The NSW Court of Appeal has allowed an appeal from the purchaser of a hotel business affected by COVID-19 public health orders, finding that although the contract was not frustrated, the vendor could not insist on completion and had repudiated the contract by purporting to terminate.
Background
In January 2020, Dyco Hotels Pty Ltd and Quarryman Hotel Operations Pty Ltd (together, Dyco) contracted to buy the Quarryman’s Hotel and business in Pyrmont, Sydney, from Laundy Hotels (Quarry) Pty Ltd (Laundy).
Completion was planned for late March 2020, with Laundy obliged to “carry on the [b]usiness in the usual and ordinary course as regards its nature, scope and manner” between signing and completion (clause 50.1). However, due to COVID-19 public health orders, from 23 March 2020 the business was restricted to take-away food and drink only.
Dyco asserted that Laundy was bound to comply with clause 50.1 despite the public health orders, was in breach of this obligation, and a result was not ready, willing and able to complete. This meant the contract was frustrated and Dyco’s deposit should be returned. Laundy responded that the business had continued to trade as a going concern, albeit in a restricted manner, and served a notice to complete followed by terminating for breach.
In the Supreme Court, Darke J concluded that the obligation in clause 50.1 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. This was also secondary to the key promise to sell and transfer the hotel assets for the agreed price, meaning the contract was not frustrated. For more information, see our previous blog post.
Majority: appeal allowed, vendor not ready willing and able to complete
Bathurst CJ and Brereton JA allowed the appeal, finding that Laundy had repudiated the contract and Dyco was entitled to the return of its deposit.
The key question was whether Laundy could serve the notice to complete, and terminate based on this notice, where it could not transfer the business as a going concern. Reading “so far as according to law” into clause 50.1 allowed compliance whether or not the resulting activities bore any resemblance to the usual or ordinary course of the business. The contract was to sell a going concern, not merely a collection of assets. It also provided that risk in the assets passed on completion, meaning pre-completion risk remained with the vendor.
Clause 50.1 was also “so connected with the purpose of the contract” that it could not be severed due to the effect on the parties’ rights and obligations. In contrast, warranties regarding the hotel’s liquor licence were qualified by future legal restraint.
Although the contract was not frustrated, it required the hotel licence and other assets to be transferred as a going concern, which was prevented by the public health orders. Laundy could be excused for its non-compliance with clause 50.1, and Dyco could not terminate on this ground, but Laundy was not ready, willing and able to complete. As a result, it was not entitled to issue the notice to complete or terminate based on this notice.
Minority judgment: clause not essential, limited to manner permitted by law
Dissenting, Basten J found that clause 50.1 was not essential or a condition precedent to completion. It was not included in the contract’s (otherwise detailed) conditions clause, and it was not clear what parts of the broader clause were essential. Laundy gave no warranties regarding present or future income, and the business to be transferred was the same business subject to a temporary decrease in value. The business was one being carried on lawfully, suggesting that the clause referred to the nature, scope and manner permitted by law.
Takeaways
The decision reinforces the importance of drafting that allows the parties to respond to future changes in circumstances. Although the case was in the context of public health orders from March 2020, uncertainty in various forms continues to be a key issue in 2022. Although the buyer was ultimately successful, a clear material adverse change clause may have avoided costly and time-consuming litigation.
The decision is also a reminder that supervening illegality can excuse a party’s breach without frustrating the underlying contract, particularly where the illegality is temporary. However, this does not mean that the party in breach can insist on completion.
A copy of the judgment is available here.
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Kathryn Schultz, is a Senior Legal Writer for the Practical Guidance Mergers and Acquisitions module at LexisNexis®. |
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