Was Vendor "ready, willing and able to complete" and not in default of its contractual obligations at the time it served the notice to complete?

Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited [2023] HCA 6 (8 March 2023)

Intro:-

This is an appeal from the Supreme Court of New South Wales and involves a contractual dispute arising from the effects of the COVID‑19 pandemic in Australia.

Facts:-

The contract

The contract was dated 31 January 2020. It provided for the sale of freehold hotel property in Pyrmont, Sydney (the Quarrymans Hotel) ("the Property"), together with an associated hotel Licence (being a specified hotel licence under the Liquor Act 2007 (NSW) and nine Gaming Machine Entitlements allocated to that Licence) and the Business[1]. The Business was defined as the hotel business trading as the Quarrymans Hotel which operates pursuant to the Licence (cl 33.1). The appellant was the Vendor. The first and second respondents together were the Purchaser. The first respondent was the purchaser of the Property and the Licence. The second respondent was the purchaser of the Goodwill, Plant and Equipment and remaining Business Assets[2]. Under cl 65.1 of the contract, the sale of the Property, Licence, and Gaming Machine Entitlements was conditional upon, and interdependent with, the sale of the Business Assets. The total purchase price was $11,250,000.

The Completion Date (specified in item 2 of Sch 1 to the contract) was 55 days after the contract date[3] in respect of the assets to be purchased by the second respondent and 56 days after the contract date in respect of the assets to be purchased by the first respondent. The parties agreed these dates to be 30 and 31 March 2020 respectively.

Clause 50 is the key provision. It was headed "Management Prior to Completion". Clause 50.1, headed "Dealings Pending Completion", provided that:-

"Subject to clause 50.2, 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 repair and maintain the Assets in the same manner as repaired and maintained as at the date of this Contract and use reasonable endeavours to ensure all items on the Inventory are in good repair and in proper working order having regard to their condition at the date of this Contract, fair wear and tear excepted." (emphasis added)

This appeal concerns the first limb of cl 50.1

The public health orders

Section 7 of the Public Health Act 2010 (NSW) enabled the Minister by order to give directions if the Minister considered that a situation had arisen that was, or was likely to be, a risk to public health. Under s 10 of that Act, a failure to comply with such a direction was a criminal offence with, relevantly, a maximum penalty of a fine, including a fine for each day the offence continued.

On 23 March 2020, the Minister made an order giving directions in response to the COVID‑19 pandemic. The order directed that pubs (meaning 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 the Quarrymans Hotel.

In response, the Quarrymans Hotel was closed on 23 March 2020 to enable a shift to a takeaway‑only operation. By 26 March 2020, the Quarrymans Hotel had re‑opened, but only for the purpose of selling takeaway craft beer and food.

Two further public health orders were made on 14 and 29 May 2020 respectively. The order made on 14 May 2020 permitted pubs to sell food or drinks for not more than ten persons to consume on the premises, as well as food or drinks for persons to consume off the premises. The order made on 29 May 2020 permitted 50 persons in a separate seated food or drink area or the total number of persons calculated by allowing four square metres of space per each customer in a pub, whichever was the lesser. The Quarrymans Hotel continued to offer takeaway food and alcohol only until 1 June 2020 when it re‑opened in accordance with the customer number restrictions in the 29 May 2020 order (which commenced on 1 June 2020).

In the meantime, on 25 March 2020, the Purchaser informed the Vendor that it would not complete the contract as the Vendor was not ready, willing and able to complete the contract as the Vendor was in breach of cll 50.1, 58.1 and 58.2. On 27 March 2020, the Purchaser wrote to the Vendor asserting also that the contract had been frustrated or that the Purchaser could issue a notice to complete with which the Vendor could not comply, enabling the Purchaser to terminate the contract and sue for damages. The Vendor responded on the same day that it was ready, willing and able to perform its contractual obligations and called upon the Purchaser to complete the contract.

As noted, Completion was due to occur on 30 and 31 March 2020. On 31 March 2020, the Vendor confirmed that all Conditions Precedent to Completion prescribed by cl 35.1 had been satisfied and said it was "ready, willing and able to settle". The Vendor reiterated this position on 6 April 2020. 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.

Ultimately, the Vendor served a notice to complete on the Purchaser on 28 April 2020 calling for completion of the sale of the Business Assets by 12 May 2020 and of the Property, Licence, and Gaming Machine Entitlements by 13 May 2020. In response, the Purchaser commenced proceedings seeking declaratory relief to the effect that the contract had been frustrated or alternatively that the Vendor was not entitled to issue the notice to complete. On 21 May 2020, the Vendor served a notice of termination on the Purchaser on the basis of the Purchaser's failure to complete in accordance with the notice to complete. On 23 May 2020, the Purchaser responded to the effect that the contract was frustrated but, if that were not so, the Vendor was not entitled to issue the notice to complete and its issue of the notice of termination constituted a repudiation of the contract which the Purchaser accepted.

The primary judge's decision

In the Supreme Court of New South Wales, the primary judge (Darke J) concluded that the contract had not been frustrated[9], and cl 50.1, properly construed, 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. It followed that the Vendor was not in breach of cl 50.1. Accordingly, the Vendor 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

The Purchaser appealed. The Purchaser alleged that the primary judge misconstrued cl 50.1 and ought to have held that from the coming into force of the first public health order the Vendor was unable to comply with cl 50.1 and, thereby, was not entitled to issue the notice to complete or to terminate when the Purchaser failed to comply with that notice. Accordingly, the Vendor's purported termination constituted a repudiation of the contract, which was accepted by the Purchaser. There was no appeal against the primary judge's conclusion that the contract was not frustrated. The Purchaser also did not allege that the Vendor was in breach of cl 50.1. Rather, the Purchaser's case on appeal was that as the Vendor could not comply with cl 50.1, the Vendor was not ready, willing and able to complete the contract, and therefore could not serve the notice to complete or terminate for the Purchaser's failure to complete.

A majority of the Court of Appeal of the Supreme Court of New South Wales (Bathurst CJ and Brereton JA) allowed the appeal and set aside the orders of the primary judge.

Bathurst CJ concluded that cl 50.1 was not to be construed as if the Vendor's obligation to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner" was limited to the extent permitted by law. Bathurst CJ therefore considered that the public health order made on 23 March 2020 was a supervening event rendering the Vendor's compliance with cl 50.1 illegal. By analogy to cases involving the enforceability of contracts during wartime restrictions and covenants in leases, his Honour considered that the supervening illegality suspended the relevant contractual obligation in cl 50.1. His Honour concluded that cl 50.1 was an essential term with which the Vendor could not comply at the time it served the notice to complete. The purported termination relying on the Purchaser's failure to comply with the notice to complete, accordingly, involved a repudiation of the contract by the Vendor. Brereton JA agreed with Bathurst CJ, but also considered that the Vendor was in breach of cl 50.1 at the time it purported to serve the notice to complete.

Basten JA (in dissent) considered that the obligation in cl 50.1 meant that the Vendor had to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner" as permitted by law. Accordingly, in complying with the public health order, the Vendor was not in breach of cl 50.1. It followed that the appeal had to fail.

Issue:-

Was Appelant in default of Clause 50.1 at the time when notice to complete was served on Respondents?

Consideration:-

The proper construction of the contract

This case is to be resolved on the proper construction of the contract, specifically cl 50.1.

"It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it."

It is not necessary to do more than construe cl 50.1 in its context to conclude that the obligation on the Vendor 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. That is, the obligation imposed on the Vendor was 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. There was no obligation (and could not have been an obligation) imposed on the Vendor to carry on the Business unlawfully. It is not necessary to have recourse to either the doctrine of implied contractual terms to impose on the Vendor an obligation to carry on the business to the extent that it was lawful, or the possible consequences of supervening illegality resulting in suspension rather than frustration of the contractual obligation imposed by cl 50.1.

The obligation in cl 50.1 was for the Vendor to carry on the Business. The "Business" was defined to be "the hotel business trading as the 'Quarrymans Hotel' which operates pursuant to the Licence". The Licence, annexed as Sch 5 to the contract, stated that "Licence conditions imposed by the Liquor Act and Regulation apply". That legislative scheme contains an extensive regime of conditions applying to hotel licences[24], for the regulation and control of licenced premises generally (including powers of the Independent Liquor and Gaming Authority to cancel, suspend, and impose new conditions on Licences), and offences for non‑compliance.

Accordingly, a reasonable businessperson in the position of the parties would have understood cl 50.1 to mean that from the date of the contract until Completion, the Vendor was required to carry on the Business "in the usual and ordinary course as regards its nature, scope and manner" in accordance with law. The past, current, and anticipated future lawfulness of the operation of the Business was objectively essential and a commercial necessity to the parties. Without the Licence and associated Gaming Machine Entitlements, there would be no "Business". The Vendor's obligation to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner", on the proper construction of that provision, could never extend to an obligation on the Vendor to act illegally. The Vendor's obligation was necessarily moulded by, and subject to, the operation of the law from time to time.

Clause 50.1 is not a provision which, on its proper construction, has a "double intendment", in the sense of contemplating an operation both within and against the law so that the provision should be construed as meaning only the former intendment. Clause 50.1 has a single intendment – that the Vendor's 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 contrary construction would require "intractable language" giving effect to an inferred objective intention of the parties that the Vendor be obliged to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner" contrary to the law as in force from time to time and thereby place at risk the continuation of the Licence.

This conclusion is reinforced by the description that the Business is to be carried on in its "usual and ordinary course". The Business, which operates pursuant to the Licence, in its usual and ordinary course must operate in accordance with law. The further description "as regards its nature, scope and manner" reflects the objectively assumed common position of the parties at the date of the contract that the nature, scope and manner of the Business at that time was in the usual and ordinary course – that is, in "the undistinguished common flow" of the business – which inherently encompasses that the business was lawful.

The relevant obligation of the Vendor in cl 50.1 cannot be construed as if one part (the "usual and ordinary course") incorporates a requirement of lawfulness, but the other part (the "nature, scope and manner") does not. Otherwise, in the event of supervening illegality, the clause would contain potentially irreconcilable obligations in that the Vendor would be obliged to carry on the Business both in the "nature, scope and manner" that it operated at the contract date (on this hypothesis, unlawfully) and "in the usual and ordinary course" that it operated at the contract date (that is, lawfully). Construed as it must be, as a single obligation subject to an overriding qualification of lawfulness, the relevant part of cl 50.1 reflects the commercial reality that ongoing legal compliance was essential to the Business.

For these reasons, the Vendor was complying with cl 50.1 (and cll 58.1 and 58.2) of the contract at the time of Completion. The fact that the then extant public health order prevented the Vendor from carrying on the Business in the same way as it had been carried on at the contract date did not mean that the Vendor was not complying or could not comply with cl 50.1. The Vendor was "ready, willing and able to complete and ... not in default" in accordance with cl 51.7(b). Accordingly, the Vendor was able to serve the notice to complete making time of the essence for Completion as provided for in cl 51.7(b)(ii). By not completing as required, the Purchaser was in breach of the contract in an essential respect, entitling the Vendor to terminate the contract by notice under cl 63.1 (and to keep the Deposit and sue for damages).

On this basis, the status of cl 50.1 as an essential or intermediate term is immaterial. So too are the difficulties and uncertainties associated with any supposed doctrine of the suspension of a contractual promise temporarily incapable of being satisfied by reason of supervening illegality.

Conclusion:-

The appeal be allowed with costs.