Introduction
The Supreme Court has recently released its judgment in Melco Property Holdings (NZ) 2012 Limited v Anthony John Hall [2022] NZSC [60]. The decision overturns the decisions in both the High Court and Court of Appeal in this long-running saga.
The unanimous decision of the Supreme Court is notable as it clarifies the limits of a party's ability to avoid a contract for non-fulfilment of a condition precedent. If the party "materially contributed" to the non-fulfilment of the condition precedent, it cannot rely on the non-fulfilment to avoid the contract.
The Claim
The claim relates to a sale and purchase agreement for property located in Lower Hutt. The appellant, Melco Property Holdings (NZ) 2012 Limited (Melco), agreed to purchase the property from the respondent (Mr Hall) in December 2019. The sale and purchase agreement included a due diligence clause under which Melco had to be satisfied the property was suitable for its requirements or waive compliance by no later than 9 January 2020.
After entering into the contract, Melco realised that it required a seismic assessment of the building and engaged a seismic engineer. Arrangements were ultimately made for Melco's engineer to access the property by 8 January 2020, just one day before the expiry of the due diligence timeframe.
However, the inspection was never carried out because Mr Hall cancelled the appointment hours before it was to proceed.
Mr Hall subsequently sought to avoid the agreement on the basis that the due diligence condition was not satisfied or waived by the stipulated deadline.
Melco rejected Mr Hall's purported avoidance of the agreement. It maintained that Mr Hall was in default of his obligations under the contract by failing to provide access to the property for Melco to complete its due diligence. It said that as a result of this breach, Mr Hall had no right to avoid the contract. Melco lodged a caveat against the title of the property to protect its claimed interest.
Melco subsequently applied to the High Court under s 143 of the Land Transfer Act 2017 to sustain its caveat. The central question in that application was whether Mr Hall had validly terminated the agreement.
The High Court dismissed Melco's application and made an order that the caveat lapse. Melco took the question to the Court of Appeal and was, again, unsuccessful. Leave to appeal to the Supreme Court was granted on the question of whether the Court of Appeal was correct to dismiss the appeal.
Before the Supreme Court, it was accepted that Mr Hall had a duty to facilitate access to the property so Melco could inspect it and undertake its due diligence. It was also accepted by Mr Hall that he arguably did not facilitate that access when he cancelled the inspection.
The primary difference in the parties' positions was as to the requisite nexus between Mr Hall's actions and Melco's ability to satisfy or waive the condition in time. Mr Hall argued that Melco was required to demonstrate a direct causal link between his failure to provide reasonable access to the premises and the failure of Melco to satisfy or waive the due diligence condition. He further argued that Melco would not have been able to satisfy the due diligence condition in time anyway, given it had left its seismic investigations so late. Melco, on the other hand, argued that it was sufficient to demonstrate that the actions of Mr Hall substantially impeded it from fulfilling the due diligence condition.
Application of the principles to Melco's case
The Supreme Court looked to the Australian courts for guidance on the extent to which a party can avoid a contract when it may have been the reason for the non-performance of a condition precedent of that very contract. The New South Wales Supreme Court found that a Court "has got to look at whether the person seeking to rescind the contract materially contributed to the non-performance of the condition on which it now basis its rescission." 1
Following suit, the New Zealand Courts have stated in cases such as this that "no one can in such case take advantage of the existence of a state of things which he himself produced".2 The Supreme Court held here that, where both parties have contributed to the non-fulfilment of a condition, the Court must determine whether the party seeking to avoid the contract "contributed substantially" to that non-fulfilment. In such circumstances, the party will not be able to avoid the contract as a result of its own conduct.
The Court concluded that, while Melco's evidence was not strong, it was, nonetheless, arguable that Mr Hall's default affected the prospect of fulfilment of the condition. Mr Hall's failure to allow access to the property at the date the inspection was set to go ahead had the necessary material effect on the prospect of Melco fulfilling the condition. Accordingly, the Court held that Melco's caveat should not lapse pending a full trial of the issues.
Key points to note
The Melco Property decision serves as a useful lesson that there is potential risk where a party impedes a counterparty's ability to fulfil its contractual obligations or satisfy applicable conditions. Even where the condition is for the sole benefit of the counterparty, a duty to facilitate the fulfilment of that condition might arise. As with Mr Hall, failure to comply with such a duty may result in a loss of the right to avoid the contract on the basis of non-fulfilment of the condition.
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