High Court says hotel sale not frustrated by pandemic

In mid-March this year, the High Court unanimously overturned a decision of the New South Wales (NSW) Court of Appeal about the sale of Quarryman’s Hotel in Sydney and the issue of frustration in the context of the COVID-19 pandemic. The High Court found the hotel’s compliance with public gathering restrictions did not give the buyer a right to repudiate the purchase agreement.

Background

The contract required the seller to carry on the business in the ‘usual and ordinary course’ until the date of settlement. However, shortly after entering the contract, the Australian Government issued public health orders restricting the hotel to takeaway sales and delivery due to the COVID-19 pandemic. The business experienced a decline in value of $1 million, and the buyer sought to be released from the contract on the basis it had been frustrated.

The NSW Supreme Court initially said the contract had not been frustrated because the seller had not warranted the future income of the business. However, the NSW Court of Appeal went on to find the public health orders meant the seller was incapable of complying with its obligation to carry on the business to the standard required so the buyer was justified in refusing to settle and demand recovery of its deposit.

High Court appeal

The High Court found unanimously in the seller’s favour and said the seller was ‘ready, willing and able to complete’ the sale and had kept trading despite the pandemic restrictions.

The Court found the seller’s obligation was to ‘carry on the business in the usual and ordinary course as regards its nature, scope and manner’ incorporated an inherent requirement to do so in accordance with law. This included not only the hotel’s liquor and gaming licences but also compliance with public health orders.

The Court also said the seller had not guaranteed the hotel’s future value, nor had it accepted the risk the buyer could withdraw from the purchase if the value was reduced.

Conclusion

The decision provides important clarity on the effectiveness of the ‘business as usual’ type clause in allocating the risk of legislative change, not only in relation to COVID-19 pandemic issues but generally.

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