In March 2023, the High Court in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd ATF The Parras Family Trust & Ors [2023] HCA 6 unanimously allowed an appeal from the Court of Appeal of the Supreme Court of New South Wales. The High Court provided further guidance on contract construction in the sale and purchase of property which is part of a business and further clarified the impact of the Covid-19 public health orders on completion of the property purchase contract.

Facts:

The case relates to a contract dated 31 January 2020 for the sale of a freehold hotel property together with an associated hotel licence and gaming machine entitlement allocated to the licence.

Clause 50 of the contract of sale “Management Prior to Completion” is the key provision of this case. Clause 50.1 stipulated that the vendor “must carry on the Business in the usual and ordinary course as regards its nature, scope and manner” from the date of the contract until completion.

On 23 March 2020, days prior to the contract completion date, NSW Health Minister made an ordering giving directions in response to the Covid-19 pandemic and directed all pubs to sell food and beverages for off premise consumption only. Such order applied to the subject hotel in the case. The vendor complied with the Health Order and subsequent orders issued by the state government.

On 25 March 2020, the purchaser informed the vendor that they would not complete the contract as the vendor was not ready, willing, and able to complete the contract as the vendor had breached clause 50.1 (and other clauses) of the contract. The purchaser argued, in essences, that by complying with the Health Order, the vendor failed to carry on the business in the usual and ordinary course. The vendor disputed the claim and served a notice to complete and subsequently, termination notice on the purchaser.

In essence, the issue before the High Court was whether the vendor’s operation of the hotel to the extent permitted by the Health Orders could be characterised as carrying on the “business in the usual and ordinary course”.

Decisions in the lower courts

The primary judge Darke J held that the obligation under the clause 50.1 of the contract was limited to carrying on the business in the usual and ordinary course “as far as it remained possible to do so according to law.” However on appeal, the Court of Appeal by majority allowed the appeal and Bathurst CJ held that the health order was a supervening event that rendered the vendor’s compliance with clause 50.1 illegal, subsequently suspending that contractual obligation. As the health orders limited the hotel’s operation to be takeaway only or subjected to customer restrictions, the hotel licence and other assets could not be conveyed as a going concern. Hence the vendor was not able to compel completion of the contract when it could not deliver possession of the business as a going concern.

Appeal in the High Court

The High Court unanimously allowed the appeal and held that even though the business was by enlarge, unable to continue to operate as it had at the date of the contract exchange, the vendor was still ready, willing, and able to complete the transaction. The court interpreted clause 50.1 to mean that carrying on the business in the usual and ordinary course as regard to the nature, scope and manner incorporated an inherit requirement to do so in accordance with law. The lawful operation of the business was essential to the parties and there could be no obligation requiring the vendor to carry on the business unlawfully by operating at full capacity in breach of the health order. There was no warranty that the hotel business would remain the same between the date of the contract and completion.  

Lesson

The High Court in this case demonstrated that contractual interpretation for business sales will as far as possible, have regard to what is legal and according to the law in force. Furthermore, that a change in law should be seen as an inherent part of any regulated business.

In any event, a contract for sale must be clear on the subsequent steps in the event of a regulatory change that may have significant impact on the business operation.

If you believe your business has affected by covid-19 or you have similar issues as indicated in this case, please feel free to contact our Property and Commercial team for consultation.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*