A recent Court of Appeal decision has confirmed that a party who enters a conditional contract has an obligation to do all things reasonably necessary to satisfy the conditions – or suffer the consequences.
Mr Grey entered into an agreement to purchase a property from the Stracks. The agreement was conditional upon Mr Grey obtaining a satisfactory builder’s report and securing finance to complete the purchase (“the conditions”). Based on comments from a valuer and his own research, Mr Grey decided that he no longer wished to purchase the property and notified the Stracks that the agreement was at an end. At that time, he had not obtained a formal builder’s report or made a formal application for finance.
Upon receiving notification that the contract was at an end, the Stracks formed the view that Mr Grey had notified them that he was no longer going to perform his obligation to do all things reasonably necessary to satisfy the builder’s report condition. In legal terms, the Stracks alleged that Mr Grey had “repudiated” the agreement. On that basis, the Stracks cancelled the agreement then sold the property for a $150,000 loss and sought to recover that sum from Mr Grey.
The High Court agreed with the Stracks that Mr Grey had repudiated the agreement. However, the court also found that that the Stracks had not suffered a loss as, on the evidence before the court, there was no real prospect that Mr Grey would have been able to secure the finance required to complete the transaction. In other words, even if Mr Grey had obtained a formal builder’s report, and had satisfied the builder’s report condition, the agreement still would not have proceeded.
The Stracks appealed. The Court of Appeal disagreed with the High Court and found that the evidence produced by Mr Grey was not sufficient to establish that he would not have obtained finance. As a result, Mr Grey was ordered to pay the Stracks their $150,000 loss.
The lesson is that if you enter a conditional contract, and then want to cancel it for non-satisfaction of a condition, you need to be able to clearly demonstrate that the condition could not be satisfied despite your reasonable efforts to ensure that it was. Clearly, the best way of being able to establish this is to ensure you have done all things reasonably necessary to satisfy the condition and to have evidence of that. To do otherwise may render you liable for any subsequent loss suffered by the other party.
This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.