Supreme Court clarifies limits on right to terminate a contract for non-fulfilment of condition
12 Jul 2022
In Melco Property Holdings (NZ) 2012 Ltd v Anthony John Hall(1) the Supreme Court unanimously decided that, where a party has materially contributed to the non-fulfilment of a condition precedent, it cannot rely on that non-fulfilment to avoid the contract. In doing so, the Supreme Court overturned decisions of the High Court and Court of Appeal which had held that, unless there was a direct causal link between the alleged default and the failure to fulfil or waive the condition, the right to avoid the contract was preserved. While the underlying claim remains subject to a full trial, the Supreme Court's decision provides important clarification in principle on the circumstances in which default by the party seeking to take advantage of non-fulfilment of a condition can defeat the right to avoid the contract.(2)
Mr Hall agreed to sell a commercial property to Melco Property Holdings (NZ) 2012 Ltd (Melco). The sale and purchase agreement contained a due diligence clause requiring Melco to be satisfied that the property was suitable or waive compliance. The date for fulfilment of the condition was 9 January 2020. The agreement provided that, if the condition were not fulfilled or waived by the due date, either party could avoid the agreement on notice at any time before fulfilment or waiver.
On 7 January 2020, Melco contacted Hall about providing its engineer with access to the building for a seismic assessment. At the time Hall was on a camping trip in the Tararua Ranges where mobile phone coverage was limited. Early in the morning of 8 January 2020, Hall contacted Melco and agreed to meet its engineer at the property at 12 o'clock. However, at 10:22am, Hall cancelled the appointment. By the time of the Supreme Court hearing, evidence had emerged that Hall had done so following a call from another buyer with a better offer.(3)
Early on the morning of 9 January 2020, Melco's solicitor emailed Hall's solicitor seeking an extension of the due diligence condition deadline to 17 January 2020. Hall instructed his solicitor not to respond to the request and to cancel the agreement. At 5:03pm, Hall's solicitor purported to cancel the agreement when Melco had neither confirmed nor waived the due diligence condition. Melco disputed Hall's purported cancellation and lodged a caveat against the title to the property to protect its asserted interest. Melco argued that Hall's actions put him in default of the agreement so that he had no right to cancel it and applied to the High Court under section 143 of the Land Transfer Act 2017 for an order that its caveat not lapse. The issue on the application turned on whether Hall had validly terminated the agreement.
The High Court ordered the caveat lapse.(4) Although it was arguable that there was an implied term that Hall would provide Melco with reasonable access to complete the due diligence, Melco had failed to show that it was reasonably arguable that its failure to confirm the due diligence condition was due to Hall's default in not providing access to its engineer. The Court found that it would not have been possible for Melco to have received the engineer's report prior to expiry of the due diligence condition. The Court also found that Melco was likely mistaken about when the due diligence clause had to be satisfied and rejected Melco's argument that Hall's failure to advise Melco that its extension request was refused had deprived Melco of the opportunity to waive the due diligence condition. Hall had no obligation to advise Melco that the extension was refused.
Court of Appeal
Hall did not challenge the High Court's finding of an implied term that would provide Melco with reasonable access to the property to undertake due diligence. Although the Court of Appeal accepted that it was reasonably arguable that Hall's conduct during the short due diligence period did not meet the obligation, it agreed with the High Court that providing access would not have produced an engineer's report before expiry of the due diligence condition. The Court of Appeal accordingly upheld the High Court's decision that it was not reasonably arguable that the failure to fulfil the due diligence condition was due to Hall's default. The Court of Appeal also agreed with the High Court that Hall had no obligation to advise Melco that he would not extend the time for compliance with the due diligence condition.(5)
Before the Supreme Court it was agreed that:
- Hall had a duty to facilitate access to the property so Melco's engineer could inspect it for the purpose of satisfying the due diligence condition;
- it was reasonably arguable that Hall, by his last-minute cancellation of the engineer's appointment, failed to facilitate access;(6) and it was arguable that, in certain circumstances, failure to satisfy the obligation to facilitate access might defeat what would otherwise be Hall's right to avoid the contract.(7)
At issue were the circumstances in which default by the party seeking to take advantage of non-fulfilment of a condition defeated the right to avoid the contract.(8)
Melco argued that it was sufficient to show that it was reasonably arguable that Hall's default substantially impeded its ability to comply with the condition.(9) Mr Hall supported the approach of the courts below, arguing that the default must be causative and that his failure had no causal effect because, in large part, Melco's own conduct had led to the situation in which it found itself.(10)
The Court began its analysis by reviewing New Zealand judicial authority for the proposition that a party cannot rely on non-fulfilment of the condition to avoid a contract where the non-fulfilment was connected to the default of that party.(11) The Court then considered New Zealand and Australian authorities for guidance about whether a direct causal link between the non-fulfilment and the default was required (as had been assumed by the courts below).(12) The Court concluded that a direct causal link was not required. What was needed was evidence that the default materially affected the prospect of fulfilment of the condition. This "put the risk where it belongs" (ie, on the party in default).(13)
In this case, both parties had contributed to the non-fulfilment of the due diligence condition. Melco had failed to arrange the engineer's inspection until the day before expiry of the condition and appeared to have misunderstood the due diligence deadline. Hall had denied Melco access to the property, for the purpose of inspection, at the last minute. In those circumstances, "material" should be construed as meaning "substantial and operating".(14) The Court considered such an approach to be consistent with the principle that a party should not be allowed to take advantage of a situation which the party's default had produced. The approach also had practical advantages in that it was realistic and avoided speculative counterfactual analysis, facilitating commercial and contractual certainty.(15)
It was accepted that Melco had to show that its case for a caveat-able interest was reasonably arguable.(16) If so, the matter should proceed to trial on Melco's claim for specific performance. While the Court did not think that the evidence before it was particularly strong, it held that there was a reasonably arguable case that Melco might have received a response from its engineer indicating that the building was highly problematic (or otherwise) from a seismic perspective prior to expiry of the condition.(17)
The Court also agreed with Melco that, while it would have been technically possible for Melco to waive the condition at that stage, since Hall had a better offer by then, he had placed Melco in a position of having to do so without a full report from its engineer. In other words, Melco was prevented from being able to satisfy itself of the integrity of the building and then decide whether to take the risk. There was a reasonable argument that the whole purpose of the due diligence period was thereby undermined.(18)
The Court concluded that Hall's failure to allow access to the property the day before the due diligence clause was due to expire had the necessary material effect on the prospect of fulfilment of the condition.(19) It ordered that Melco's caveat not lapse pending a full trial of the issues.
The decision sounds a cautionary note for a party looking to avoid a contract for non-fulfilment of a condition. Prior to doing so, the party should carefully examine the circumstances which resulted in the condition not being complied with. If the party has had a role to play in the default, there will be a risk that its right to avoid the contract is lost. It will not matter that the condition is for the sole benefit of the counterparty, as the due diligence condition was in the Melco case.
With inflation and interest rates on the rise, a cooling local property market and the continuing uncertainties arising from covid-19 and the war in Ukraine, parties may well be reconsidering their contractual obligations to settle agreements for sale and purchase. It will be interesting to see how the Supreme Court's decision is relied on by parties looking to hold counterparties to their contractual obligations in this and other contexts.
For further information on this topic please contact Shan Pearson at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]).
(1)  NZSC 60.
(2) Id at .
(3)  NZSC 60 at .
(4) Melco Property Holdings (NZ) 2012 Ltd v Hall  NZHC 2831.
(5) Melco Property Holdings (NZ) 2012 Ltd v Hall  NZCA 184; (2021) 22 NZCPR 186.
(6)  NZSC 60 at .
(7) Id at .
(8) Id at .
(9) Id at .
(10) Id at , .
(11) Id at  to . The Court noted that there was frequent reference in this regard to New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers de France  AC 1 (HL).
(12) Id at  to . The Court found the following authorities to be most helpful on the issue:
- Nopera Log House Ltd v Godsiff  NZHC 639, (2014) 15 NZCPR 144; and
- Sanctuary Investments Pty Ltd v St Gregory's Armenian School Inc (1998) 9 BPR 16,823 (NSWSC).
(13)  NZSC 60 at .
(14) Id at .
(15) Id at  and .
(16) Id at .
(17) Id at .
(18) Id at .
(19) Id at .