, so sellers could impose short deadlines for payment of the deposit after contracting. Since then, anti-money laundering and ‘know your customer’ (“KYC”) regulations have transformed the process of account opening and receipt of funds by escrow agents into their accounts. This led to the sequence being changed in the 2012 and 2022 revisions (“NSF 2012” and “NSF 2022”) to require the buyer to pay the deposit within three banking days of a ‘Deposit Holder’ confirming to the parties that a deposit account has been opened, rather than timing payment of the deposit to follow directly on from MOA signature. Only where a buyer fails to pay the deposit within three banking days of the Deposit Holder’s confirmation, can a seller cancel the MOA for ‘Buyer’s Default’ and retain the deposit (clause 13).
Even if a buyer provides the requested KYC documents promptly, it may take an escrow agent up to three weeks to complete its KYC checks, that will often involve further rounds of KYC requests, especially where source of funds is opaque. NSF 2012 requires each party to provide “all necessary documentation” to the Deposit Holder “without delay” (clause 2). But a buyer that has not collected the funds to pay the deposit or that is wavering in a falling market may hope to delay the Deposit Holder’s confirmation by drip-feeding its KYC documents. The recent decision of the Court of Appeal in King Crude Carriers makes clear that a buyer who acts in this way will do so at its peril.
King Crude Carriers: the facts
"The judge held the Deposit Holder’s confirmation to be 'no empty cipher'."
Three related buyers had signed MOAs on NSF 2012 terms, after which they had failed to provide KYC documents to the Deposit Holder without delay and in one case, not even signed the escrow agreement. This led the sellers to cancel the MOAs under clause 13 relying on the buyers’ failure to pay the deposits. In the alternative, the sellers claimed that the buyers’ failure to pay the deposits was repudiatory, entitling them to terminate the MOAs at common law and to claim the deposits as damages. Given that the Deposit Holder had never been able to confirm the opening of the deposit account to trigger the three banking day window for payment, the sellers relied on a somewhat obscure legal principle of deemed fulfilment established in the nineteenth century Scottish case of Mackay v Dick (1881) 6 App Cas 251 that they should be put in the same position as if the Deposit Holder had confirmed the account opening, because the buyers had prevented this by breaching their separate obligation to provide all necessary documentation without delay. In other words, the sellers contended that, since the only reason the escrow account had not been opened was because the buyers breached the MOA, the relevant condition precedent (“CP”) to the sellers’ right to cancel must be deemed to have been waived or satisfied.
At first instance, the judge dismissed the sellers’ claim, holding that the Scottish law doctrine of deemed fulfilment does not form part of English law (King Crude Carriers SA & Ors v Ridgebury November LLC [2023] EWHC 3220 (Comm)). Whilst recognising that English law may bar one party to a contract from relying on their own wrongdoing to argue that their counterparty has failed to fulfil a condition precedent and therefore, the buyers were not permitted to rely on their own failure to provide KYC documents, the first instance judge held the Deposit Holder’s confirmation to be “no empty cipher”, because even if the buyers had provided the KYC documents, the Deposit Holder may have refused to give the confirmation for its own reasons.
However, the Court of Appeal reviewed the English authorities at length and found a good number before and since Mackay v Dick in which the principle had been applied by the English courts. The court held that the principle, which derives from the concept that a person should not be permitted to take advantage of their own wrong, applies under English law where:
- there is an agreement capable of giving rise to a debt rather than damages;
- the debt accrues and/or becomes payable upon fulfilment of a CP; and
- the obligor prevents the CP from being fulfilled, preventing the debt accruing and/or becoming payable.
"Confidentiality will likely prevent the Deposit Holder from informing the seller that the buyer is responsible."
This meant that the buyers could not rely on non-fulfilment of the CP (i.e., the Deposit Holder’s confirmation that the Deposit Account had been opened) to their obligation to pay the deposit because this was caused by their breach of their obligation to provide the KYC documents without delay. Accordingly, the sellers were entitled to cancel the MOAs on the basis that the CP was deemed to have been waived or satisfied. As a result, the MOA deposits fell due as debts.
The sellers were entitled to claim the full MOA deposits, totaling US$4.94m, despite not having suffered this loss on re-sale of the ships. This liability, described as a ‘windfall’ by the buyers’ counsel, was rather the legal consequence of the buyers being held to the bargain they failed to perform. The court re-stated the well-established law in The Griffon [2013] EWCA Civ 1567, that a deposit is an ‘earnest of performance’ that may be forfeited if the buyer defaults, without any need on the part of the seller to prove loss.
Lessons to be learned
This judgment leaves no doubt that a deposit operates as a powerful disincentive to a buyer from signing a contract unless the buyer both genuinely intends and is confident of being able to complete; and an equally powerful disincentive to a buyer who has signed a contract from defaulting on the purchase. For the seller it gives reassurance that the buyer is serious about completing, as well as providing a fixed sum the seller may keep if the buyer fails to complete, without having to prove what damage has been suffered, and very often without having to initiate proceedings at all.
Well before this case was decided, it was common for MOA sellers who had any doubts about their buyers’ ability to perform to insist on the inclusion of bespoke wording into the NSF 2012 form to provide that if the Deposit Holder has not confirmed to the seller within an agreed number of days (usually 7-14) of the MOA being entered into that the buyer has provided all the required KYC documentation, the seller may cancel the MOA based on the buyer’s default.
Whilst the King Crude Carriers decision considerably strengthens the seller’s position, even in the absence of such bespoke wording, a seller may still wish to include it, not least because where the opening of a deposit account becomes delayed, it may have little or no visibility as to the cause of the delay. Confidentiality will likely prevent the Deposit Holder from informing the seller that the buyer is responsible for the delay. In King Crude Carriers, the delay had dragged on for some time and two of the three sellers had even tendered notices of their ship’s readiness for delivery by the time of their termination. Especially in a volatile market or where a seller has other buyers waiting in the wings, it will likely want to extricate itself from the MOA at the first sign that its buyer is dragging its feet.
