In Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited  HCA 6 (8 March 2023), the High Court was required to consider the proper construction of a clause in a contract for the sale of a hotel, and associated business, requiring the vendor to carry on the hotel business until completion.
In January 2020 the appellant (vendor) sold a freehold hotel property in Pyrmont, Sydney (Quarrymans Hotel), together with an associated hotel licence under the Liquor Act 2007 (NSW) and nine gaming machine entitlements allocated to that licence and the hotel business.
Together, the two respondents (purchasers) purchased the Quarrymans Hotel and the business. Clause 50.1 of the contract provided that, from the date of the contract until completion (being 30 and 31 March 2020), the vendor “must carry on the Business in the usual way and ordinary course as regards its nature, scope and manner …”.
On 23 March 2020, in response to the COVID-19 pandemic, the Minister directed that pubs, like the Quarrymans Hotel, must not be open to members of the public except for the purposes of selling food or beverages to consume off the premises.
In May 2020 the Minister made two further orders permitting pubs to sell food and beverages to be consumed on the premises, subject to certain limits on the number of patrons. From 26 March until 1 June 2020, the vendor offered takeaway food and alcohol only from the Quarrymans Hotel.
On 25 March 2020 the purchasers informed the vendor that they would not complete the contract because the vendor was not ready, willing and able to complete the contract.
On 27 March 2020 the purchasers also wrote to the vendor asserting that the contract had been frustrated, or that the purchasers could issue a notice to complete with which the vendor could not comply, entitling the purchasers to terminate the contract and sue for damages. The vendor responded that it was ready, willing and able and called on the purchasers to complete the contract.
Ultimately, on 28 April 2020, the vendor served a notice on the purchasers to complete the sale of the Quarrymans Hotel and business on 12 and 13 May 2020. The purchasers responded by commencing legal proceedings in the Supreme Court of New South Wales in which they sought a declaration that the contract had been frustrated, or that the vendor was not entitled to issue the notice to complete.
The vendor later served a notice of termination on the purchasers when the purchasers failed to complete the purchase in May 2020.
At first instance the primary judge (Darke J) held that the contract had not been frustrated and the vendor was not in breach of the contract. Darke J considered that cl 50.1 of the contract, properly construed, required the vendor to carry on the business as usual so far as the vendor could within the limits of the law – and that was what the vendor did.
The purchasers appealed to the Court of Appeal of New South Wales. The purchasers did not appeal the primary judge’s finding that the contract had been been frustrated. Instead, the purchasers’ case, on appeal, was that the vendor did not comply with cl 50.1 and, as such, was not ready, willing and able to complete the contract when the vendor purported to terminate the contract for the purchasers’ failure to complete.
A majority of the Court of Appeal allowed the purchasers’ appeal (Bathurst CJ and Brereton JA, Basten JA dissenting). Bathurst CJ considered that the vendor’s obligation to carry on the business, under cl 50.1, was not limited to the extent possible by the law.
Bathurst CJ instead considered that the Minister’s orders made complaince with cl 50.1 illegal, and that this “supervening illegality” suspended the vendor’s contractual obligation. Bathurst CJ concluded that cl 50.1 was an essential term which the vendor could not complete at the relevant time, and, as such, in purporting to terminate the contract the vendor was, in fact, repudiating the contract.
Brereton JA agreed with Bathurst CJ but also considered that the vendor was in breach of cl 50.1. In dissent, Basten JA favoured the primary judge’s construction of cl 50.1.
The vendor obtained leave to appeal to the High Court. The High Court (Kiefel CJ, Gageler, Gordon, Gleeson and Jagot JJ) delivered a short joint judgment in which the court unanimously allowed the vendor’s appeal.
Their Honours, at , adopted an objective approach to the construction of cl 50.1 and, at , considered that the clause “incorporated an inherent requirement to do so in accordance with the law”. Conversely, their Honours observed, at , that there was “no obligation (and could not have been an obligation) imposed on the vendor to carry on the Business unlawfully”.
Their Honours outlined, at , the legislative regime within which the business operated and, at , the provisions of the contract which reflected this regime.
Reading the contract as a whole, their Honours considered, at , that a reasonable business person in the position of the parties would have understood cl 50.1 to mean that the vendor’s obligation to carry on the business – in the usual and ordinary course – meant in accordance with the law.
Dr Michelle Sharpe is a Victorian barrister practising in general commercial, real property, disciplinary and regulatory law, 03 9225 8722, email email@example.com. The full version of these judgments can be found at austlii.edu.au.