UK Supreme Court rejects a universal principle against profiting from your own wrong

Is there a universal principle of law that a party to a contract cannot take advantage of their own wrong? Many lawyers would say yes. But in a decision last week, the UK Supreme Court said no.

To be fair, the UK Supreme Court said that there were many situations in which the courts will not allow a party to take advantage of their own wrong. The Supreme Court’s point was that this is not a principle of “universal application”, and that there are “many contractual circumstances” in which a party is permitted to benefit from their own wrong.

For example, what if a party considers it more economical to breach a contract and pay damages, rather than having to perform their obligations under the contract? The breaching party is typically only required to pay compensation damages, and may otherwise keep the profits they make from their breach.

As the UK Supreme Court put it: “contract law permits efficient breach and the defendant may therefore profit from its wrong”.

In the case before the Court, the buyers of three ships agreed to pay a 10% deposit to a stakeholder. They were required to provide documentation to the stakeholder, and to pay the deposit within 3 days of the stakeholder opening the account.

The general principle is that once a deposit is paid, a seller can keep the deposit, even if the buyer doesn’t go ahead with the transaction, and even if the seller’s damages claim is for less than the amount of the deposit.

Here, however, the buyers failed to provide the documentation to the stakeholder, the account was never opened, and the deposit was never paid. The sellers terminated the agreement. In the meantime, the market price of the ships had increased. As a result, the sellers had not suffered any loss, and therefore could not claim damages from the buyers.

Instead of claiming damages, the sellers brought a claim against the buyers for the deposit. Although the buyers had failed to pay the deposit, the sellers claimed that this was because of the buyers’ own wrong in failing to provide the documentation, and that the buyers should not be allowed to rely on their own wrong to avoid the sellers’ claim.

The UK Supreme Court rejected the sellers’ argument. It said that the principle of not benefiting from your own wrong was not of universal application. If an agreement requires payment of a deposit at the same time the agreement is entered into, the seller is entitled to the deposit. But where, as here, the agreement makes the payment of the deposit conditional on other steps, the seller has no claim to the deposit unless and until the deposit is in fact paid.

Instead, the sellers’ only claim is in damages. While that is of little use to the sellers on the facts of this case, those facts do not allow the sellers to claim against the buyers for an unpaid deposit – even if the buyers were at fault.