The Usual and Ordinary Course in these Unusual and Extraordinary Times

In the recent NSW Court of Appeal decision of Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWCA 332 (Appeal Decision),¹ the Court considered the effect of the Public Health (COVID-19 Places of Social Gathering) Order 2020 (Public Health Order) on a contract for the sale of a hotel business as a going concern, in circumstances where the vendor was required to carry on the business ‘in the usual and ordinary course as regards its nature, scope and manner’ until completion.

The Court overturned the previous NSW Supreme Court decision of Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWSC 504 (Original Decision)² and held (by majority) that, as a consequence of the restrictions imposed on the hotel business by the Public Health Order, the vendor could not carry on the business ‘in the usual and ordinary course as regards its nature, scope and manner’ and was, by extension, not ready, willing and able to proceed to completion so as to entitle it to serve a notice to complete on the purchaser.

Background

• Laundy Hotels (Quarry) Pty Ltd (Vendor), Dyco Hotels Pty Ltd and Quarryman Hotel Operations Pty Ltd (together, the Purchaser) entered into a contract for the sale of a freehold hotel property, together with the associated hotel licence, gaming machine entitlements and hotel business (together, the Hotel), on 31 January 2020 (Contract).
• It was agreed between the parties that completion of the sale and purchase of:
  • the business assets would take place on 30 March 2020, and
  • the hotel property, hotel licence and gaming machine entitlements would take place on 31 March 2020.
• Prior to the completion date, the Public Health Order commenced operation. As a consequence of the Public Health Order, licensed premises, including the Hotel, were to close from midday on 23 March 2020, with the exception that food and beverages could still be sold for takeaway. Relevantly, it was an offence not to comply.
• From the commencement of the Public Health Order to 31 May 2020, the Hotel was not operating to capacity and revenue substantially declined.
• On 25 March 2020, the Purchaser (through its solicitor) asserted that:
  • the Vendor was not ready, willing and able to complete the Contract because it remained in breach of additional clause 50.1, which provided that “from the date of this contract until Completion, the Vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner…”; and
  • the Contract had been frustrated by the commencement of the Public Health Order.
• The Vendor rejected the Purchaser’s assertions and, noting that the Purchaser had not made any arrangements for settlement, issued a notice to complete on 28 April 2020 (Notice to Complete).
• The vendor issued a notice of termination of the Contract on 21 May 2020 (Notice of Termination).
• By a letter dated 23 May 2020, the Purchaser contended that the Notice of Termination constituted a repudiation of the Contract and was accepted by them.
• The Purchaser subsequently commenced proceedings in the NSW Supreme Court, alleging that the Vendor had breached the Contract as it was unable to comply with Additional Condition 50.1, or alternatively that the Contract had been frustrated.

Original Decision

In the Original Decision, the key issues for consideration were as follows:

• to what extent, if at all, did Additional Condition 50.1 oblige the Vendor to carry on the business in a manner contrary to the Public Health Order; and
• whether, as a result of the Public Health Order, the Contract was discharged by frustration.

Issue One

Consideration of the first issue turned, the Court said, on what a reasonable business person would have understood Additional Condition 50.1 to mean, which would require “consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract”.³

Noting the above, the Court held that:

• the parties both had considerable experience in the operation of hotels in Sydney and so could be taken to have “knowledge of the nature of the legal and regulatory environment within which such hotels operate”,⁴ which is characterised by extensive and detailed legislative prescription and regulatory oversight;
• on a true construction of the Contract, Additional Clause 50.1 did not oblige the Vendor to carry on the business in a manner contrary to the Public Health Order;⁵ and
• as a result, the obligation was to carry on the business in the usual and ordinary course, as far as it remained lawful to do so, which the vendor had done in performance of the Contract.⁶

Issue Two

Consideration of the second issue required the Court to determine whether the commencement of the Public Health Order gave rise to:

• a ‘fundamental commercial difference’ between the contemplated and actual performance of the Contract; or
• a ‘fundamentally different situation’,

such that it would not be just for the parties to remain bound to the Contract.⁷

The Court held that the purpose of the Contract was for the sale and purchase of a property and assets for an agreed price (and in circumstances where no warranties were given as to future financial performance), which remained able to be transferred notwithstanding the temporary alterations to trading brought about by the introduction of the Public Health Order.⁸ Consequently, the Contract had not been frustrated and the Vendor was entitled to retain the deposit and receive $900,000 in damages for loss of bargain.

Appeal Decision

On appeal, the Purchaser challenged the conclusion of the primary judge that Additional Condition 50.1 was limited to require the respondent only to carry on the business to the extent permitted by law. The primary judge’s conclusion that the Contract had not been frustrated was not challenged on appeal.

Specifically, the Purchaser contended that it ought to have been held that, from the date of the Public Health Order, the Vendor was unable to comply with Additional Condition 50.1 and that consequently:

• the Vendor was not entitled to issue the Notice to Complete; and
• the purported termination by the Vendor amounted to a repudiation of the Contract that was accepted by the Purchaser.

The Court’s decision turned on the construction of Additional Clause 50.1, the principles of which were not in dispute. That is, Additional Provision 50.1 should be construed by what a reasonable business person would understand it to mean.⁹ In overturning the Original Decision, the Court held that:

• Additional Condition 50.1 referred to the ‘usual and ordinary course’ of the defined Hotel business and not of a hotel business generally, with such interpretation supported by the succeeding words in Additional Condition 50.1: ‘as regards its nature, scope and manner’;¹⁰
• the primary judge’s construction of Additional Condition 50.1 carries with it the possibility that it could be complied with irrespective of whether what is carried out as a result of the Public Health Order bears any resemblance to the usual and ordinary course of the business of the Hotel as regards in nature, scope and manner;¹¹
• the purpose of the transaction was to sell the Hotel as a going concern and not simply as a group of assets which, if the Public Health Order was revoked, gave the owner the capacity to operate a hotel of the nature of that envisaged by Additional Condition 50.1;¹²
• additional condition 57.2 provided that risk passed on completion and not on contract and that such risk would include the restriction on trading resulting from the Public Health Order;¹³ and
• as a result:
  • the Vendor was in breach of Additional Condition 50.1 and was consequently not entitled to serve the Notice to Complete;
  • the Vendor’s purported termination of the Contract was a repudiation, which was accepted by the Purchaser; and
  • as a result, the Purchaser was entitled to a return of the deposit.

Key Takeaways

The Appeal Decision demonstrates that the risk of restrictive public health orders impacting the conduct or nature of a business, in the context of the sale of a business where the vendor is required to carry on the business ‘in the usual and ordinary course’ until completion, lies with the vendor. Going forward, prospective vendors should ensure that their contractual obligations to carry on the business ‘in the usual and ordinary course’ until completion are expressly limited, having regard to the potential for similar public health orders to be introduced in the future. That is, any obligation should be qualified with the words “so far as it remains lawful to do so”, or words to a similar effect.