Three years after COVID-19 changed the way the business world operates, we finally have a High Court decision clarifying how contractual obligations to carry on a business in its usual course are to be construed in the context of disruptions posed by the pandemic.
Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited  HCA 6 is the culmination of a series of proceedings that considered whether Laundy Hotels (Quarry) Pty Ltd (Vendor) was "ready, willing and able" to complete its contract for the sale of The Quarryman's Hotel in the midst of COVID-19 upheavals.
The sale of The Quarryman's
The Quarryman's was sold by the Vendor to Dyco Hotels Pty Limited (Purchaser) under contract for sale dated 31 January 2020, with a staged completion to occur on 30 and 31 March of that year (Completion). Clause 50.1 of the contract for sale stated that for the period between exchange of the contract for sale and completion the Vendor was required to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner". During this period, a NSW public health order restricted the operation of pubs to the sale of takeaway food and beverages only. The Vendor complied with the public health order (any failure to comply would have constituted a criminal offence) and operated The Quarryman's to the extent that it was able to do so within the confines of the public health order.
Prior to Completion, the Purchaser indicated to the Vendor that Completion would not be able to occur because the Vendor was not ready, willing and able to complete the contract. The Purchaser argued that clause 50.1 had not been complied with as the business was being operated in a manner far different to that which existed at the time of the contract. In response, the Vendor served a notice to complete, followed by a notice of termination after the Purchaser failed to comply.
The Purchaser commenced proceedings arguing that the contract had been frustrated, or in the alternative, that the Vendor was not entitled to issue a notice to complete and subsequently terminate the contract – this conduct was a repudiation of the contract by the Vendor that had been validly accepted by the Purchaser.
In the first instance, Justice Darke found that the contract had not been frustrated by COVID-19 and restrictive public health orders. The Vendor was not in breach of clause 50.1 as the clause required the Vendor to carry on business within the confines of the law. Justice Darke ultimately held that the Vendor was entitled to serve a notice to complete on the Purchaser.
The Purchaser successfully appealed, with the Court holding that the public health order was a supervening event that would render the Vendor's compliance with clause 50.1 illegal. The Court held that the Vendor's obligation under clause 50.1 was therefore suspended. The Vendor's issuing of a notice to complete was done at a time where it was not "ready, willing and able" to complete, and therefore served to repudiate the contract.
The High Court and the centrality of lawfulness in contract construction
In allowing the Vendor's appeal, the High Court held that the obligation to "carry on the Business in the usual and ordinary course" contained an inherent requirement to do so only in accordance with the law.
The matter came down to simple construction and the court noted it was "not necessary to do more than construe clause 50.1 in its context". Considered objectively from the position of the reasonable businessperson the Vendor "was to carry on the Business in the manner it was being conducted at the time of the contract to the extent that doing so was lawful". Proper construction of clause 50.1 meant it "could never extend to an obligation on the Vendor to act illegally". Operating The Quarryman's within public health order parameters was considered to be business "in the usual and ordinary course" in the context.
This case serves as a reminder that:
- the requirement to operate a business in "the usual and ordinary course as regards its nature, scope and manner" includes a fundamental requirement that the operation of the business must be lawful. This does not need to be explicitly stated or even implied, but exists inherently;
- where circumstances between the signing of a contract and the date for completion drastically change, do not assume the transaction is unable to be completed. Parties should very carefully consider their obligations and how they are to continue to operate within the confines of the law and contract before taking action that could be considered repudiation of the contract; and
- it is important to consider all the potential risks that may occur prior to completion in any transaction. A purchaser may consider adding a clause allowing termination of a contract where a supervening event or material adverse change affects the value of the asset being sold, or the operation of the business, or prevents the business from being traded as a going concern. This is especially the case where there is, or may be, a lengthy period between exchange and completion.