Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd

Case •

[2021] NSWCA 332

•

21 December 2021

No judgment structure available for this case.

Court of Appeal


Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: Dyco Hotels Pty Ltd & Ors v Laundy Hotels (Quarry) Pty Ltd [2021] NSWCA 332
Hearing dates: 15 November 2021
Decision date: 21 December 2021
Before: Bathurst CJ at [1];
Basten JA at [86];
Brereton JA at [141]
Decision:

(1)   Appeal allowed.

(2)   Set aside the orders made by the primary judge and in lieu make the following orders:

(a)   Declare that the defendant by issuing a notice of termination of the contract between it and the plaintiffs dated 31 January 2020 for the sale and purchase of the property 214-216 Harris Street, Pyrmont and the assets associated with the hotel business carried on at those premises, repudiated the contract which repudiation was accepted by the plaintiffs.

(b)   Declare that the plaintiffs are entitled to a return of the deposit paid by them in respect of the contract.

(c)   Order the cross-claim be dismissed.

(d)   Order that the defendant pay the plaintiffs’ costs of the proceedings.

(3)   Order the respondent pay the appellants’ costs of the appeal and have a Certificate under the Suitors’ Fund Act 1951 (NSW) if eligible.

Catchwords:

CONTRACTS – construction – interpretation – contract for the sale of a hotel and associated business – where cl 50.1 required the business to be conducted in its “usual and ordinary course” – the meaning of “usual and ordinary course” – whether the phrase refers to the usual and ordinary course of hotel businesses generally or to the particular business – whether the business was required to be carried on in an identical manner to the way it was carried on pre-contract – objective intention of the parties – purpose of the transaction

CONTRACTS – construction – interpretation – contract for the sale of a hotel and associated business – COVID-19 pandemic – restrictions on trading – where risk passed on completion not on contract – whether such risk would include the significant restriction on trading resulting from the Public Health Orders – Public Health Act 2010 (NSW), ss 7, 10 – Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)

CONTRACTS – construction – interpretation – contract for the sale of a hotel and associated business – COVID 19 pandemic – restrictions on trading – severability – where cl 63.7 dealt with severance – whether cl 63.7 operated to sever cl 50.1 in the contract of a temporary supervening illegality – whether the Public Health Order rendered cl 50.1 unenforceable – whether cl 50.1 formed part of an indivisible whole by which the hotel and business was to be transferred as going concern – Public Health Act 2010 (NSW), ss 7, 10 – Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)

CONTRACTS – implied terms – terms implied in law – contract for the sale of a hotel and associated business – whether there was an implied term to the effect that the obligation in cl 50.1 of the contract was limited to the extent permitted by law – Public Health Act 2010 (NSW), ss 7, 10 – Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)

CONTRACTS – termination – repudiation of contract – wrongful termination – contract for the sale of a hotel and associated business – COVID-19 pandemic – restrictions on trading – whether the respondent was entitled to issue a notice to complete and a notice of termination – whether the conduct of the respondent amounted to repudiation of the contract – whether the conduct of the respondent was such as to convey to a reasonable person in the position of the appellants renunciation either of the contract as a whole or a fundamental obligation under it

CONTRACTS – termination – frustration – supervening illegality – contract for the sale of a hotel and associated business – COVID-19 – restrictions on trading – whether compliance with cl 50.1 was illegal because of the operation of the Public Health Order – where the effect of the temporary supervening illegality of cl 50.1 rendered the sale of the business not as a going concern – whether the respondent was entitled to demand completion in circumstances where it was not able to deliver possession of the hotel as a going concern – whether cl 50.1 of the contract made it a condition that the business be sold as a going concern – whether cl 50.1 was an essential term in that a purchaser would not have entered into the contract without the business being sold as a going concern – Public Health Act 2010 (NSW), ss 7, 10 – Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)

Legislation Cited:

Conveyancing Act 1919 (NSW)

Liquor Act 2007 (NSW)

Public Health Act 2010 (NSW)

Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)

Cases Cited:

Arab Bank Ltd v Barclays Bank (Dominion, Colonial & Overseas) Ltd [1954] AC 495

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 337; [1951] HCA 24

Bakhos v Fenner [2007] NSWSC 641

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; [1977] UKPCHCA 1

Canary Wharf (BP 4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch)

Carney v Herbert [1985] AC 301

Cass v Rudele (1692) 2 Vern 280; 23 ER 781

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24

Collingridge v Sontor Pty Ltd (1997) 141 FLR 440; 15 ACLC 1681

Cricklewood Property & Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221

Davis Contractors Ltd v Fareham [1956] 1 AC 696

Davjoyda Estates Pty Ltd v National Insurance Co of New Zealand Ltd (1965) 69 SR (NSW) 381; [1965] NSWR 1257

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432; [1978] HCA 12

Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWSC 504

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Fagan v Canterbury Waste Lands Board (1882) 1 NZLR (SC) 242

Fletcher v Manton (1940) 64 CLR 37 at 48; [1940] HCA 32

Gerraty v McGavin (1914) 18 CLR 152; [1914] HCA 23

Gordon & Gotch Australia Pty Ltd v Horwitz Publications Pty Ltd [2008] NSWCA 257

HG & R Securities Pty Ltd v Sayer [2009] NSWSC 427

John Lewis Properties plc v Viscount Chelsea [1993] 2 EGLR 77

Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd [1942] AC 154

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 647; [1989] HCA 23

Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728

Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095

Lysaght v Edwards (1876) 2 Ch D 499

McDonald v McDonald (1947) 21 MPR (Canada) 346

McFarlane v Daniell (1938) 38 SR (NSW) 337

McIntyre v Marshall [2004] NSWSC 412

McNally v Waitzer [1981] 1 NSWLR 294

Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; [1976] HCA 30

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

Neeta (Epping) Pty LtdvPhillips (1974) 131 CLR 286; [1974] HCA 18

Nwai Pty Ltd v Johnston [2005] NSWSC 1368

Poole v Adams (1864) 33 LJ Ch 639

Proctor v Chahl [2008] NSWSC 1252

Re Sweeny’s Estate (1890) 25 LR Ir 252

Robertson v Skelton (1849) 12 Beav 260; 50 ER 1061

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169; [1943] HCA 43

Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47

Smith v Hayles (1877) 3 VLR (L) 237

Stenner v Sterling Homes Northside Pty Ltd (1973) 3 DCR (NSW) 72

Taylor v White (1964) 110 CLR 129; [1964] HCA 11

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632

Urban House Pty Ltd v Purnell Bros Pty Ltd [2007] NSWSC 1248

Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392

Zaccardi v Caunt (2008) 15 BPR 28,403; [2008] NSWCA 202

Texts Cited:

Chitty on Contracts (34th ed, 2021, Sweet & Maxwell)

JD Heydon, Heydon on Contract (2019, Thomson Reuters)

Lewison and Hughes, The Interpretation of Contracts in Australia (Law Book Co 2012)

Trietel on The Law of Contract (15th ed, 2020, Sweet & Maxwell)

Category:Principal judgment
Parties: Dyco Hotels Pty Limited (ACN 100 275 974) atf the Parras Family Trust (First Appellant)
Quarryman Hotel Operations Pty Limited (ACN 634 263 933) (Second Appellant)
Daphne Maria Parras (Third Appellant)
Colin Michael Parras (Fourth Appellant)
Laundy Hotels (Quarry) Pty Limited (Respondent)
Representation:

Counsel:
N Hutley SC with C Freeman (Appellants)
C Birch SC with B DeBuse (Respondent)

Solicitors:
A C Comino & Associates (Appellants)
JDK Legal (Respondent)
File Number(s): 2021/143047
Publication restriction: Nil
 Decision under appeal 
Court or tribunal:
Supreme Court
Jurisdiction:
Equity
Citation:

[2021] NSWSC 504

Date of Decision:
10 May 2021
Before:
Darke J
File Number(s):
2020/126628

Judgment

  1. BATHURST CJ: This appeal raises difficult questions as to the effect of a Public Health Order on a contract for sale between the appellants, Dyco Hotels Pty Ltd (Dyco) and Quarryman Hotel Operations Pty Ltd (Quarryman) (collectively called the appellants) as purchasers and the respondent as vendor of a hotel and associated business, known as the Quarrymans Hotel, situated at 214-216 Harris Street, Pyrmont. Although there was a single contract it involved the separate sale of the hotel property, the liquor licence and gaming machine entitlements to Dyco for a consideration totalling $9 million, and the goodwill, plant and equipment and what were described as Business Assets to Quarryman for a consideration of $2,250,000.

The background to the proceedings

  1. The contract for sale was dated 31 January 2020. It provided for completion of that part of the contract relating to assets to be purchased by Quarryman 55 days after the contract date, and those to be purchased by Dyco 56 days after that date. Because the 56 day period expired on a Saturday, it was agreed that settlement of the sale and purchase of the Business Assets would take place on 30 March 2020, and the settlement of the purchase of the property, licence and gaming machine entitlements take place on 31 March 2020.

  2. Clause 59.1 of the contract provided that if completion of the contract did not take place on the date specified due to default of the purchaser, interest at a rate of 7 per cent per annum would be paid on so much of the purchase price as remained outstanding from the date completion was due to take place until the date of actual completion.

  3. The contract also provided that if completion did not take place on the completion date, a party which was ready, willing and able to complete and not in default was entitled to serve the other party with a notice requiring completion not less than 10 business days after the date of that notice and making time of the essence.

  4. In an Information Memorandum, which it was acknowledged was made available to Dyco prior to the contract, the hotel was shown as trading on three levels with trading hours from 11.00am to midnight Monday to Saturday, and 11.00am to 10.00pm on Sunday. It was stated the average weekly revenue was $65,188 for the 2019 financial year.

  5. The contract made provision for management of the hotel prior to completion. Because it was at the forefront of the dispute between the parties, it is convenient to set out this provision (cl 50.1) at this stage of the judgment:

“50.1 Dealings Pending Completion

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.”

  1. On 23 March 2020 the Public Health (COVID-19 Places of Social Gathering) Order 2020 (the Public Health Order) came into effect. The order, which was made under the Public Health Act 2010 (NSW), relevantly provided that pubs must not be open to the public except for the purpose of selling food and beverages for persons to consume off the premises. “Pub” was defined as a licensed premises under the Liquor Act 2007 (NSW).

  2. Section 7(5) of the Public Health Act provides that orders made under the Act expire after a period of 90 days unless revoked earlier. On 14 May 2020, a substitute order was made: the Public Health (COVID-19 Restrictions on Gatherings and Movement) Order (No 2) 2020. The order relaxed the restrictions somewhat by providing that in addition to selling food and drink for consumption off the premises, licensed premises could sell food or drink to not more than 10 persons at any time but only if liquor was sold ancillary to food service.

  3. From 30 March 2020 up to the date on which the contract was terminated, the hotel sold craft beer from a takeaway window but food was only offered on select days because demand was minimal. Mr Patrick Maguire, the licensee of the hotel, gave evidence that alcohol sales for April were a little over $11,000 and food sales a little over $1,000, whilst in May alcohol sales were just over $7,000 and food sales were around $750. He stated that the hotel managed to retain six staff, compared to the previous period where, in addition to Mr Maguire, there were four full-time employees including three managers and a head chef, with up to 16 casuals as and when needed. There appears to have been no increase in trading as a result of the second Public Health Order.

  4. As I indicated settlement was due to take place on 30 and 31 March 2020. On 25 March 2020, the solicitors for the appellants wrote to the solicitors for the respondent asserting the respondent was not ready, willing and able to complete the contract because of the breach of Special Conditions cll 50.1, 58.1 and 58.2.

  5. On 27 March 2020, the solicitors for the appellants again wrote to the solicitors for the respondent asserting the contract had been frustrated or, alternatively, they were entitled to serve a Notice to Complete and terminate because of the respondent’s inability to complete the contract.

  6. On 27 March 2020, the solicitors for the respondent wrote to the solicitors for the appellants asserting that compliance with cl 50.1 was illegal because of the Public Health Order and the provision was severable by virtue of cl 63.7 of the contract. In a letter written on the same day they asserted the contract was not frustrated. On 31 March 2020 they supplied settlement figures to the solicitors for the appellants and on 6 April 2020 they wrote again asserting their client was ready, willing and able to complete.

  7. On 8 April 2020, the solicitors for the appellants wrote to the solicitors for the respondent again asserting the contract was frustrated. They also asserted cl 50.1 was not severable and as a consequence the respondent was not ready, willing and able to complete the contract.

  8. On 17 April 2020, the solicitors for the respondent wrote rejecting the assertions made on behalf of the appellants. However, the letter made what was described as an open offer to extend the time for completion to a date 14 days after the removal of the existing Public Health Order. It requested the appellants indicate their position by Monday 20 April 2020.

  9. On 21 April 2020, the solicitors for the respondent wrote demanding arrangements for settlement be made within the next two days and stating that if those arrangements were not made by 5.00pm on 23 April they envisaged they would be instructed to serve a Notice to Complete. On 22 April 2020, the solicitors for the appellants claimed the respondent was not entitled to serve such a notice. However, on 28 April 2020 a Notice to Complete was served.

  10. On the same day the appellants commenced the proceedings the subject of the appeal. The relief sought included a declaration that the contract was frustrated, a declaration that the defendant was not entitled to issue a Notice to Complete or alternatively, a declaration that whilst the Public Health Order was in force and the business was not trading as a going concern, the defendant was not ready, willing and able to complete the contract and not entitled to issue the notice requiring completion.

  11. On 21 May 2020, the solicitors for the respondent served a Notice of Termination of the contract on the solicitors for the appellants.

  12. On 23 May 2020, the solicitors for the appellants wrote to the solicitors for the respondent stating that if the Court held that the contract was not frustrated, the Notice of Termination issued on behalf of the respondent constituted a repudiation which was accepted.

The contract

  1. Basten JA, whose judgment in draft I have had the privilege of reading, has set out a number of the relevant provisions of the contract and I shall only add to them to the extent necessary to explain my reasoning.

  2. The contract was structured in such a way that Quarryman was to purchase the goodwill, plant and equipment and any remaining Business Assets for $2,225,000. “Business Assets” were defined as Business Records, Goodwill, the Contracts, Stock, Business Name, Domain Name, Facebook and Instagram accounts and the Lease.

  3. “Contracts” were defined in cl 33.1 as all agreements relating to the business, excluding employee contracts. “Goodwill” was defined as the goodwill of the Business including the exclusive right for the purchaser to represent itself as carrying on the Business as the vendor’s successor. “Business” was defined as the hotel business trading as the “Quarrymans Hotel”. “Lease” was defined as the lease in the same or similar form as the lease in Sch 10. In this regard cl 65.6 obliged the respondent on completion of the sale of the Business Assets to enter into a lease of the property with Quarryman as lessee.

  4. As I indicated, the completion of the sale of the Business Assets was to take place one day prior to the completion of the sale of the property, licence and gaming machine entitlements. To give effect to this proposal, on the date of the contract the respondent, Dyco and Quarryman entered into a Condition Subsequent Deed which provided for the manner in which the Business Sale Completion would take place. It involved, in effect, notional vendor finance being provided by the respondent to Quarryman to be repaid on settlement of the Property Sale and obliged Quarryman between the Business Sale Completion and the Property Sale Completion to occupy the property strictly in accordance with the Property Lease. The Property Lease was in identical terms to the lease in Sch 10 of the contract. It provided in cl 9.2 for the lessee to keep the business open during the usual hours of trade and actively conduct the business.

  5. Clause 48.8 of the contract contained a number of warranties given by the respondent in respect of the Liquor Licence. Of relevance are the following provisions:

“48.8   The Vendor warrants that as at the date of this contract, to the best of its knowledge:

…

(f) There are no conditions on the Licence which have not been disclosed and there are no further conditions as are authorised to be imposed or likely to be imposed on the Licence under the Liquor Act or taken to have been imposed;

…

(r) The Licence authorises the sale and supply of liquor as defined in the Liquor Act and as at the date of completion, will not be subject to any conditions restricting the sale or supply of liquor, other than any condition already imposed on the licence or automatically imposed by virtue of the Liquor Act and the Regulations under that act from time to time.”

  1. I have set out cl 50.1 above. Clauses 50.2 and 50.3 contained a number of the exceptions to that provision. Those provisions were in the following terms:

“50.2   Exceptions

Clause 50.1 does not:

(a)   prevent the vendor terminating, or procuring the termination of, any contracts or arrangements to which it is a party other than the Contracts;

(b)   prevent any action contemplated or required by this contract;

(c)   prevent the vendor from terminating any contract to which it is party; or

(d)   prevent any action or omission agreed in writing between the vendor and the purchaser.

50.3   Before Completion

Before Completion, the Vendor must not, other than in the ordinary course of Business:

(a)   dispose of any Business Asset (whether owned, hired or otherwise held by the Vendor);

(b)   acquire any Business Asset;

(c)   enter into a Material Contract without the Purchaser’s written consent provided that the purchaser is not required to take an assignment or novation of any such Material Contract and the Vendor remains solely responsible for any obligation under any such Material Contract; and

(d)   employ any new person on a full‐time or part‐time basis, terminate any full‐time or part‐time Employee, change any term of employment or provide any bonus to any Employee.”

  1. Clause 50.4 provided that the obligation in cl 50.1 did not apply if the purchaser had given its prior written consent to the vendor in respect of a failure to comply with the obligation.

  2. Clause 51.7 provided that if a completion did not occur on the Completion Date, a party which was ready, willing and able to complete may serve a Notice to Complete.

  3. Clauses 57.1 and 57.2 provided that the title and risk to the assets would pass to the purchaser on completion.

  4. Clause 58.2 was in the following terms:

“58.2   Vendor to Carry on Enterprise

The Vendor undertakes that it will carry on the enterprise transferred under this contract until the day that the supply is made for the purposes of the A New Tax System (Goods and Services Tax) Act 1999.”

  1. Clause 63.7 dealt with severance. It provided as follows:

“63.7   Severability

If it is held by any court of competent jurisdiction that:

(a)   any part of this contract is void, voidable, illegal or otherwise unenforceable; or

(b)   this contract would be void, voidable, illegal or otherwise unenforceable unless any part of this contract is severed from this contract,

then that part will be severed from this contract and will not affect the continued operation of the rest of this contract.”

  1. Clause 65 provided that the sale of the property, licence and gaming machine entitlements was conditional on and interdependent with the sale of the Business Assets.

The primary judgment

  1. The primary judge concluded that the obligation in cl 50.1 was limited to the carrying on of the hotel business according to law. He summarised his conclusion as follows:

“[84] In my opinion, reasonable business persons in the position of these parties would have understood Additional Clause 50.1 to mean that the defendant's obligation to carry on the Business would not extend to carrying on the Business in any manner contrary to law. So, to the extent that the usual and ordinary manner of conducting the Business (presumed at the time of contract to be lawful) ceased for some reason to be lawful, the defendant would not be required to break the law. Rather, the obligation would be to carry on the Business in the usual and ordinary course (as regards its nature, scope and manner) as far as it remained possible to do so in accordance with the law.”

  1. His Honour rejected the claim that the contract was frustrated. Although there was no appeal from that decision, his reasoning explains his approach on the question of construction. Referring to the decision in Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095, he made the following remarks:

“[104]   An important difference between that case and the present case is that here all of the components of the sale and purchase transaction remained able to be transferred. In particular, all of the Assets (as defined) and the Business (as defined) remained able to be transferred even if the conduct of the Business itself was then affected by the public health orders.

[105]   The obligations to carry on the business have to be seen in the context of the contract as a whole and its relevant surrounding circumstances. It may be accepted that the effect upon the performance of the obligations was significant. Following the short cessation of trading between 23 March 2020 and 25 March 2020 the trading was very limited and unlike the usual and ordinary course. Moreover, there was great uncertainty about how long trading would remain restricted to some degree or another. The situation was understandably most concerning to the plaintiffs. Nevertheless, I agree with the submission of the defendant to the effect that the obligations to carry on the business ought not be regarded as of cardinal significance. Rather, the essential nature or purpose of the contract is a sale and transfer of particular assets for the agreed price. The obligations to carry on the business until completion of the sale can be seen to further that essential purpose by ensuring that in the short period until settlement the defendant, as far as it was lawful to do so, continued to operate the business in the usual and ordinary manner, thereby supporting the preservation of the goodwill of the business. The obligations are important, but I agree that they ought be regarded as ancillary to the principal promises to sell and transfer the hotel assets and pay the agreed price.”

  1. In light of these conclusions the primary judge held that the respondent was entitled to terminate the contract and assessed damages and interest in its favour in an amount of $937,044.11.

The issues in the appeal

  1. In the appeal the appellants challenged the conclusion of the primary judge that cl 50.1 was limited to require the respondent only to carry on the business to the extent permitted by law. They contended that it ought to have been held that from the date of the Public Health Order the respondent was unable to carry on the business as provided by cl 50.1 (Issue No 1 on the appeal).

  2. The second issue was whether it followed that the respondent was not entitled to issue the Notice to Complete or terminate the contract based on non-compliance with it. It was contended the purported termination amounted to a repudiation of the contract by the respondent (Issue No 2 on the appeal).

  3. By notice of contention the respondent contended that the primary judge should have implied a term into the contract to the effect that the obligation of the respondent to trade between exchange and settlement was to trade according to law (Issue No 1 on the notice of contention).

  4. The respondent also contended that the primary judge should have found that cl 50.1 was severable to the extent it required the respondent to trade in contravention of the Public Health Order (Issue No 2 on the notice of contention).

  5. The respondent also contended that the primary judge should have found the respondent lawfully terminated the contract following the appellants’ repudiation by asserting that the contract had been discharged by frustration, refusing to co-operate to settle and commencing the proceedings in the Court below (Issue No 3 on the notice of contention).

The construction of cl 50.1 (Issue No 1 on the appeal and Issue No 1 on the notice of contention)

  1. The principles of construction relevant in determining these issues are not in dispute. Clause 50.1, like any other provision in a contract, is to be construed by what a reasonable person would understand it to mean. That requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or object to be served by the contract: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18], [78]; Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392 at [51].

  2. Clause 50.1 required the Business to be conducted in its usual and ordinary course. As I have indicated, “Business” was defined as the hotel business trading as the Quarrymans Hotel. In interpreting the expression “usual and ordinary course”, reference was made by the appellants to the interpretation of the expression “ordinary course of business” in the context of bankruptcy and insolvency legislation. Thus in Taylor v White (1964) 110 CLR 129; [1964] HCA 11, Dixon CJ at 136 described the expression “in the ordinary course of business” in the following terms:

“I do not doubt that ‘in the ordinary course of business’ refers to ‘business’ as a general conception and is not restricted to the conduct of any particular business such as the business carried on in a shop or merchant's office or the like, but is referring to the transaction of business as a known and recognized activity pursued by anybody engaged in an attempt to win or earn or ‘make’ money or a living in a systematic or regular way.”

  1. However, it must be remembered that what was referred to in cl 50.1 was the usual and ordinary course of the defined Business. The clause was focusing on how the particular business was conducted, not the usual course of a hotel business generally, much less the usual course of businesses referred to in statutes of general application.

  2. That is also made clear by the succeeding words in cl 50.1, “as regards its nature, scope and manner”. “Nature” refers to the type of business, a hotel business, “scope” refers to the extent that business is carried on and “manner” refers to how it is carried on. It can be readily inferred that all these matters were known to the parties having regard to the terms of the Information Memorandum.

  3. That does not mean that cl 50.1 required that the Business be carried on between the date of contract and the date of completion in an identical manner to the way it was carried on pre-contract. There may be variations in the manner or extent the Business was carried on due, for example, to economic or regulatory requirements. Provided the Business can still be seen to be carried on in the usual or ordinary course having regard to its nature, scope and manner, the obligations in cl 50.1 will be complied with.

  4. By contrast, the primary judge construed the clause as obliging the respondent to carry out the Business in the usual and ordinary course as regards its nature, scope and manner, so far as it was permitted to do so according to law.

  5. There are, with respect, a number of difficulties with this construction. First, it is not what the clause says. Second, it ignores the fact that cl 50.4 provided the obligation in cl 50.1 could be varied with the written consent of the purchaser. Third, it carries with it the possibility that cl 50.1 could be complied with irrespective of whether what is carried out as a result of the restriction imposed bears any resemblance to the usual or ordinary course of the business of the Quarrymans Hotel as regards its nature, scope and manner. In my opinion, that does not conform with the objective intention of the parties having regard to the purpose of the transaction.

  6. The present case falls within this category. Selling craft beer in takeaway vessels (referred to as “Growlers” or “Squealers”) from a takeaway window and food on limited occasions from the same window with a skeleton staff, could not be said to amount to the carrying on of the business of the Quarrymans Hotel as regards its nature, scope and manner. Trading in that fashion bears no resemblance to trading in food and liquor from a three storey hotel open to the public.

  7. The construction of cl 50.1 which I prefer is supported by context, in particular the warranties in cl 48.8(f) and cl 48.8(r) which emphasised the importance of the licence permitting the trading activities to be carried on.

  8. Contextual support is further provided by the Lease, which provides an express obligation that the lessee will keep the premises open during the usual hours of trading.

  9. The construction of cl 50.1 preferred by the primary judge may have been influenced by his conclusion on the frustration issue that the Assets (as defined) and the Business (as defined) remained able to be transferred, even if the conduct of the Business was affected by the Public Health Orders. It also may have been influenced by his conclusion that the essential nature of the contract was the sale and transfer of the particular assets at an agreed price: see PJ [104]-[105] referred to at [32] above. Whilst in one sense that may be correct, it is evident that the purpose of the transaction was to sell the Business as a going concern not simply as a group of assets which, if the Public Health Order was revoked, gave the owner the capacity to operate a hotel of the nature of that envisaged in cl 50.1.

  10. It also must be remembered that cl 57.2 provided that risk passed on completion not on contract. Such risk was described by Dixon J in Fletcher v Manton (1940) 64 CLR 37 at 48; [1940] HCA 32 (in circumstances where risk passed on contract) as whatever loss or detriment may fortuitously befall the property or be placed by law upon the person filling the character of owner. Such risk would include the significant restriction on trading resulting from the Public Health Orders.

  11. Nor is it appropriate to imply a term to the effect that the obligation in cl 50.1 was limited to the extent permitted by law. As senior counsel for the appellants pointed out, it is not reasonable. The effect would be that any legal limitations on the ability of the hotel to trade, no matter how serious or how prolonged, would have no effect on the purchasers’ obligation to complete the contract irrespective of whether the restraint could otherwise be said to frustrate the contract or deprive the purchasers of the substantial benefit of it. It seems to me that such a clause is not only unreasonable, it is not one in the context of the present transaction where the risk remained with the purchasers until completion that is so obvious that it goes without saying.

  12. For this reason cl 50.1 was not limited in the manner suggested by the primary judge, nor is there an implied term to that effect.

Severability – Issue No 2 on the notice of contention

  1. I have set out the severability provision, cl 63.7 above. The question is whether the provision operates to sever cl 50.1 in the context of what might be described as a temporary supervening illegality.

  2. The first thing to note is that the provision is contingent on a court declaring any part of a contract void, voidable, illegal or unenforceable. No application for such a declaration has been made. The respondent has contended that the clause should be read down, whilst the appellants accept that the effect of the Public Health Order was to suspend the necessity for complying with the obligation whilst contending that the inability of the respondent to transfer the hotel as a going concern meant it was not able to require completion at the time of the service of the Notice to Complete or at the time of termination.

  3. The second matter to note is that the effect of the Public Health Order was to render cl 50.1 unenforceable during the course of the Public Health Order at least to the extent described in [73] below. It does not seem to me that cl 63.7 can operate to effect a temporary severance. Thus, in the circumstances of the present case, if the Public Health Order expired or was revoked prior to the date fixed for completion the severed obligation in cl 50.1 would not again become operative and the respondent would be free to ignore the provision if it regarded it as in its interests to do so.

  4. The third matter is this. Although the provision is broadly expressed, I do not think it was intended to operate irrespective of the effect severance of a particular provision would have on the rights and obligations of the parties of the contract. In the well-known passage in the judgment of Jordan CJ in McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345, he set out one of the conditions for severance in the following terms:

“When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature: Horwood v. Millar’s Timber & Trading Co. Ltd. If the elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable: Putsman v. Taylor. If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.”

This passage was approved by the Privy Council in Carney v Herbert [1985] AC 301 at 311; see also JD Heydon, Heydon on Contract (2019, Thomson Reuters) at [20.1000].

  1. In the present case it seems to me that the obligation to carry on the Business up to completion formed part of an indivisible whole by which the property and business of the hotel was to be transferred to the appellants as a going concern. Notwithstanding the width of cl 63.7 I do not consider this provision was severable from the balance of the contract.

Was the respondent entitled to issue the Notice to Complete and terminate the contract (Issue 2 on the appeal)

  1. It was not disputed that the primary judge was correct in his conclusion that the contract was not frustrated. In so concluding, the primary judge found that terms of the contract, particularly the promises to sell and transfer the assets in return for the agreed price in circumstances where no warranties were given as to future financial performance, were wide enough to apply to the new situation as it emerged (PJ [110]).

  2. The primary judge reached this conclusion in circumstances where he had held that cl 50.1 only obliged the respondent to carry on the Business to the extent permitted by law. It was not necessary for the primary judge to consider the issue if cl 50.1 was not limited in that way.

  3. Although there is no appeal from the conclusion of the primary judge on the question of frustration, it is necessary to consider the effect of the supervening illegality of cl 50.1 and particularly whether the appellants were obliged to complete the contract in circumstances where what was being transferred to them was not a going concern.

  4. The appellants contended that the obligation under cl 50.1 was suspended by the Public Health Order, and that whilst the hotel could not trade in the manner provided for by that clause, the respondent could not compel completion. They relied on cases involving the enforcement of contracts between citizens of warring countries during the currency of war.

  5. The first of the cases relied upon was Arab Bank Ltd v Barclays Bank (Dominion, Colonial & Overseas) Ltd [1954] AC 495. The proceedings involved the right of the appellant to be paid money due on a current account frozen as a consequence of the 1948 Arab-Israeli War. The appellant sued the respondent for monies due on the account as money had and received on the basis that the contract between it and the respondent was frustrated. The House of Lords rejected this claim, stating the liability to pay the monies held on the current account had been suspended, not terminated: see Lord Morton at 527, 529; Lord Reid at 530.

  6. The second of the cases relied upon, Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728, involved a dispute concerning monies due on a call account in circumstances where payment would have been illegal. The plaintiff sued the defendant in debt or damages, or alternatively, for money had and received on the basis the contract had been frustrated. Staughton J rejected the submission that the principle in Arab Bank Ltd v Barclays Bank was limited to cases concerning the outbreak of war. In rejecting the submission that the contract was frustrated and that money was recoverable as money had and received, he made the following remarks (at 772):

“… The first answer to it is in my judgment that the obligation of Bankers Trust was suspended but not discharged: Arab Bank Ltd. v. Barclays Bank (Dominion Colonial & Overseas) Ltd. [1954] A.C. 495, and see also the observations made in the Court of Appeal in that case [1953] 2 Q.B. 527. Mr. Cresswell seeks to distinguish that case on the ground that special rules apply to the outbreak of war. That is no doubt true to some extent; but I see no ground for holding that war has a different effect on the obligations of a banker from any other kind of supervening illegality for present purposes. Accordingly I would hold that the contract as a whole has not become impossible of performance or been otherwise frustrated; or at any rate that the parties have not been altogether discharged from further performance.”

  1. That decision is cited in Heydon on Contract at [23.120] as authority for the general proposition that when illegality is temporary, the relevant obligation is suspended rather than discharged. In Chitty on Contracts (34th ed, 2021, Sweet & Maxwell), it is cited at 26-098 as authority for the proposition that English law recognises that in certain circumstances the contractor may have a partial excuse for non-performance of a contractual obligation, whilst in Trietel on The Law of Contract (15th ed, 2020, Sweet & Maxwell) it is cited at 19-053 for the proposition that where temporary illegality does not discharge the contract, it provides an excuse for non-performance for so long as the prohibition lasts.

  2. The appellants placed particular reliance on the decision of Marcus Smith J in Canary Wharf (BP 4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch). The facts were complex, but in broad outline the defendant contended a lease between it and the claimant of premises at Canary Wharf in London had been or would be frustrated as a result of immunities lost by the defendant consequent on the withdrawal by the United Kingdom from the European Union. In the course of his judgment, Marcus Smith J made the following remarks (at [41]):

“[41]   …

It is clear that not every supervening illegality causes a contract to be frustrated. In the context of contracts and the English law of illegality and frustration, the following points must be noted:

(a)   English law distinguishes between illegality at the outset or as to formation and supervening illegality or illegality as to performance. For present purposes, it is unnecessary to consider illegality at the outset or as to formation. It does not arise in the present case.

(b)   In cases of supervening illegality, it is quite clear that the law has a range of responses. Although it used to be said that a contract could be void or voidable for illegality, that language is no longer helpful when considering illegality. As Chitty notes:

‘…much confusion would have been avoided if contracts were no longer themselves categorised as being voidable for illegality, or on grounds of public policy, in the same kind of way as contracts are being categorised as being void on other grounds, as the effect of illegality on the contract may vary according to the circumstances…’

In some cases, the supervening illegality has no effect at all on the enforcement of contractual obligations; in others, it renders the contract unenforceable by one party or the other but leaves the rest of the contract standing and enforceable; in yet others, neither party will be able to enforce the contract. In some cases, supervening illegality will cause the contract to be frustrated, but not in all.” (footnotes omitted)

  1. The principle that supervening illegality can constitute an excuse for non-performance of a contractual obligation whilst not frustrating the contract is demonstrated by a number of cases concerning covenants in leases.

  2. In Gerraty v McGavin (1914) 18 CLR 152; [1914] HCA 23, a lease of land contained a covenant that the lessee would “cause the baking business now carried on to be still carried on and kept alive”. Because of certain legislation introduced during the term of the lease, it became impossible to use the bakehouse. The lessor was held not entitled to rely on the breach of covenant to forfeit the lease. Griffith CJ made the following remarks (at 162):

“It was therefore impossible for the defendant to resume the business of baking in that building as it stood, and in order to resume that business it would have been necessary to put up what would be practically a new structure. The covenant which I have already read, is to ‘cause the baking business now carried on to be still carried on and kept alive during the said term.’ The covenant therefore was, as the learned Chief Justice thought, to carry on the business in that building. It was impossible for the defendant to do so in accordance with the law. Performance of the covenant had become impossible by law. The covenant cannot be construed as one that the defendant in the event of a change of the law would put up an entirely new structure. On that ground the plaintiffs cannot take advantage of the failure of the defendant to resume the business of baking as a breach of the covenant.”

  1. Both parties relied on this decision. The appellants relied on it in support of the proposition that the effect of the primary judge’s reading down of cl 50.1 resulted in the creation of a new or different obligation on the vendor and the loss of a right by the purchasers. It was relied upon by the respondent as demonstrating that the unenforceability of a covenant due to illegality did not lead to the suspension of other obligations absent frustration.

  2. In Cricklewood Property & Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 the lessees obtained a lease of land of 99 years at a peppercorn rent until the lessors gave notice that the erection of shops on the land might proceed, after which an annual ground rent would be payable. The lessors gave the requisite notice, but the lessees claimed that the obligation to pay the ground rent had been excused or discharged by frustration as wartime restrictions made it impossible to erect the shops. It was unanimously held that even if the doctrine of frustration applied to leases, the lease was not frustrated and the lessees remained liable to pay the ground rent. Lord Russell of Killowen made the following remarks at 233:

“… It seems to me clear that the intention of the parties was that rent would be payable even though the sites were vacant, and that the landlord was not to be driven to sue for damages for breach of covenant to erect shops. To such an action the war-time restrictions might well afford a defence, but that is a consequence very different and far removed from frustration. Therefore, even on the assumption that the doctrine of frustration can be applied to a lease, this appeal must fail.”

  1. It can be seen that Lord Russell’s conclusion was based on his view of the proper construction of the contract. Likewise in the present case, whether the appellants were required to complete the contract depends on whether as a matter of construction the appellants were obliged to accept a transfer of the property and other assets where the hotel was not being operated in the manner envisaged by cl 50.1.

  2. A similar conclusion with that reached in Cricklewood was reached in John Lewis Properties plc v Viscount Chelsea [1993] 2 EGLR 77 at 82.

  3. The critical question thus is whether on the proper construction of the contract, the respondent was entitled to demand completion in circumstances where it was not able to deliver possession of the hotel as a going concern. An affirmative answer to this question may seem surprising. It would involve the respondent not only being excused from liability for contravention of cl 50.1, but to be able to take advantage of that by compelling the appellants to accept a conveyance of the property in circumstances quite different to what was envisaged at the time of contract.

  4. I do not think this result follows. The contract on its proper construction requires the hotel licence and other assets to be conveyed as a going concern, which at the time of the Notice to Complete and termination was prevented by the Public Health Order. Although the respondent was excused from any liability for damages for non-compliance with cl 50.1 and the appellants would not have been entitled to terminate on this ground, it does not follow that at the time the respondent was ready, willing and able to complete the contract, a necessary pre-condition for serving the Notice to Complete both at law and pursuant to cl 51.7: see McNally v Waitzer [1981] 1 NSWLR 294 at 303-304 (where Hutley JA described the correct rule as “that a vendor who is in default in respect of things which up until then should have been done cannot give a notice to complete, but he can give notice to complete prior to performing all those other things which he has to perform in order to complete the contract”).

  5. This is for the following reasons. First, it is evident from the terms of cl 50.1 itself that the parties’ expectation was that the hotel be transferred as a going concern. Clause 50.1 was designed to preserve this position between contract and completion. It seems to me that cl 50.1 of the contract was an essential term in that a purchaser would not have entered into the contract without the contractual assurance that the business would be maintained until completion: see Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642; Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 337; [1951] HCA 24.

  6. Second, the purchase price was apportioned as the $2,500,000 for the Licence and Gaming Machine Entitlements, $750,000 for goodwill and $1,500,000 for plant and equipment. Leaving aside the hypothetical possibility of the Licence and Gaming Machine Entitlements being transferred to another hotel, these assets would be of no benefit to the purchaser unless and until the hotel was operational.

  7. Third, as I have pointed out, the risk up to completion remained with the respondent. Requiring the appellants to complete the transaction in circumstances where a risk had materialised between contract and completion and to bear the loss flowing from that risk, is contrary to that provision.

  8. In these circumstances I am of the view that the respondent was not ready or able to complete the contract at the time of the Notice to Complete or at the time it purported to terminate the contract in reliance on that notice. The purported termination amounted to a repudiation of the contract which, subject to Issue No 3 on the notice of contention, entitled the appellants to accept the repudiation and treat the contract at an end.

Repudiation by the appellants (Issue No 3 on the notice of contention)

  1. This matter can be dealt with shortly. The respondent contended that three matters demonstrated that the appellants repudiated the contract. The second and third of these matters, namely, refusing to settle and commencing the proceedings the subject of the appeal, could not amount to repudiation as the respondent was not entitled to call upon the appellants to complete the contract.

  2. The other matter relied upon was the contention made by the solicitors for the appellants in the correspondence leading up to the respondent’s purported termination of the contract that the contract was frustrated. Although the appellants’ solicitors in their letter of 27 March 2020 asserted the contract was frustrated, that was accompanied by a statement that their clients did not wish to resort to “contractual remedies” and proposed a method of resolution. It also stated that if legal proceedings were necessary, the letter would be tendered on an application for a special costs order.

  3. The assertion that the contract was frustrated was repeated in the letter from the solicitors for the appellants of 8 April 2020. That letter set out the basis the claim of frustration was made and indicated that if the contract was not frustrated, the respondent was not ready, willing and able to complete the contract. It also stated the appellants’ rights were reserved.

  4. The proceedings were commenced on 28 April and the relief sought included declaratory relief that the contract had been frustrated and that the parties’ obligations had been discharged. Importantly it sought the following alternate relief:

“6.   Alternatively, and without admission, a declaration that in the premises of paragraphs 14-18 of the Pleadings and Particulars below:

(a)   while clause 7(1) of the Public Health (COVID-19 Places of Social Gathering) Order 2020 remains in force; and/or

(b)   the Business is not trading as a going concern and in the usual and ordinary course as regards its nature, scope and manner as at the date of the Contract; and/or

(c)   the Business has not traded as a going concern and in the usual and ordinary course as regards its nature, scope and manner as to the date of the Contract for at least 4 weeks prior to any date of completion;

the defendant is not ready, willing and able to complete the Contract and was not entitled to issue the Notice to Complete dated 28 April 2020.”

  1. I do not think this conduct amounted to repudiation of the contract. A party repudiates a contract when he or she evinces an intention no longer to be bound by the contract or fulfil it in a manner substantially inconsistent with that party’s obligations. The test is whether the conduct of one party is such as to convey to a reasonable person in the position of the other party renunciation either of the contract as a whole or a fundamental obligation under it: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 647; [1989] HCA 23; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61 at [44].

  2. However, repudiation is not to be inferred lightly. As was pointed out by the plurality in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432; [1978] HCA 12, although there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he or she will not perform the contract according to its terms, there are others in which a party, though asserting a wrong view of the contract because he or she believes it to be correct, may be willing to accept an authoritative exposition of the correct interpretation. The plurality stated that in those circumstances an intention to repudiate will not be attributed to that party.

  3. The present case falls within the latter category. The appellants were correct in asserting that they were not required to complete the contract and sought a declaration raising that question in addition to the question of frustration. There is no reason to suggest they would not have accepted the Court’s conclusion on these issues. In these circumstances their conduct did not amount to a repudiation of the contract.

Conclusion

  1. The appellants were entitled to accept the respondent’s purported termination of the contract as a repudiation and terminate the contract. In these circumstances they had no liability to the respondent for damages and are entitled to a return of the deposit. The appeal should be allowed and the following orders made:

  1. Appeal allowed.

  2. Set aside the orders made by the primary judge and in lieu make the following orders:

  1. Declare that the defendant by issuing a notice of termination of the contract between it and the plaintiffs dated 31 January 2020 for the sale and purchase of the property 214-216 Harris Street, Pyrmont and the assets associated with the hotel business carried on at those premises, repudiated the contract which repudiation was accepted by the plaintiffs.

  2. Declare that the plaintiffs are entitled to a return of the deposit paid by them in respect of the contract.

  3. Order the cross-claim be dismissed.

  4. Order that the defendant pay the plaintiffs’ costs of the proceedings.

  1. Order the respondent pay the appellants’ costs of the appeal and have a Certificate under the Suitors’ Fund Act 1951 (NSW) if eligible.

  1. BASTEN JA: This case involves a question as to the effect of a public health order on an uncompleted contract for the sale of a hotel and associated business as a going concern, in March 2020. Contracts were signed on 31 January 2020, with a completion date for the transfer of the hotel business on 27 March 2020. At midday on 23 March 2020 the Public Health (Covid-19 Places of Social Gathering) Order 2020 commenced, limiting the hotel to take-away orders for a period of 90 days. Settlement did not take place because the purchasers asserted that either there was a breach of the vendor’s obligations, or the contract had been frustrated, because the effect of the public health order was to prevent the vendor carrying on business in the usual and ordinary course up until settlement, as required by a term of the contract.

  2. On 25 May 2020 the purchasers, Dyco Hotels Pty Ltd (“Dyco”) and Quarryman Hotel Operations Pty Ltd (“Quarryman”), commenced proceedings in the Equity Division (Real Property List) seeking a number of declarations and consequential orders. The primary declaration sought was that the contract had been frustrated; the purchasers sought return of the deposit. In the alternative, the purchasers sought a declaration that the vendor, Laundy Hotels (Quarry) Pty Ltd, had repudiated the contract or that it was not ready, willing and able to complete the contract and was not entitled to issue a notice to complete on 28 April 2020, as it had done.

  3. In response, the vendor filed a cross-claim seeking a declaration that the contract had been terminated by the service of a notice of termination on the purchasers on 22 May 2020, a declaration that the deposit was forfeit and damages.

  4. The matter was heard by Darke J in mid-April 2021. On 10 May 2021 Darke J delivered judgment, holding that (i) the contract had not been frustrated; (ii) the vendor was not in breach; (iii) the vendor had been entitled to terminate the contract for breach by the purchasers and was therefore entitled to retain the deposit and recover damages. Damages were assessed at $900,000.

  5. On 2 August 2021 the purchasers filed an appeal challenging the findings that the vendor was entitled to issue a notice to complete on 28 April 2020 and had validly terminated the contract, and sought an order for repayment of the deposit. The appeal did not seek to renew the claim that the contract had been frustrated, which had been rejected by the trial judge, but asserted that the effect of the Public Health Order was to prevent the vendor complying with the condition of the contract as to the continued running of the business and was thus unable to deliver the property and business the subject of the contract. Although it was not said to be in breach of the contract, it was not entitled to enforce performance by the purchaser.

  6. For the reasons set out below, in my view Darke J was correct in his analysis and in the orders made. The appeal should be dismissed.

Sale contract

  1. The contract adopted the NSW standard form contract for the sale and purchase of land (2019 edition), together with lengthy additional clauses necessary for the sale of the hotel business with the land. The purchase price was $11,250,000. [1] The contract was in two parts: in addition to the standard form contract with additional clauses, there was a “Condition Subsequent Deed” (“the Deed”) executed on the same date and between the same parties. The property sale contract provided that the property would be transferred to Dyco and the business assets to Quarryman. The Deed provided that Quarryman would take a lease of the property from the vendor which would entitle it to possession and required it to carry on the hotel business “in a good and businesslike manner.” [2] The lease accompanying the Deed was expressed to be for a period of two years with three further options each for a term of three years. The starting rent was identified as $390,000 per annum. The effect was that, although the goodwill of the business was transferred as a business asset to Dyco, the business itself was transferred to Quarryman.

    1. The price was wrongly written in the sum of the different elements of the price in Sch 1, item 3 by omission of a zero; the intended number was clear and was stated on the first page of the standard form contract.

    2. Deed, par 2.3(d).

  1. As to whether Additional Clause 50.1 may be severed, Additional Clause 63.7 provides as follows:

“63.7   Severability

If it is held by any court of competent jurisdiction that:

(a)   any part of this contract is void, voidable, illegal or otherwise unenforceable; or

(b)   this contract would be void, voidable, illegal or otherwise unenforceable unless any part of this contract is severed from this contract,

then that part will be severed from this contract and will not affect the continued operation of the rest of this contract.”

  1. Construing Additional Clause 50.1 as I would, it is not “void, voidable, illegal or otherwise unenforceable” within the meaning of Additional Clause 63.7. Additional Clause 63.7 is addressed to the contract as made, and speaks to its status as at the date of the contract. It is not addressed to what is sometimes called “supervening illegality”, the divergent effects of which were referred to in Canary Wharf (BP4) T1 Ltd v European Medicines Agency by Marcus Smith J:[43]

“In some cases, the supervening illegality has no effect at all on the enforcement of contractual obligations; in others, it renders the contract unenforceable by one party or the other but leaves the rest of the contract standing and enforceable; in yet others, neither party will be able to enforce the contract. In some cases, supervening illegality will cause the contract to be frustrated, but not in all.”

43. [2019] EWHC 335 (Ch) at [41(2)(b)] (Marcus Smith J).

  1. Marcus Smith J referred to the following statement of Viscount Simon LC in Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd:[44]

“Discharge by supervening impossibility is not a common law rule of general application, like discharge by supervening illegality; whether the contract is terminated or not depends on its terms and the surrounding circumstances.”

44. [1942] AC 154 at 163-164 (Viscount Simon LC).

  1. In the present case, the “terms and surrounding circumstances” enable the question to be resolved by their allocation of the risk of supervening illegality prior to completion, consistently with Additional Clause 57, to the Vendors. In other words, the supervening illegality did not excuse the Vendors from performance of Additional Clause 50.1 if they wished to insist upon completion by the Purchasers. For these reasons, in addition to those given by the Chief Justice for holding that Additional Clause 50.1 is not severable, Additional Clause 67 is not engaged.

  2. It follows that, in my opinion, the Vendors were in default under Additional clause 50.1 when they purported to give the Notice to Complete, and were therefore not entitled to give that notice.

  3. The alternative basis on which I reach the same conclusion is that, viewed as a whole, the subject matter of the contract which the Vendors were obliged to convey to the Purchasers upon completion was an operating hotel business of substantially the same nature scope and manner as at the date of contract. This follows from:

  1. The “agreement” clause at the beginning of the standard conditions which, as amended by Additional Clause 33.5(a)(i), provided:

“The vendor sells and the purchaser buys the Assets for the price under these provisions …”

  1. The following definitions of “the Assets” in Additional Clause 33.1: [45]

    45. Further, in Schedule 1 to the contract, “the Business” is described in Item 1 as “Hotel business trading as ‘Quarrymans Hotel’ carried on by the Vendor at the Property.” (see also the definition of Business in Additional Clause 33.1).

“‘Assets’     means:

(a)   Licence;

(b)   Gaming Machine Entitlements

(c)   Plant and Equipment;

(d)   Property; and

(e)   Business Assets.

…

‘Business’   means the hotel business trading as the ‘Quarrymans Hotel’ which operates pursuant to the Licence.

‘Business Assets’   means:

(a)   the Business Records;

(b)   the Goodwill;

(c)   the Contracts;

(d)   Stock;

(e)   Business name; and

(f)   Domain name, Facebook & Instagram Account

(g)   Lease

and includes all assets used or to be used in or necessary for the conduct of the Business, but excludes the Excluded Assets.

…

‘Goodwill’   means the goodwill of the Business and includes the exclusive right for the Purchaser to represent itself as carrying on the Business as the vendor’s successor.”

  1. The Vendors’ obligation under Additional Clause 50.1, set out and considered above, 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”;

  2. The express deferral under Additional Clause 57.2 of the passage of risk until completion, with the consequence that the Vendors were bound to convey to the Purchasers the assets sold in the condition in which they were at the date of the contract;

  3. The essentiality to the transaction of the sale of the ‘Business Assets’, including ‘Goodwill’, as confirmed by Additional Clause 65, which provides that the sale of the property, liquor licence, and gaming machine entitlements is conditional on and interdependent with the sale of the ‘Business Assets’; and

  4. The allocation, in Item 3 of Schedule 1, of $750,000 of the price to ‘Goodwill’.

  1. The Purchasers contracted to acquire an operating hotel business of a nature, scale, and manner of that in operation on the date of the contract. Because risk passed only upon completion, it was the Vendors’ obligation to convey upon completion the business in the condition in which it was at the date of contract. When it gave the Notice to Complete, the Vendors were in no position to convey that subject matter to the Purchasers: they could convey only a modified, reduced, and scaled-down version. For the reasons already advanced, the contract required the Vendors, not the Purchasers, to bear the risk of that reduction.

  2. Accordingly, for that reason also, the Vendors were disqualified from giving the Notice to Complete when they purported to do so. This is not a case in which the Vendors were in a position to resolve the impediment between serving the notice and completion. [46]

    46. Cf HG & R Securities Pty Ltd v Sayer [2009] NSWSC 427 at [156] (Ward J) (vendor not precluded from giving Notice to Complete where it had made arrangements to clear land tax on settlement but had not done so when the notice was issued, as vendor’s obligation was to clear land tax, "but only at the latest on completion and there is no objection to him giving a valid and effective notice to complete if at the time he gives it the property is still subject to [a charge for] land tax" [quoting from McNally at 303-304 (Hutley JA)]); Nwai Pty Ltd v Johnston [2005] NSWSC 1368 at [9] (Windeyer J) (vendor’s Notice to Complete not defective merely because vendor failed to issue evidence of clearance of contaminated soils required in the contract before date of completion, as “a notice to complete is not to be held invalid merely because some obligation, which the vendor is required to satisfy on settlement, has not been satisfied at the date of service of the notice, provided that the vendor will be able to satisfy the obligation on completion.” Cf McIntyre v Marshall [2004] NSWSC 412 at [26] (Gzell J) (failure by vendor to answer requisitions on title was sufficient to constitute a breach by the vendor of an obligation under the contract).

  3. It follows that the Notice to Complete was not validly given. The Vendors were not entitled to insist on completion, and were not entitled to terminate for the Purchaser’s failure to complete. Their purported termination was a repudiation, which the Purchasers have accepted. The Purchasers are entitled to the return of the deposit. I agree with the orders proposed by the Chief Justice.

**********

Endnotes

Amendments

08 February 2022 - Amend numbering of footnotes

Decision last updated: 08 February 2022

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Cases Citing This Decision

18

Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6
Manson v Lybert [2025] NSWSC 460
ISPT Pty Ltd and AWPF Management No. 2 Pty Ltd v Cao and Zhao [2023] NSWSC 1115
Cases Cited

31

Statutory Material Cited

4

Associated Newspapers Ltd v Bancks [1951] HCA 24
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61
Associated Newspapers Ltd v Bancks [1951] HCA 24