The High Court has held unanimously that inherent to a contractual requirement on a vendor to operate its business ‘in the usual and ordinary course’ until completion of the contract was that it do so in accordance with law. The obligation on the vendor to operate its business ‘in the usual and ordinary course’ did not mean that the business was required to operate at completion as it had operated as at the contract date, if that required it to operate unlawfully.

Background

On 31 January 2020, the appellant vendor (Laundy) entered into a contract with the respondent purchasers (Dyco and Quarryman) for the sale of real property in Pyrmont (Quarrymans Hotel), together with the hotel’s licence, gaming machine entitlements and business.

Clause 50.1 of the contract required Laundy to carry on the hotel’s business ‘in the usual and ordinary course as regards its nature, scope and manner’ until completion of the contract.

On 23 March 2020, the Minister for Health made an order under s 7 of the Public Health Orders Act 2010 (NSW) (Act) in response to the COVID-19 pandemic, directing that pubs ‘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.’ Section 10 of the Act provided that a failure to comply with such a direction was a criminal offence.

On the same day, Laundy closed Quarrymans Hotel to facilitate a shift to take-away operations. Quarrymans Hotel re-opened on 26 March 2020 as a takeaway operation, in compliance with the Minister’s direction.

On 25 March 2020, Dyco and Quarryman informed Laundy they would not complete the contract, as the vendor was not ‘ready, willing and able to complete’. They cited breaches of a number of contractual terms, including cl 50.1. Two days later, Dyco and Quarryman asserted that the contract was frustrated.

On 21 May 2020, having already issued a notice to complete, Laundy served a notice of termination on the purchasers. The purchasers claimed that the notice of termination constituted a repudiation of the contract.

Procedural History

Dyco and Quarryman commenced proceedings in the NSW Supreme Court seeking declaratory relief.

The primary judge, Darke J, held that the contract had not been frustrated and that in carrying on the hotel’s business as a take-away operation, the vendor had complied with cl 50.1. His Honour held that, properly construed, the clause required the vendor to carry on its business in the usual and ordinary course, as far as it remained possible to do so in accordance with law (at [21]). The vendor had therefore validly issued a notice to complete, and the purchasers had breached the contract in failing to complete.

A majority of the Court of Appeal (Bathurst CJ and Brereton JA) allowed an appeal. Bathurst CJ rejected the primary judge’s construction of cl 50.1 and considered that the Minister’s order was a supervening event which suspended the contractual obligation in cl 50.1. Since 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 noticeto complete involved a repudiation of the contract by the vendor (at [24]). In agreeing with Bathurst CJ, Brereton JA also considered that the vendor was in default of cl 50.1 at the time of issuing its notice to complete (at [24]). In dissent, Basten JA favoured the primary judge’s construction of cl 50.1 and emphasised the highly regulated nature of the hotelier business (at [25]).

High Court’s Decision

The High Court (Kiefel CJ, Gageler, Gordon, Gleeson and Jagot JJ) unanimously allowed Laundy’s appeal. Their Honours held that, on its proper construction, cl 50.1 incorporated an inherent requirement on the vendor to carry on its business ‘in the usual and ordinary course’ in accordance with law (at [28]). It was not necessary to imply a contractual term to that effect. Nor was it necessary to consider whether the obligation in cl 50.1 was suspended due to supervening illegality. The requirement stemmed from the lawfulness of the business being essential to its operation (at [28] and [31]).

The court noted that the ‘business’ of the vendor was defined under the contract as the hotel business operating pursuant to its licence. The licence was subject to an extensive legislative regime under the Liquor Act 2007 (NSW) and associated regulations, which included powers of suspension, cancellation and variation, and offences for non-compliance (at [29]).

The court emphasised the ‘commercial necessity’ of lawful operation to the hotel business; without the hotel’s licence there would be no business. It followed that a reasonable businessperson would consider that the obligation to carry on the business in the usual and ordinary course ‘could never extend to an obligation on the [v]endor to act illegally’ and was ‘necessarily moulded by, and subject to, the operation of the law from time to time’ (at [31]).

The requirement under cl 50.1 that the business be carried on ‘in the usual and ordinary course’ reinforced that construction because the business, operating pursuant to its licence, must in its usual and ordinary course act in accordance with law (at [33]).There was no promise that the business would operate at completion as it operated at the contract date (at [47]). BN