The importance of contractual construction: the Quarryman’s Hotel case
By Mark Petrucco, James Pinkerton and Natalia Di Stefano
In delivering its judgment in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd  HCA 6, the High Court set aside orders made by the New South Wales Court of Appeal and confirmed that the operation of the Quarryman’s Hotel, to the extent permitted by public health orders issued during COVID lockdowns, could be characterised as carrying on business in the usual and ordinary course.
This decision is significant as it considers a contractual dispute that arose from the effects of the COVID-19 pandemic in Australia. The Court analysed the contractual construction of clause 50.1 of a contract for the sale and purchase of the property and assets of a hotel business and its interactions with public health orders. Before the High Court were the Vendor as the appellant, and the first and second respondents together as the Purchaser of the Property, the Licence, the Goodwill, Plant and Equipment and the remaining Business Assets.
Context and overview
The contract for the sale and purchase of the property and assets, dated 31 January 2020 (the Contract), provided for the sale of freehold hotel property (the Quarryman’s Hotel) together with an associated hotel Licence (being a specified hotel licence under the Liquor Act 2007 (NSW)) and the Business.
Public health orders
In response to the COVID-19 pandemic, the Minister made an order on 23 March 2020 under the Public Health Act 2010 (NSW) giving directions that licensed premises under the Liquor Act ‘must not be open to members of the public ... except for the purposes of ... selling food or beverages for persons to consume off the premises’.
The order applied to Quarryman’s Hotel and required it to be closed from 23 March 2020 to shift to a takeaway-only operation. By 26 March 2020, the Quarryman’s Hotel had re-opened, but only for the purpose of selling takeaway craft beer and food. Takeaway sales continued until 1 June 2020 when the Quarryman’s Hotel re-opened in accordance with customer number restrictions under the 29 May 2020 public health order.
On 31 March 2020, the Vendor confirmed that all Conditions Precedent to Completion had been satisfied and said it was ‘ready, willing and able to settle’. Concerned with the possible impact of the health orders on 22 April 2020, the Purchaser obtained an updated valuation of the hotel business of $10,250,000, being $1 million less than the contracted purchase price in the Contract. On 28 April 2020, the Vendor served a notice to complete on the Purchaser calling for completion of the sale by 12 May 2020 (in respect of the Business Assets) and 13 May 2020 (in respect of the Property, Licence and Gaming Machine Entitlements). Following the service of the notice, the Purchaser commenced proceedings seeking declaratory relief on the basis that the Contract had been frustrated or that the Vendor was not entitled to issue the notice. The Vendor then served a notice of termination on 21 May 2020 on the basis of the Purchaser's failure to complete. On 23 May 2020, the Purchaser responded, alleging that the notice of termination constituted a repudiation of the Contract by the Vendor.
The case in dispute
- In light of the COVID-19 public health order, a question arose whether the Vendor was obliged to comply with clause 50.1 from the Contract date until completion to carry on business in ‘usual and ordinary course as regards its nature, scope and manner’ by operating as usual notwithstanding the public health order.
- Despite operating on a restricted basis as required by the COVID-19 public health order, the question remained: was the Vendor ‘ready, willing and able to complete and ... not in default’ at the time the Vendor served a notice to complete?
The primary judge's decision
Justice Darke, at first instance, concluded that the Contract had not been frustrated, and clause 50.1 required the Vendor to ‘carry on the Business in the usual and ordinary course’ as far as it remained possible to do so in accordance with law. Hence, the Vendor was not in breach of clause 50.1 and was entitled to serve the notice to complete, which was effective to make the time for completion essential. As the Purchaser failed to complete, the Vendor was entitled to terminate the Contract and was able to seek damages for loss of the bargain.
The Court of Appeal’s decision
A majority of the New South Wales Court of Appeal (Chief Justice Bathurst and Justice of Appeal Brereton) allowed the appeal and set aside the orders of the primary judge. Chief Justice Bathurst considered that the public health order made on 23 March 2020 was a supervening event, rendering the Vendor's compliance with clause 50.1 illegal. His Honour concluded the first public health order meant that the Vendor was unable to comply with clause 50.1 and therefore was not entitled to issue the notice to complete or to terminate when the Purchaser failed to comply with that notice. Justice of Appeal Brereton also found that the Vendor was in breach of clause 50.1 of the Contract when the notice to complete was purportedly served.
Justice of Appeal Basten dissented, finding that the obligation in clause 50.1 was to be read in accordance with what was permitted by law, and therefore the Vendor was not in breach of clause 50.1 for complying with the public health order.
The High Court’s decision
The key issue for the High Court to resolve was whether the Vendor’s operation of the Quarryman’s Hotel, to the extent permitted by public health orders, could be characterised as carrying on business in the usual and ordinary course. The decision relied on the proper construction of the Contract, specifically clause 50.1.
The High Court unanimously (Chief Justice Kiefel and Justices Gageler, Gordon, Gleeson and Jagot) found that that the Vendor was ‘ready, willing and able to complete’ the Contract. The Court found that the Vendor was not in default of its contractual obligations at the time it served the notice to complete since the Vendor was obliged to carry on the Business in the manner it was being conducted at the time of Contract, to the extent that doing so was lawful as per the COVID-19 public health order. Hence, the Purchaser had no capacity to vary the obligation to permit the Vendor to carry on the Business other than in accordance with law at the time.
Further, the High Court found that the Vendor’s obligation in clause 50.1 was ‘necessarily moulded by, and subject to, the operation of the law from time to time’, and the parties recognised this in clause 48.8 of the Contract, which referred to changing regulatory requirements under the Liquor Act and Regulations. Under the terms of the Contract, the Purchaser also bore the risk of the change in circumstances and any reduction in value of the Assets of the Business between the date of the Contract and the date for completion.
The key takeaways from this High Court decision are that:
- dynamic regulatory environments can have substantial effect on contractual construction, such as an obligation to ‘carry on the Business in the usual and ordinary course as regards its nature, scope and manner’ is moulded by, and subject to, the law as in force from time to time;
- the requirement of carrying on of a business to be lawful does not need to be express or even implied in a contract, rather it is inherent within the words ‘the usual and ordinary course as regards to its nature, scope and manner’ construed in the context of the contract as a whole; and
- as has been well established, the court will step into the shoes of a reasonable businessperson in the position of the parties to understand the terms of a contract, and from that perspective will also consider the surrounding circumstances.
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