On 8 March 2023, the High Court of Australia delivered its judgment in the case of Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited [2023] HCA 6, providing insight as to how contractual obligations to carry on a business in its usual course are to be interpreted in the context of changing circumstances in the law.
Background
In January 2020, Laundy Hotels entered into a contract with Dyco Hotels for the sale of the Quarryman’s Hotel at Pyrmont, Sydney.
Under the contract, Laundy was obligated to "from the date of this contract until Completion, carry on the Business in the usual and ordinary course as regards its nature, scope and manner".
Seven (7) days before completion of the sale, a Public Health Order came into effect to address COVID-19 and required hotels to be closed to the public and restricted to selling takeaway food and drink.
Dyco notified Laundy that because of the Public Health Order, Laundy was not in a position to complete the contract because it was unable to carry on the business in the usual and ordinary course that existed at the time the contract was entered into.
Laundy disputed this and served a notice to complete on Dyco, Dyco did not complete, and Laundy subsequently terminated the contract, entitling Laundy to keep the deposit and sue for damages.
Dyco commenced legal proceedings against Laundy for repudiation of contract.
Position of the Courts
The Supreme Court of NSW held that Laundy was not in breach of the contract and that it had carried on the business as far as it was possible in accordance with the law.
Dyco appealed the decision, and the NSW Court of Appeal held that Laundy was not ready, willing and able to complete, as the Public Health Order rendered Laundy’s compliance with its contractual obligation illegal and therefore suspended, meaning that Laundy’s notice to complete served as a repudiation of the contract.
The matter was then appealed to the High Court of Australia and it was held that the obligation on Laundy to carry on its business in the usual and ordinary course incorporated the inherent requirement to do so in accordance with law. Accordingly, there was no obligation imposed on Laundy to operate the business unlawfully and that the contractual obligations had to be construed in its context, that is, operating the business within the Public Health Orders.
Takeaways
The key takeaways from the case are as follows:
- What constitutes carrying on a business can change according to changes in law from time to time and if such changes occur between the date of signing a contract and completing a contract, a contact may still be able to be completed, even if the law has unexpectedly changed. Accordingly, obligations under a contract are subject to the operation of law from time to time.
- There is an inherent requirement that the carrying on of a business must be lawful and this does not need to be expressly stated or implied into a contract.
- Parties to a contract should pay close attention to including clauses in contracts which allow for termination if there are supervening events (such as changes in law which impact the business) or material changes in circumstances until completion, such as a reduction in in the value of assets or changes in the financial position of the business.
If you would like advice or assistance in relation to commercial contracts, please contact our Senior Associate, Josef Ferraro on jferraro@marsdens.net.au or our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
