By Belinda Green.

 

We’ve known for a long time that a party can’t rely on a failure to satisfy a condition if the condition failed to satisfy because of their action. But we never really had an explanation of how bad that “failure” had to be until now. In its unanimous decision of Melco Property Holdings (NZ) 2012 Limited v Hall [2022] NZSC 60, the Supreme Court has confirmed that you can’t cancel a contract for failure to satisfy a condition if your behaviour had a material effect on the failure to satisfy.

MELCO PROPERTY HOLDINGS (NZ) 2012 LIMITED V HALL

Pre-Christmas rush

Melco and Mr Hall were neighbours. Melco already occupied 1–3 Parliament Street in Lower Hutt, and wanted to buy Hall’s number 5 to expand its business premises. An offer of $1.5 million was made and accepted, conditional on due diligence. The contract was signed near the start of December 2019 and the due diligence condition was fixed for 15 working days after the agreement was signed.

Melco inspected the property in mid-December, and Hall told them that there was no seismic assessment.[1] Melco appointed a seismic engineer on 16 December, but they had availability issues and would not be able to inspect the property until the week commencing 13 January.

Around this time, Melco seems to have realised that it had made a mistake about the condition date – it had been working towards a condition date of 2 February, when in fact the condition date was 9 January. Melco sought an extension to the due diligence period on Christmas Eve. Hall responded on Boxing Day, saying an extension might be possible but that he’d check with his lawyer (who wasn’t due back into the office until 9 January). By 6 January, Melco was sufficiently concerned to have appointed another seismic engineer, who said they could do an urgent site visit if access could be arranged.

The deal unravels

On the morning of 8 January, the following texts and calls were made:

  • Hall (who was camping in the Tararua ranges) sent an early morning text to Melco saying that he could meet at midday to provide access to the new seismic engineer.
  • Later in the morning, Hall took a call from a third party who offered $1.6 million for the property.
  • At 10:22 am, Hall texted Melco saying he had to cancel the meeting “due to an unforeseen delay”.

Consequently, the seismic engineer wasn’t able to visit the property on 8 January. And the 9 January condition date was looming.

In the early hours of 9 January (6:10 am!), Melco’s lawyer emailed Hall’s lawyer to request an extension of the due diligence condition. Hall instructed his lawyer not to respond to the request and to cancel the agreement as soon as he was able to. Sometime that same morning, the first seismic engineer provided a preliminary report raising some concerns, and said an inspection was needed. Melco’s lawyer called to follow up on the requested condition date extension, but Hall’s lawyer did not call back.

At 5:03 pm, Hall’s lawyer emailed a letter to Melco’s lawyer cancelling the agreement on the basis of failure to confirm the due diligence condition.[2]

Caveat and argument

Hall signed an agreement with a third party to sell the property at a higher price, but that agreement fell over because Melco had lodged a caveat against the property.[3] Hall applied to the High Court to remove the caveat, and the matter went on to the Court of Appeal and now the Supreme Court.

To protect its caveat (and block a sale to a third party), Melco needed to prove to the Court that the agreement for sale and purchase was still in place.[4] An argument based on the “fairness” of the case was not going to be sufficient – even when a condition is for the benefit of one party only, the other party can cancel the agreement if the condition deadline comes and goes without action. And the reason for cancelling doesn’t have to be related to the condition itself: having another deal lined up or simply changing your mind can be enough. So Melco needed to find a legal basis to say that Hall’s cancellation did not take effect.

By the time the matter got to the Supreme Court, the legal argument was focused on one thing: Hall had cancelled the seismic assessment appointment with only an hour’s notice, and on the day before the condition date was due.

Conditions Precedent  

Everyone was generally willing to accept that Hall’s actions on 8 January affected Melco’s ability to satisfy or waive the 9 January due diligence condition. But the question was whether they had enough effect that it meant Hall was not legally entitled to cancel the contract.

Naturally, the parties had different views on what test the Court should apply:

  • Hall argued there was a need for a direct causal link and that Melco would have to show that Hall’s actions were a substantial cause of the failure to fulfil or waive the condition.
  • Melco argued the standard was whether Hall’s actions substantially impeded Melco from fulfilling the condition.

It was a good time to have this argument. The principle that a party cannot rely on a failure of a condition if the condition failed because of their action is a very longstanding one – the leading case is from 1919(!).[5] But it turns out that the New Zealand courts had never really been asked to articulate a specific standard of proof or causation test. So as well as considering New Zealand case law, the Supreme Court also turned to the Australian courts for assistance.

 

Has the breach contributed materially to non-fulfilment

Ultimately, the Supreme Court decided that the law should put the risk where it belongs. This meant favouring Melco’s softer approach over Hall’s stricter one. The general idea is that a defaulting party should not be able to rely on their own default. As a result, the principle was explained as follows:[6]

A party whose breach of the contract has contributed materially to non-fulfilment of the condition may not rely on such non-fulfilment to avoid a contract.

In cases where both parties have contributed to the non-fulfilment of a condition the Court thought that the breach would have to be substantial and operating.

What did this mean for Melco and Hall? Well, it’s true that Hall’s actions were not the only reason for Melco not satisfying the condition. Even if the seismic engineer had been able to get on-site on the 8th, the evidence suggested that a written report wouldn’t be available until the following week and that the engineer was not in a position to offer an oral report. So it wasn’t possible to prove that Melco would be in a good position to satisfy the due diligence clause on the 9th, given the position on the 8th.[7] But despite this, the Court still thought that there was a reasonably arguable case that Hall’s actions had had a material effect on Melco’s ability to satisfy or waive the condition. Because of that, the caveat could remain and the parties could choose to go to trial.

Want to learn more about how the parties could have made the most of their conditional contract?  Click here.

 

 

 

[1] Property owners and developers will be aware of the Earthquake Prone Buildings regime and know that, for example, a seismic assessment may be required as part of a building consent application or that the local council could identify a building as an EQPB and require seismic strengthening to be undertaken.

[2] Legal purists would want us to note that the correct term here is avoided rather than cancelled.

[3] A caveat is a “stop notice” that is registered against the title to a property. It notifies third parties of your interest in the property, and (usually) stops transfers or other transactions from being registered. A person needs to have a caveatable interest to register a caveat – so in this case it was essential that Melco establish there was still a binding agreement for sale and purchase.

[4] Because this is a caveat case, the Court only had to consider if Melco had a reasonably arguable case. This is an easier test than what will apply if/when Melco wants to get a court order requiring Hall to sell the property to it. This distinction is an important one for the parties. But it has little effect for readers who are more interested in the general statement of law from the Supreme Court.

[5] New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers de France [1919] AC 1.

[6] At [53].

[7] The lower courts had wanted this kind of “counterfactual analysis” (causing all those who have been involved in overseas investment applications to shudder). The Supreme Court was less keen: We also see our approach as having practical advantages in that it is realistic and avoids a counterfactual analysis which may well be speculative – at [54].

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