Introduction
The recent Court of Appeal decision in Liu v Hu [2024] NZCA 205 provides a significant examination of contractual obligations, misrepresentation, and equitable set-off within the context of a property development agreement. The case revolves around the sale and purchase of a property intended for development into six residential units, raising critical questions about the satisfaction of contract conditions, misrepresentation, and the equitable set-off defence.
Case Background
Kun Liu, the appellant, and Zhengxi Hu, the respondent, entered into an agreement for the sale and purchase of a property in Papakura, Auckland. The property was intended for the development of six two-bedroom units. The agreement stipulated a deposit payable in two tranches: the first tranche was paid, but the second tranche of $128,000 was not paid by Liu, leading to Hu applying for summary judgment.
Liu sought to cancel the agreement due to alleged breaches of contract conditions related to resource consent and misrepresentations regarding the nature of the units and foundation work costs. The High Court granted summary judgment in favour of Hu, prompting Liu to appeal the decision.
Key Issues on Appeal
The appeal primarily focused on whether Liu had an arguable defence based on three main grounds:
- Breach of Contract: Alleging that the resource consent condition was not met.
- Misrepresentation: Claiming false representations about the unit layout and foundation costs.
- Equitable Set-Off: Asserting that her counterclaims should constitute a defence to the application for summary judgment.
Detailed Analysis
Breach of Contract and Resource Consent
The initial agreement between Liu and Hu included a clause making the contract conditional upon obtaining a satisfactory resource consent. There were disputes over the exact wording of the clause and whether amendments made during negotiations were agreed upon by both parties. For instance, clause 22 of the agreement, which pertained to the resource consent, was subject to various interpretations and proposed changes.
The Court noted that regardless of the precise wording, Liu argued that the resource consent was unsatisfactory, which she claimed justified her decision not to pay the second tranche of the deposit. However, the High Court had previously held that the payment of the deposit was not conditional on the satisfaction of the resource consent condition but on the successful settlement of a prior agreement, which had occurred.
Misrepresentation Claims
Liu claimed that the estate agent had misrepresented the size and layout of the units and the cost of the foundation work. She argued that these misrepresentations materially affected her decision to enter into the contract. The High Court acknowledged the possibility of misrepresentation but stated that Liu’s obligation to pay the deposit accrued before she purported to cancel the contract due to these misrepresentations.
Equitable Set-Off as a Defence
The pivotal argument in the appeal was whether Liu’s counterclaims constituted an equitable set-off, thus providing a defence against the summary judgment for the unpaid deposit. The Court of Appeal referenced the principle from Grant v NZMC Ltd that an equitable set-off may be applicable if a cross-claim affects the plaintiff’s claim to the extent that it would be unjust to allow judgment without considering it.
The Court found that Liu’s claims were interdependent with Hu’s demand for the deposit, as her claims of misrepresentation and breach of contract directly questioned the validity and enforceability of the deposit payment. Thus, Liu’s counterclaims for breach and misrepresentation could indeed constitute an equitable set-off, providing a defence against the summary judgment.
Court of Appeal’s Decision
The Court of Appeal allowed Liu’s appeal, setting aside the High Court’s summary judgment. The Court emphasised that Liu had an arguable defence based on her equitable set-off claims and that it would be unjust to grant summary judgment without fully resolving these issues. Consequently, the case was remitted for further proceedings to determine the merits of Liu’s defences.
Conclusion
The decision in Liu v Hu [2024] NZCA 205 underscores the importance of clear contractual terms and the potential for equitable set-off to serve as a robust defence in summary judgment applications. For parties involved in property transactions and development agreements, this case highlights the necessity of ensuring all conditions and representations are meticulously documented and honoured. Furthermore, it illustrates how claims of misrepresentation and breach of contract can significantly impact the enforceability of contractual obligations, particularly regarding deposit payments.