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

Supreme Court

New South Wales

Medium Neutral Citation: Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWSC 504
Hearing dates: 12-14 April 2021
Date of orders: 10 May 2021
Decision date: 10 May 2021
Jurisdiction: Equity
Before: Darke J
Decision:
Contract held not to have been frustrated. Vendor held to have terminated contract for breach by purchasers. Vendor entitled to forfeit deposit and recover damages for loss of bargain.

Catchwords:
CONTRACTS – construction – agreement for sale of hotel property and business – vendor obliged to carry on business in usual manner until completion of contract – public health orders made in response to COVID-19 pandemic limited ability to operate business – whether vendor in breach of obligation to carry on business in usual manner – obligation construed as not requiring the carrying on of business in any manner contrary to law – vendor held not to be in breach
CONTRACTS – discharge by frustration – agreement for sale of hotel property and business – vendor obliged to carry on business in usual manner until completion of contract – public health orders in response to COVID-19 pandemic limited ability to operate business – actual performance of obligation departed from that which the parties contemplated would occur – whether contract frustrated – essential purpose of contract was for sale and transfer of particular assets for agreed price – vendor’s obligation to carry on business until completion designed to further this essential purpose – no warranties given as to future performance of business – unexpected events did not give rise to such a fundamentally different situation that it would not be just to hold the parties bound to the terms of the contract – held that contract not frustrated
CONTRACTS – damages – assessment – date for assessment of damages – vendor terminated contract for purchaser’s breach – damages for loss of bargain – held that damages should be assessed as at date the bargain was lost – no justification to assess damages at later time – avoided loss principle – whether vendor obtained compensating advantage by retaining assets the subject of sale – not established that retention of assets is attributable to a decision made in consequence of the purchaser’s breach – mitigation of damage principles not engaged

Legislation Cited:
Civil Procedure Act 2005 (NSW) s 100
Conveyancing Act 1919 (NSW) s 55(2A)
Liquor Act 2007 (NSW)
Liquor Regulation 2018 (NSW)
Public Health Act 2010 (NSW), ss 7, 10
Public Health (COVID-19 Gatherings) Order 2020
Public Health (COVID-19 Places of Social Gathering) Order 2020
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 2) 2020
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 3) 2020

Cases Cited:
ASIC v Atlantic 3 – Financial (Aust) Pty Ltd (No 2) [2007] 2 Qd R 399; [2006] QCA 540
Baguley v Lifestyle Homes Mackay Pty Ltd [2015] QCA 75
Barrak Corporation Pty Ltd v Jaswil Properties Pty Ltd (2016) 18 BPR 35,759; [2016] NSWCA 32
Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143
Carrapetta v Rado (2012) 16 BPR 30,997; [2012] NSWCA 202
Clark v Macourt (2013) 253 CLR 1; [2013] HCA 56
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12
El Ali v Tritton [2019] NSWCA 111
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Gerraty v McGavin (1914) 18 CLR 152
Global Network Services Pty Ltd v Legion Telecall Pty Ltd [2001] NSWCA 279
Johnson v Perez (1988) 166 CLR 351
Krell v Henry [1903] 2 KB 740
Langley v Foster (1906) 4 CLR 167
Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095
McNally v Waitzer [1981] 1 NSWLR 294
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146; [2014] NSWCA 389
oOH! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255; [2011] VSCA 116
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35
Ronnoc Finance Ltd v Spectrum Network Systems Ltd (1997) 45 NSWLR 624
Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) (2017) BPR 37,025; [2017] NSWSC 866
Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8

Texts Cited:
K Lewison and D Hughes, The Interpretation of Contracts in Australia (Lawbook Co, 2012)

Category: Principal judgment
Parties: Dyco Hotels Pty Ltd (First Plaintiff/First Cross-Defendant)
Quarryman Hotel Operations Pty Ltd (Second Plaintiff/Second Cross-Defendant)
Daphne Maria Parras (Third Plaintiff/Third Cross-Defendant)
Colin Michael Parras (Fourth Plaintiff/Fourth Cross-Defendant)
Laundy Hotels (Quarry) Pty Ltd (Defendant/Cross-Claimant)
Representation:
Counsel:
Mr C D Freeman (Plaintiffs/Cross-Defendants)
Dr C J Birch SC with Mr B DeBuse (Defendant/Cross-Claimant)
Solicitors:
A C Comino & Associates (Plaintiffs/Cross/Defendants)
JDK Legal (Defendant/Cross-Claimant)

File Number(s): 2020/126628
Publication restriction: None

Judgment

Introduction

These proceedings concern a contract for the sale of a freehold hotel property in Pyrmont (The Quarrymans Hotel) together with associated hotel licence, gaming machine entitlements and hotel business. The contract was entered into between the first and second plaintiffs as purchasers and the defendant as vendor for a purchase price of $11,250,000, with a deposit of $562,500 (5% of the price). The third and fourth plaintiffs were also parties to the contract as guarantors of the obligations of the purchaser. For convenience, the four plaintiffs will be generally referred to as “the plaintiffs”.
The contract is dated 31 January 2020. The time for completion of the contract is governed by Additional Clause 65 which in that regard provides:

that subject to the satisfaction of certain conditions precedent, completion of the sale of the hotel business (the Business Assets) is to take place on the 55^th day after the contract date or such other date as agreed in writing; and

that subject to the completion of the sale of the Business Assets, completion of the sale of the hotel property, licence and gaming machine entitlements is to take place on the 56^th day after the contract date or such other date as agreed in writing.

Additional Clause 65 further provided, inter alia, that the sale of the hotel property, licence and gaming machine entitlements was conditional upon, and interdependent with, the sale of the Business Assets.

On 13 February 2020 an agreement was reached between the respective solicitors to the effect that instead of settlement of the Business Assets taking place on Friday, 27 March 2020 (the 55^th day after the contract date), settlement would take place on Monday, 30 March 2020, with settlement of the hotel property, licence and gaming machine entitlements to take place on Tuesday, 31 March 2020.
Additional Clause 50 imposed various obligations upon the vendor in respect of the period up to completion. In particular, Additional Clause 50.1 provided that from the date of the contract until completion:

…the Vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner…

Performance of that obligation (and perhaps also Additional Clause 58 concerning the carrying on of the enterprise) became affected by the making of various orders under s 7 of the Public Health Act 2010 (NSW) in response to public health risks associated with the outbreak of COVID-19. These orders included the Public Health (COVID-19 Places of Social Gathering) Order 2020 which commenced operation at midday on 23 March 2020.
The central issue in the case is whether, as a result of such orders, the contract for sale was discharged by frustration.
The plaintiffs contend that the contract was frustrated because from midday on 23 March 2020 the hotel business was not able to be operated as a going concern, or in the usual and ordinary course as regards its nature, scope and manner as required by Additional Clause 50.1, and as a consequence the value of the assets the subject of the contract decreased by at least $1 million. The plaintiffs claim that if the contract has been frustrated the deposit of $562,500 should be returned. The plaintiffs also claim that in the circumstances the Court should exercise its discretion to make an order under s 55(2A) of the Conveyancing Act 1919 (NSW) for the return of the deposit.
The defendant denies that the contract was discharged by frustration as alleged, and denies that it would be appropriate for the Court to order the return of the deposit. The defendant contends that despite the public health orders, the hotel business continued to trade as a going concern, albeit that it was restricted to providing food and beverages to customers to consume off the premises. The defendant contends that in these circumstances the plaintiffs wrongfully refused to perform or otherwise repudiated the contract, and failed to complete the contract as required by a Notice to Complete issued on 28 April 2020, such that the defendant was entitled to terminate the contract and forfeit the deposit. The defendant purported to terminate the contract by notice given on 21 May 2020. By its Cross-Claim against the plaintiffs, the defendant seeks declaratory relief to the effect that it validly terminated the contract and forfeited the deposit, and seeks damages for loss of the bargain.
By their Defence to the Cross-Claim the plaintiffs deny that the defendant was entitled to issue the Notice to Complete and deny that the defendant was entitled to terminate the contract. The plaintiffs also assert the existence of an estoppel, either an estoppel by convention or an equitable estoppel, which precludes the defendant from, inter alia, maintaining that the plaintiffs were required to complete the contract. The plaintiffs further contend that if the contract was not frustrated such that it remained on foot, the purported termination of the contract amounted to a repudiation of the contract by the defendant, which repudiation was accepted on 23 May 2020. The plaintiffs seek the return of the deposit in those circumstances as well.
It should be noted that some other matters that are referred to in the pleadings bear upon the central issue of frustration. These include:

whether upon the true construction of Additional Clause 50.1 (and also Additional Clause 58) the defendant is only obliged to carry on the hotel business where to do so is lawful;

if not, whether those provisions are subject to an implied term to that effect; and

if the provisions would oblige the defendant to carry on the hotel business in an unlawful manner, whether the words of those provisions having that effect are severed from the contract pursuant to Additional Clause 63.7 and/or the general law principles of severance.

The terms of the contract

The contract employs the standard Law Society/Real Estate Institute form of contract for the sale and purchase of land (2019 edition), as amended and supplemented by Additional Clauses 33 to 67. The provisions of clauses 33 to 67 prevail over the standard form clauses 1 to 32 if there is any inconsistency (see Additional Clause 33.3).
The contract as a whole has to be considered when dealing with the various issues in the case, but particular note should be taken of the following provisions, most of which were emphasised in the course of submissions.
Additional Clause 35.1 provides:

35.1 Conditions
The parties’ obligation to complete the sale and purchase of the Assets does not become binding and there is no obligation to complete the transaction until each of the conditions specified in Item 13 of Schedule 1 have been satisfied or waived (Conditions Precedent).

Item 13 of Schedule 1 referred to:

the granting by the Vendor of a lease of the real property in favour of the second plaintiff; and
the Vendor satisfying Additional Clause 66 in relation to certain leaking pipes.

Additional Clause 38.1 provides:

(a)   The Purchaser acknowledges that:
(i)   it has inspected the Property;
(ii) in entering into this contract, the Purchaser does not rely on any other letter, statement, document, correspondence, representation, warranty or agreement made by or on behalf of the Vendor whether oral or in writing as adding to or amending the terms, conditions, warranties and agreements set out in this contract other than as expressly provided in this contract and that except for the warranties deemed to be included by Section 52A(2)(b) Conveyancing Act 1919 and the Conveyancing (Sale of Land) Regulation 2017 the provisions contained in this contract comprise the whole of the contract between the parties.
(b)   The Purchaser relies on its own enquiries in relation to all matters affecting the Assets whether or not disclosed in this contract and that the Purchaser is purchasing the Assets as a result of and that the Purchaser has relied exclusively on, its own knowledge, investigation and enquiries of and in relation to the Assets, independently of any statements, inducements or representations made by or on behalf of the Vendor (including by an agent acting on behalf of the Vendor) and, without limiting the generality of the foregoing, the Purchaser acknowledges that prior to entering into this contract the Purchaser, by appropriate independent enquiry and examination, inspection and advice, has satisfied itself as to and accepts the following:
(i)   the nature, quality, condition or state of repair of the Property (including but not limited to any defects whether latent or patent or any contamination, infestation or dilapidation) existing as at the date of this contract;
(ii)   the fitness and suitability for any purpose or development of the Property;
(iii)   the zoning and planning restrictions and prohibitions (including without limitation any and all planning approvals, permits and consents concerning the Property);
(iv)   the present and future financial or income return to be derived from the Property or the Business;
(v)   the neighbourhood in which the Property is located;
(vi)   the rights and privileges relating to the Property;
(vii)   all services or connections in or to the Property including but without limitation, all electrical, gas, telephone, sewerage or drainage services or connections in its and their present state and condition existing as at the date of this contract,
and that the Purchaser shall not be entitled to make any objection, requisition, claim or delay Completion, rescind or terminate this contract as a result of or arising out of any of these matters in (i) to (viii) [sic].
(c)   The Purchaser accepts the Assets in their present state of repair and subject to any latent or patent defects or any infestation or dilapidation or contamination existing at the date of this contract.
(d)   The Purchaser is not entitled to:
(i)   make any objection, requisition or claim for compensation in relation to; or
(ii)   rescind, terminate or delay Completion of this contract because of,
any matter referred to in this clause or the condition of the Property, or improvements on Completion as a result of fair wear and tear occurring between the date of this contract and Completion.

Additional Clause 50 provides:

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.
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.
50.4   Consent
An obligation contained in clause 50.1 or a limitation contained in clause 50.3 does not apply if the Purchaser has given its prior written consent to the Vendor in respect of a failure to comply with that obligation or limitation.

Additional Clause 51.7 provides:

51.7   Notice to Complete
(a)   Completion of this contract is to take place on the Completion Date in accordance with clause 51.1.
(b)   If completion does not occur in accordance with clause 51.1 a party which is ready, willing and able to complete and is not in default, may serve the other party with a notice:
(i)   requiring the other party to complete this contract not less than 10 business days after the date of that notice; and
(ii)   making time of the essence.
(c)   The parties acknowledge that a period of 10 business days' notice referred to in clause 51.7(b)(i) is sufficient time to complete this contract;
(d)   The issuing party can, at any time, withdraw its notice without prejudice to its continuing right to give a further notice.

Additional Clause 55 provides:

55.1   No Representations
The Purchaser and any related body corporate of the purchaser may not make any Claim for anything:
(a)   disclosed in this contract;
(b)   of which the Purchaser or any related body corporate of the purchaser has actual knowledge before entering into this contract; or
55.2   Exclusion of Other Representations
Except as expressly stated in this contract, the Vendor gives no representation or warranties whatever about anything including without limit:
(a)   future matters, including the future financial position or performance of the Business;
(b)   the accuracy or completeness of any information, including the material provided to the Purchaser or to the Purchaser's solicitor about the Assets; or
(c)   the compliance of or approvals under any planning or local government requirements.
55.3   Purchaser's Acknowledgements
The Purchaser acknowledges and agrees that:
(a)   it has had adequate opportunity to:
(i)   conduct due diligence investigations into the Assets; and
(ii)   inspect the Records; and
(iii)   raise queries with the vendor about the Assets
(b)   before entering into this contract, it did not know of anything that may result in a Claim;
(c)   the Vendor is not responsible or liable for any representation, specifications or promises of any kind or description other than those expressly made in this contract; and
(d)   the Purchaser buys the Assets subject to restrictions imposed by any relevant environmental planning instruments (mid [sic] all other relevant planning controls or proposals) and shall satisfy and is deemed to have satisfied itself as to the purposes for which the Business may be used in accordance with the requirements of all planning controls.

Additional Clause 57 provides:

57.1   Title
Title to the Assets passes to the purchaser on Completion.
57.2   Risk
Risk in the Assets passes to the purchaser on Completion.
57.3   Insurance
Until Completion, the Vendor must take out and maintain current insurance policies in respect of the Assets covering such risks and for such amounts as would be maintained in accordance with prudent business practice.
57.4   Plant and Equipment
The Purchaser purchases the Plant and Equipment in its current state of repair and condition as at the date of the contract. The Vendor will use reasonable endeavours to ensure that that [sic] all items in the Inventory will be in reasonable working order on completion having regard to the condition at the date of the contract, fair wear and tear excepted.

Additional Clauses 58.1 and 58.2 provide:

58.1 Going Concern
The Vendor and the Purchaser agree that the sale of the Assets under this contract constitutes the supply of a going concern for the purposes of the A New Tax System (Goods and Services Tax) Act 1999.
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.

Additional Clause 63.1 provides:

63.1   Termination by Vendor
If the Purchaser does not comply with this Contract (or a notice under or relating to it) in an essential respect, the Vendor can terminate this Contract by serving a notice and then:
(a)   keep or recover the Deposit; and
(b)   hold any money paid by the Purchaser under this Contract as security for anything recoverable under this clause:
(i)   for 12 months; or
(ii)   if the Vendor commences proceedings under this clause within 12 months of this Contract being terminated, then until those proceedings are concluded; and
(c)   sue the Purchaser and the Guarantor:
(i)   to recover damages for breach of this Contract; or
(ii)   where the Vendor has resold the Assets under an agreement made after termination of this Contract, to recover the deficiency on resale (with credit for any money kept or recovered and after allowance for any capital gains tax and GST payable on anything recovered under this clause), and the reasonable costs and expenses arising out of the Purchaser's non-compliance with this Contract and of resale and any attempted resale.

Additional Clause 63.7 provides:

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.

Additional Clause 64 provides:

64.1   For the purposes of this Contract, the Purchaser comprises the following entities:
(a)   As to the Property, Licence and 9 Gaming Machine Entitlements and the Items marked Lessors Property annexed to the Lease and so marked on the Inventory - Dyco Hotels Pty Limited ACN 100 275 974 Atf The Parras Family Trust;
(b)   As to the Goodwill, Plant and Equipment and any remaining Business Assets, including those marked as Lessee's Property annexed to the Lease and so marked on the Inventory -Quarryman Hotel Operations Pty Ltd ACN 634 263 933;
64.2   Where, under this Contract, an asset is to be transferred or conveyed to the Purchaser, the asset shall be conveyed or transferred to the following entity:
(a)   In respect of the Property, Licence and 9 Gaming Machine Entitlements and the Lessors Property as annexed to the Lease - Dyco Hotels Pty Limited ACN 100 275 974 Atf The Parras Family Trust;
(b)   In respect of the Goodwill, Plant and Equipment and any remaining Business Assets - Quarryman Hotel Operations Pty Ltd ACN 634 263 933.

Additional Clause 65 provides:

65.1   The sale of the Property, Licence and 9 Gaming Machines is conditional upon, and interdependent with, the Sale of the Business Assets.
65.2   Completion of the sale of the Business Assets must take place the day prior to Completion of the Property, Licence and 9 Gaming Machine Entitlements.
65.3   Subject to the satisfaction of Conditions Precedent in Item 13 of Schedule 1, completion of the sale of the Business Assets shall take place on the 55th day after the Contract date or such other date as agreed in writing by the parties.
65.4   Subject to Completion of the sale of the Business Assets, Completion of the sale of the Property, Licence and 9 Gaming Machine Entitlements shall take place on the 56th day after the Contract date or such other date as agreed in writing by the parties.
65.5   If the Sale of the Business Assets does not complete and this contract is rescinded, terminated or otherwise ended, then the sale of the Property, Licence and Gaming Machine Entitlements will not proceed to completion.
65.6   On the day of completion of the Sale of the Business Assets and prior to completion, the Vendor (as lessor) must grant, and Quarryman Hotel Operations Pty Ltd ACN 634 263 933 (as lessee) must enter into the Lease.

Schedule 1 to the contract contains numerous details, including the following:

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);

the Completion Date is described in Item 2 as “55 days after the Contract Date for the Business Assets and 56 days after the Contract Date for the Property, Licence and 9 Gaming Machine Entitlements”; and

the Purchase Price is described in Item 3 as a total of $11,250,000.00, which is allocated as between:

Property $6,500,000.00;

Licence & Gaming Machine Entitlements $2,500,000.00;

Goodwill $750,000.00; and

Plant & Equipment (Inventory) $1,500,000.00.

Events prior to entry into the contract

The third plaintiff, Daphne Parras, is the sole director of the first plaintiff (“Dyco”). Her son, Colin Parras, is the fourth plaintiff. He is the sole director of the second plaintiff (“Quarryman Hotel Operations”). The third and fourth plaintiffs between them have extensive experience of the hotel industry in Sydney, extending over many years, through the ownership, operation and management of several hotels.
The defendant (“Laundy”) owns the Quarrymans Hotel property in Harris Street, Pyrmont. A small majority of the ordinary shares in the company are owned by a company associated with the Laundy family. The remaining shares are owned by a company controlled by Patrick Maguire. He is one of three directors of Laundy and is the licensee of the licence for the Quarrymans Hotel.
In about November 2019, selling agents were engaged for the sale of the hotel (HTL Property and Knight Frank Hotels), and an Information Memorandum was prepared. In early December 2019, Mr Handy of HTL Property contacted Colin Parras about the sale of the hotel. On 3 December 2019 Mr Handy provided certain information to Mr Parras about the hotel, including a profit and loss statement for the July 2018 to June 2019 period, and the Information Memorandum. Mr Parras forwarded the Information Memorandum to his mother. The Information Memorandum indicated that the figure for the hotel EBITDA in respect of the 2019 financial year was $1,164,476.
The Parras’ inspected the hotel on 6 December 2019.
The asking price for the hotel was $13,000,000. Following their inspection, the Parras’ were interested in acquiring the hotel, but not at that price.
Further information was provided to them by the agents, including further financial details, and access was given to a “data room” which contained information in respect of the hotel. The Parras’ provided at least some of the financial information to their accountant, John Morrison, in order to obtain his advice. It seems that from about 9 December 2019 various due diligence checks were undertaken by or on behalf of the Parras’ in relation to the hotel.
On 18 December 2019 the Parras’ made an offer to purchase the hotel property and business for $10.6 million. Mr Handy said that he did not believe the offer would be acceptable, and that the vendor wanted to go to a full selling campaign.
On about 10 January 2020, after considering information received in relation to revenues earned by the hotel in December 2019, the Parras’ made an offer to purchase for a price of $11,250,000. Mr Parras deposed that the offer was based on a capitalisation rate of 8.9% and on advice given by Mr Morrison. The offer was accepted on 10 January 2020. A Sales Advice prepared by Mr Handy set out the commercial terms that had been agreed, including that the deposit would be 5% of the purchase price payable on exchange, and that settlement would occur 56 days from the date of exchange.
A draft contract (including Additional Conditions) had been provided to the plaintiffs’ solicitors by 20 January 2020. The evidence is not clear as to what, if any, negotiations occurred thereafter between the solicitors in relation to the terms of the draft contract. In any event, contracts were finally executed and exchanged on 31 January 2020. The deposit of $562,500 was paid as required by the contract.
Also on 31 January 2020, the defendant and the first and second plaintiffs entered into a Condition Subsequent Deed. This deed primarily made provision in relation to the one day period expected between completion of the sale of the hotel business and completion of the sale of the hotel property, licence and gaming machine entitlements.

Events following entry into the contract

On 12 February 2020 the plaintiffs’ solicitors sent an email to the defendant’s solicitors noting that the due date for settlement was on or about Friday 27 March 2020 and suggesting that, for logistical reasons, settlement instead occur on Monday 30 March 2020. The defendant’s solicitors responded by email on 13 February 2020 stating that this suited the defendant as well. It seems that the parties thereafter proceeded, at least for a time, in accordance with that arrangement.
Daphne Parras deposed that the purchase was to be financed by $5.2 million in cash from herself and $6.5 million in funds to be borrowed from St George Bank.
On 16 March 2020 St George Bank made an offer to the plaintiffs in respect of a $6.5 million bill facility. The financial covenants set out in the offer included:

Actual EBITDA of not less than 80% of Valuation EBITDA used in the last going concern valuation.

Robertson & Robertson Valuers had recently provided a valuation of the Quarrymans Hotel for the purposes of the plaintiffs’ obtaining finance. The value was expressed to be $11.25 million as at 4 February 2020. The valuation does not specify any particular EBITDA figure, but contains an adjusted net profit figure of $978,771 which is said to be representative of the annual maintainable net operating profit of the hotel. A capitalisation rate range of 8.6% to 9.0% was used. The St George Bank finance offer was accepted by the plaintiffs on 17 March 2020.
By that time, the first of a series of orders made under s 7 of the Public Health Act in relation to the COVID-19 virus had commenced operation. The first such order to directly affect the operation of the hotel appears to be the Public Health (COVID-19 Gatherings) Order that was made on 20 March 2020 to commence on 21 March 2020. Of greater significance was the Public Health (COVID-19 Places of Social Gathering) Order 2020, that was made on 23 March 2020 to commence at Noon on that day. Clause 5 of the order relevantly provided:

(1) The Minister directs that the following must not be open to members of the public except as provided in this clause –
(a)   pubs and registered clubs, except for the purposes of –
(i)   selling food or beverages for persons to consume off the premises, or
(ii)   if the premises include hotel or motel accommodation, providing that accommodation including by providing food or beverages to persons using that accommodation to consume in their rooms,
…

Mr Maguire gave evidence that the hotel closed its doors at Noon on 23 March 2020 and re-opened for takeaway sales and delivery on 26 March 2020. The takeaway service included food “according to demand”. Mr Maguire said in the witness box that the kitchen was not open every day. Mr Maguire gave evidence that even though he had decided that the defendant would try to maximise sales and keep every aspect of the hotel that was permitted to remain open in operation as far as possible, it was not possible to immediately implement the change to a takeaway sales operation. He explained that it was necessary, for example, to obtain suitable containers for takeaway draft beer (referred to as “Growlers” and “Squealers”). That evidence was not challenged.
These events caused great concern to the plaintiffs. Colin Parras deposed, for example, that he was concerned that the closure of the hotel would have serious if not catastrophic consequences upon his ability to obtain the revenue from the hotel “as at the date of exchange” and thereby meet the financial covenants in the facility offer.
On 25 March 2020 Mr Parras spoke on the telephone to Ms Fong, the plaintiffs’ Relationship Manager at St George Bank. Mr Parras asked about obtaining some relief from compliance with the financial covenants in the facility.
At 11:44am on 25 March 2020, Ms Fong sent an email to Mr Parras in the following terms:

Thank you for the phone discussion today.
In respect of the Financial Covenants (Interest cover and EBITDA), we are agreeable to the following;
i)   waiver of the testing of the Financial Covenants due on 30 June 2020 and 31 December 2020;
ii)   thereafter, the Financial Covenants shall be tested as follows;
-   On a calendar Year To Date basis for the period ending 30 June 2021 and 31 December 2021.
-   Thereafter, on a 12 month rolling basis.
Please let me have your views. We can redocument the above by issuing a Facility Offer update.

The plaintiffs’ solicitors had earlier sent a letter to the defendant’s solicitors on 25 March 2020 in the following terms:

We refer to the proposed settlement on Tuesday, 31 March 2020.
Your client is not ready, willing and able to complete the Contract because it is in breach of each of Special Conditions 50.1, 58.1 and 58.2 of the Contract.
Any steps taken by my firm and clients in respect of the Contract or towards completion are without admission or waiver of each of these breaches. To be clear, my client will not complete the Contract while your client remains in breach of the special conditions.

That letter was followed by an email from the plaintiffs’ solicitors which attached draft settlement figures, said to be sent on a without admissions basis.
Mr Parras sought advice from Mr Morrison about whether he believed that in light of the “concession” made by St George Bank the business would meet and satisfy the covenants at the new testing dates.
At 2:20pm on 25 March 2020 Mr Morrison sent an email to Mr Parras in which he stated that there was no certainty as to how long the shutdown would last and as to where the hotel industry will end up “when we come out of the crisis”. On that basis, Mr Morrison suggested that an alternative timetable for the testing of covenants be put to the bank. Mr Parras sent the suggested alternative to Ms Fong by email at 2:32pm on 25 March 2020. Ms Fong did not respond until 3 April 2020.
On 27 March 2020 the plaintiffs’ solicitors sent a letter to the defendant’s solicitors which included the following:

We refer to the above matter and to the Contract for Sale dated 31 January, 2020 entered into between the parties.
We advise that in the circumstances of the mandatory closure of licensed premises including pubs and hotels from Midday on 23 March 2020, your client is in breach of Special Conditions 50.1, 58.1 and 58.2. There are two consequences from this:
(a) the Contract has now been frustrated;
(b) alternatively and without waiver or admission of sub-paragraph (a), our client will be at liberty to issue a 14 day notice to complete after next Tuesday. Your client will not be able to comply with it and our client can then terminate the Contract and sue for damages.

The defendant’s solicitors responded by letter on 27 March 2020 in terms which included the following:

Our client does not consider that it is in breach of the contract as alleged, or at all. Further, our client is ready, willing and able to perform its obligations and calls upon the purchaser to complete the contract.
To ensure there is no misunderstanding, we have summarised below the bases upon which the vendor considers: it is not in breach; that the contract is on foot; and that it is entitled to insist upon completion.
…
The vendor calls upon the purchaser to complete the contract.

A further letter sent by the defendant’s solicitors on that day stated that no particulars had been provided of the assertion that the contract had been frustrated. Once again there was a call for the purchaser to complete the contract.
On 31 March 2020 the defendant’s solicitors sent an email to the plaintiffs’ solicitors which included the following:

I note we have not received any reply to our correspondence of 27 March 2020.
For the avoidance of doubt the vendor’s position is that the conditions precedent in special condition 35.1 and Item 13 of Schedule 1 have been satisfied.
The Property Lease has been granted by the vendor but will not commence until business sale completion. The Ausgrid issue has been resolved, as specified in my letter of 20 March 2020.
My client was ready to conduct the stocktake, calculate on site adjustments and to complete the business sale yesterday. I am instructed there was no attendance at the hotel on behalf of the purchaser.
I attach revised settlement figures as at today. These calculations have been uploaded into PEXA.
…
My client remains ready, willing and able to settle.

That was the day completion was due in accordance with the arrangements made by the solicitors in February 2020.

On 3 April 2020 Ms Fong responded to Mr Parras’ email of 25 March 2020 in the following terms:

Sorry for the delay in reverting.
Hope all is well with you.
The proposal from your accountant does make sense. The bank would however need to weight this also from our compliance perspective.
We have a system that tracks all covenants falling due and in the past there have been issues raised by our regulators on tracking of covenants which have been missed out on, as a start date was not recorded clearly at the onset of the funding. As such, we are required to have a defined start date.
While we understand that there is uncertainty on an eventual start date, in our covenant proposal we have attempted to push out covenants as far as possible based on the current situation, with testing eliminated for Calendar Year 2020. While I do not have a firm approval for an extension beyond Calendar Year 2020, I understand the start date of the testing for covenants will be reviewed again if COVID-19 situation progresses.

On 6 April 2020 the defendant’s solicitors sent a letter to the plaintiffs’ solicitors which included the following:

We refer to our two letters dated 27 March 2020 and to our subsequent email dated 31 March 2020.
Despite repeated requests, we have received no response from you. You have failed to co-operate and make arrangements to achieve settlement of the transaction. As we have previously indicated, our client is ready, willing and able to complete and, again, calls on the purchasers to make an appointment for settlement.

The plaintiffs’ solicitors responded by letter on 8 April 2020. The position was maintained that the contract had been frustrated, that Additional Condition 50.1 was not severable, and that the defendant was in breach of Additional Clauses 50.1 and 58.2 and thus not ready, willing and able to complete the contract (if it had not already been frustrated).

On 17 April 2020 the defendant’s solicitors sent a letter to the plaintiffs’ solicitors which included the following:

We note in the above matter your client has to date declined to take steps to complete the contract and proceed with the purchase of the land and associated business known as the Quarrymans Hotel.
As we have previously indicated in correspondence, we do not accept the contentions you have put forward to the effect that our client is presently unable to complete the contract. We have explained why we reject your contentions.
The next step for our client would be to issue a Notice to Complete pursuant to Clause 15 of the contract.
Mindful of the potential for litigation and the associated expense and delay, we are instructed by our client that it is prepared to make an open offer to extend the time for completion to a date 14 days after the removal of the existing COVID-19 related legal impediments which prevent the Hotel opening to members of the public other than to sell food and drink to be consumed off the premises.
…
We, therefore, ask if you could indicate your client’s position on this matter by close of business on Monday 20 April 2020. If for whatever reason your client has been unable to determine by that time its attitude to our proposal, then could you indicate whether or not your client wishes to further consider it and seeks further time.

There does not seem to have been any response to this email.

On 21 April 2020 the defendant’s solicitors sent a letter to the plaintiffs’ solicitors in which it was stated that if the plaintiffs did not agree to settle the contract, the defendant would likely issue a Notice to Complete. On 22 April 2020 the plaintiffs’ solicitors replied, stating that the defendant was not legally entitled to issue a Notice to Complete.
Also on 22 April 2020, Robertson & Robertson prepared an Addendum to the earlier valuation of 4 February 2020. A deduction of one year’s maintainable earnings of $978,771 was applied to the capitalised value assessed as at 4 February 2020, so as to arrive at a new valuation figure of $10,250,000.
On 28 April 2020 a Notice to Complete was served by the defendant. It called for completion of the sale of the hotel business by 3:00pm on 12 May 2020, and completion of the sale of the hotel property, licence and gaming machine entitlements by 3:00pm on 13 May 2020.
Later on 28 April 2020 the first and second plaintiffs commenced these proceedings by the filing of the Statement of Claim. The relief sought included declaratory relief to the effect that the contract had been frustrated, or alternatively that the defendant was not entitled to issue the Notice to Complete.
On 11 May 2020 the defendant’s solicitors sent a letter to the plaintiffs’ solicitors which attached “updated settlement calculations which have been entered into the PEXA workspace”. It was stated that the defendant remained ready, willing and able to complete, and the purchasers were called upon to complete within the time specified in the Notice to Complete.
The plaintiffs’ solicitors responded on 12 May 2020, stating that it was not accepted that the defendant was ready, willing and able to settle, and that reliance in this regard was placed on the matters pleaded in the Statement of Claim.
On 13 May 2020 the defendant’s solicitors sent a letter to the plaintiffs’ solicitors which included the following:

We note:
there was no attendance on behalf of the purchaser to conduct the stocktake and other onsite calculations for completion of the business sale on 12 May 2020. We enclose a copy of the calculations for stock and cash completed by our client on 12 May 2020. The additional amount of $46,545.95 due and payable by the purchaser was included in the calculations for the financial settlement scheduled for 3pm today on the PEXA workspace;
that your client failed to make an appointment for completion of the business on or before 3pm on 12 May; and
that your client failed to make an appointment for completion of the land and the financial settlement for the business on before 3pm today.

On 14 May 2020 the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 2) 2020 was made. Relevantly, the order permitted hotels (from 15 May 2020) to open for the purposes of selling food or drinks for not more than 10 persons at any time to consume on the premises, provided any liquor sold was sold with or ancillary to food served for eating on the premises.
Mr Maguire gave evidence that it was not economically feasible for the hotel to open for up to 10 people. The hotel thus continued to operate for takeaway sales only until 1 June 2020 when a further easing of restrictions allowed hotels to open for up to 50 customers in each separate area, subject to a 1 customer per 4m² limit (see Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 3) 2020, made on 29 May 2020 to commence on 1 June 2020).
On 20 May 2020 it was stated on the defendant’s Instagram account that the hotel would be re-opening. It seems that at that time there was at least some hope that a further easing of restrictions would occur in the not too distant future.
On 21 May 2020 the defendant’s solicitors served a Notice of Termination upon the plaintiffs’ solicitors. The Notice of Termination stated that the contract was terminated pursuant to cl 63.1, upon the following grounds:

The business purchaser failed to complete the purchase of the business assets on or before 3.00pm on 12 May 2020;
The freehold purchaser failed to complete the purchase of the land assets (and the financial settlement for the business assets) on or before 3.00pm on 13 May 2020;
Time was of the essence in regard to the obligations to complete referred to in paragraphs 1 and 2 above.
By letters of 1 May 2020 and 12 May 2020 forwarded by A.C. Comino & Associates on behalf of the purchaser company, and by the Statement of Claim filed by the purchaser companies on 28 April 2020, the purchaser companies evinced the intention that they would not proceed to settle the contract.

The defendant reserved its rights to keep the deposit and seek damages from the purchasers and their guarantors.

On 22 May 2020 it was announced by the defendant via its Instagram account that Monday, 1 June 2020 was the re-opening date for the hotel.
On 23 May 2020 the plaintiffs’ solicitors sent a letter to the defendant’s solicitors in the following terms:

We refer to your letter dated 21 May 2020 enclosing a Notice of Termination of the Contract dated 21 May 2020 (Notice of Termination).
For the reasons pleaded in the Statement of Claim filed in Proceedings 2020/00126628, it is our clients’ position that the Contract has been frustrated. That remains the case.
In the event that the Court holds that the Contract was not frustrated (which is denied), then the purchasers say without admission that your client was not entitled to issue the Notice to Completed dated 28 April 2020:
(a) while clause 7(1) of the Public Health (COVID-19 Places of Social Gathering) Order 2020 remained in force; and/or
(b) because the Business (as defined) was 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.
Without admission, and if and only if the Court holds that that [sic] the Contract was not frustrated (which is denied), the issue of the Notice of Termination has constituted a repudiation of your client’s obligations under the Contract. That repudiation is hereby accepted and all parties are discharged from performance of the Contract. All rights are reserved.

The hotel in fact re-opened for trading on the premises on 1 June 2020. Mr Maguire explained that the hotel had four separate areas, but the 1 customer per 4m² rule meant that the maximum number of customers permitted on the premises at that stage was only 137.
Trading figures for the hotel for the period from January 2020 to January 2021 indicate that operating losses were incurred in March, April and May 2020, with operating profits achieved in all other months (although the profit in January 2021 was negligible).

The defendant’s obligations to carry on the hotel business

The content of the defendant’s obligations to carry on the hotel business, in the period from exchange of contracts until completion, is of central importance to the determination of the issues in this case. In particular, it is necessary to understand the extent to which, if at all, Additional Clauses 50.1 and 58.2 obliged the defendant to carry on the business in a manner contrary to the provisions of the various public health orders that were issued after the contract was made.
Those orders were Ministerial directions made pursuant to s 7 of the Public Health Act. Section 10 of that Act provides that it is an offence if a person who is subject to such a direction and has notice of the direction, without reasonable cause, fails to comply with the direction.
It is clear, and common ground between the parties, that carrying on the hotel business in the manner it was being carried on at the time the contract was made on 31 January 2020 would have been contrary to at least the orders that were in force from 23 March 2020 to 1 June 2020.
By their Amended Statement of Claim, the plaintiffs plead in paragraph 17 that since Noon on 23 March 2020 the hotel business had not been open to the public “except for the limited sale of food and beverages off premises” and as at 21 May 2020 (the date of termination by the defendant) the business remained closed “and does not trade as a going concern in the same nature, scope and manner that it did at the date of the Contract”. In paragraph 18, the plaintiffs allege, inter alia, that from Noon on 23 March 2020 the defendant has not complied, or been able to comply, with Additional Clauses 50.1 and 58.2 of the contract.
Whilst the term “breach” is not used in the pleading, the plaintiffs seem to contend that the defendant was bound by those provisions to operate the hotel business in a manner that would be contrary to the public health orders. Counsel for the plaintiffs confirmed in the course of closing submissions that it was part of the plaintiffs’ case that the defendant was in breach of the contract (as had been asserted by the plaintiffs’ solicitors in correspondence at the time).
The defendant contends that upon the true construction of the contract, neither Additional Clause 50.1 nor Additional Clause 58.2 obliged the defendant to carry on the business in a manner contrary to the public health orders. The defendants contended, in the alternative, that the contract included an implied term to the effect that the obligations to carry on the business were to do so only according to law.
The questions of construction of Additional Clauses 50.1 and 58.2 fall to be determined in accordance with the principles that apply to the construction of written commercial agreements, as stated in cases such as Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22]; 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 [47]; and Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 at [16]. Accordingly, the meaning of the terms of the contract are to be determined objectively by what reasonable business persons would have understood those terms to have meant. That determination requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract.
The commercial purposes or objects of the contract in the present case may be broadly described as the sale and transfer of various assets including the real property on which the hotel stands, the associated hotel licence and gaming machine entitlements, and the hotel business that is operated pursuant to the licence. The parties, each of whom possessed considerable experience of the operation of hotels in Sydney, can be taken to have knowledge of the nature of the legal and regulatory environment within which such hotels operate, particularly the regime established by the Liquor Act 2007 (NSW) and the Liquor Regulation 2018 (NSW). That operating environment is characterised by extensive and detailed legislative prescription, and regulatory oversight that can involve action to cancel or suspend licences, impose various penalties, and interfere with hotel operations (e.g. by the making of closure orders under Division 4 of Part 5 of the Liquor Act).
Additional Clause 50.1 provides (subject to the specific exceptions set out in Additional Clause 50.2) that from the date of the contract until completion of the contract (envisaged to occur approximately 8 weeks after the date of the contract), the defendant must carry on the Business (as defined) “in the usual and ordinary course as regards its nature, scope and manner”. The provision can be readily seen as aimed at least in part at the protection or preservation of the goodwill of the Business the subject of the transaction.
Additional Clause 50.1 does not in terms specify that the required carrying on of the Business must accord with applicable laws. However, the notion of carrying on the Business in “the usual and ordinary course” suggests in the circumstances that the Business will continue to be carried on in a lawful fashion. The parties evidently proceeded on the basis that the Business had hitherto been carried on in a lawful fashion. The defendant gave warranties in Additional Clause 48.8 to the effect that there were no current or proposed proceedings and no infringement notices likely to be issued, and further warranted that the defendant was not aware of any conditions of the licence which have not been complied with, except as set out in the contract. No disclosure of that kind was included. In my view, the language of Additional Clause 50.1, which speaks of carrying on the Business in the usual and ordinary course as regards its manner, is thus capable of being read as requiring the carrying on of the Business in a lawful manner only.
The defendant referred to authority in support of the principle that if the words of a contract are capable of being read in two ways, one of which is consistent with the law and the other is not, the former should be preferred. Reference was made to Langley v Foster (1906) 4 CLR 167 where Griffith CJ stated at 180-1:

Now, as to the suggestion that the permission to remove timber necessarily imports something illegal. The proper rule for the construction of such an agreement is laid down in Sheppard’s Touchstone: “That if the words may have a double intendment, and the one standeth with the law, and the other is against law, that it be taken in that sense which is agreeable to law”. If, therefore, these words can be construed in a sense agreeable to the law, they ought to be so construed. Moreover, it must, I think, be taken to have been in the contemplation of the parties that the timber could not be removed without a licence, and it must also be taken that it was the intention of the parties that it should be obtained. Sufficient authority for that view is to be found in the case of Waugh v. Morris, and in the case of Hutchinson v. Scott in this Court.

(See also Gerraty v McGavin (1914) 18 CLR 152 at 162 and 165.)

The defendant also referred to Global Network Services Pty Ltd v Legion Telecall Pty Ltd [2001] NSWCA 279 where Mason P stated (at [102]):

The absolute construction contended for by Global involves the parties to the Contract promising in effect that one will act in a grossly uncommercial way that would involve unlawful activity on Legion’s part and complicity on Global’s part. Unless driven to such an outcome by intractable language, such a construction should be rejected having regard to the principle that, where the words of a contract are capable of two meanings, one lawful and the other unlawful, the former construction should be preferred.

Other examples of expressions of a principle of this kind can be found in K Lewison and D Hughes, The Interpretation of Contracts in Australia (Lawbook Co, 2012) at paragraph 7.10, for example ASIC v Atlantic 3 – Financial (Aust) Pty Ltd(No 2) [2007] 2 Qd R 399; [2006] QCA 540 at [66] (McMurdo J).
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.
This construction is to be preferred to a construction that would require the defendant to continue the Business in the same fashion regardless of a change in the law which renders such conduct unlawful. Quite apart from the invidious position the defendant would be placed in, it would run counter to the object of preservation of the goodwill. Operating the hotel business in an unlawful manner, contrary to public health orders, would obviously place the future operation of the business pursuant to the hotel licence (and the licence itself) in some jeopardy. The construction would thus give rise to commercially unexpected results. As the language of Additional Clause 50.1 is not so intractable as to require the adoption of that construction, I decline to do so.
Additional Clause 58.2, which requires the defendant to carry on the “enterprise” to be transferred under the contract, should be construed in a similar fashion. That is to say, it should be construed as an obligation to continue to carry on the hotel business, but not in any manner contrary to law.
In these circumstances it is not necessary to consider the defendant’s alternative argument that in order to give the contract business efficacy a term should be implied to the effect that the defendant’s obligations to carry on the business were to do so only according to law. Neither is it necessary to consider any questions of severance. As Additional Clauses 50.1 and 58.2, properly construed, did not oblige the defendant to carry on the hotel business in any manner that is contrary to law, no issue of illegality arises. There is no occasion to consider whether any parts of those provisions may be severed from the contract.
Finally, I did not understand the plaintiffs to submit that if the defendant’s construction of Additional Clauses 50.1 and 58.2 was correct, the defendant nevertheless breached those provisions. As I apprehend it, the plaintiffs’ case on breach of the contract depends upon acceptance of the plaintiffs’ construction of the provisions. That is, acceptance of the proposition that the defendant was obliged to continue to carry on the business in the same manner that it was being carried on at the date of the contract, even though public health orders rendered such conduct wholly or partly illegal. Accordingly, it seems to me that insofar as the plaintiffs have alleged that the defendant breached the contract, those allegations have not been made out.

Frustration of the contract

The next issue to consider is whether the making of the public health orders brought about a situation where the contract was discharged by frustration.
The plaintiffs’ case on frustration, as pleaded, proceeds on the basis that the public health orders operated so as to make it impossible for the defendant to comply with its obligations under Additional Clauses 50.1 and 58.2 (see Amended Statement of Claim at paragraphs 18(b) and 18(c)). My conclusion concerning the construction of those provisions undermines that aspect of the plaintiffs’ case. The public health orders did not cause the defendant to fail to comply with (or breach) the provisions. However, that does not necessarily put an end to the case on frustration. A contract is capable of being discharged by frustration even if it remains possible for the contract to be performed without breach. Krell v Henry [1903] 2 KB 740 is a well-known example. It is true that in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 Lord Radcliffe spoke (at 729) of frustration occurring when a contractual obligation becomes incapable of being performed because circumstances would render it radically different from that which was undertaken by the contract. However, this has not been understood as saying that without a change in obligation there can be no frustration (see Stephen J in Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 161). In oOH! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 Nettle JA, after referring (at [63]) to the speech of Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (supra), continued (at [64]):

Codelfa was preceded, however, and to a large extent informed by Stephen J’s analysis of frustration in Brisbane City Council v Group Projects Pty Ltd. In a passage which Mason and Aickin JJ later endorsed in Codelfa, Stephen J observed that, although Lord Radcliffe spoke in Davis Contractors in terms of a “change in obligation”, his Lordship was not to be understood as saying that there can be no frustration without a change in obligation. The emphasis on obligation was the result of the factual situation with which his Lordship was concerned. Thus, in some cases it has been said to be enough to engage the doctrine of frustration that events have given rise to a “fundamental commercial difference” between contemplated and actual performance or to a “fundamentally different situation” arising for which the parties made no provision “so much so that it would not be just in the new situation to hold them bound to its terms”.

(See also Aickin J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 379-80 where his Honour notes that Lord Radcliffe spoke of a change in the significance of an obligation.)

In the present case, the plaintiffs pleaded at paragraph 19 of the Amended Statement of Claim that the parties entered into the contract with the intention and understanding that the business would operate, and continue to operate, 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 until the date of completion. In submissions, the plaintiffs put that from Midday on 23 March 2020, the public health orders in place meant that the hotel business was not able to be operated in the usual and ordinary course as regards its nature, scope and manner, and indeed not able to be operated as a going concern. The plaintiffs accept that hardship, inconvenience or material loss itself is usually insufficient to make out a case of frustration. However, they contend that the present case goes beyond those descriptors because the fundamental nature of the hotel business changed as a result of the public health emergency.
The defendant submitted that if the contract properly construed did not require any trading of the hotel in breach of the public health orders there would be little scope for the operation of the doctrine of frustration. It was submitted that had the contract been completed the plaintiffs would have received the substantial benefit for which they bargained. It was put that the public health orders merely imposed a temporary alteration in the nature of the trading. It was emphasised that the defendant gave no warranty about the present or future income return that could be derived from the hotel property or business, and the plaintiffs were not entitled to make any objection or claim or delay completion as a result of that matter (see Additional Clauses 38.1(b)(iv) and 38.1(d)). The defendant submitted that the purpose of the contract was for the plaintiffs to acquire the assets the subject of the contract for the agreed price, not to require the defendant to maintain the hotel’s trading in the period between the date of the contract and completion. The defendant’s obligations under Additional Clauses 50.1 and 58.2 were thus described as ancillary.
The approach to the doctrine of frustration taken by Lord Reid in Davis Contractors Ltd v Fareham Urban District Council (supra), which has been approved in the High Court of Australia, is pertinent in the circumstances of the present case. Lord Reid stated at 720-1:

It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made. There is much authority for this view. In British Movietonews Ltd. v. London and District Cinemas Ltd Viscount Simon said: “If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point — not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.” In Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of Works Asquith L.J. said: “In each case a delay or interruption was fundamental enough to transmute the job the contractor had undertaken into a job of a different kind, which the contract did not contemplate and to which it could not apply, although there was nothing in the express language of either contract to limit its operation in this way.” I need not multiply citations, but I might note a reference by Lord Cairns so long ago as 1876 to “additional or varied work, so peculiar, so unexpected, and so different from what any person reckoned or calculated upon” (Thorn v. London Corporation). On this view there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.

Later (at 723) his Lordship described frustration as “the termination of the contract by operation of law on the emergence of a fundamentally different situation”.

These passages were cited with approval by Stephen J in Brisbane City Council v Group Projects Pty Ltd (supra) at 160-1. His Honour’s acceptance of the approach adopted by Lord Reid (and also by Lord Radcliffe) was itself adopted in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (supra) by Mason J at 356-7 and by Aickin J at 378.
The authorities make it clear that in determining a question of frustration the Court must consider the terms of the contract, the nature of the contract, and any relevant surrounding circumstances (see, for example, Codelfa Construction Pty Ltd v State Rail Authority New South Wales (supra) at 358 per Mason J). In that regard, the plaintiffs referred to evidence concerning the market for the buying and selling of hotels. This evidence was said to support the proposition that the revenue of a hotel business and the assessment of the maintainable earnings of a hotel business (generally based on a calculation of earnings before income tax, depreciation and amortisation, or EBITDA) plays a central role in the valuation and pricing of hotel properties, and the terms upon which finance is provided for the purchase of hotels. The plaintiffs also referred to evidence to the effect that it was usual for contracts for sale of hotels to contain a term requiring the business to be trading in its normal and usual course from exchange until settlement.
In relation to the present transaction, there was evidence that an EBITDA figure was contained in the Information Memorandum provided by the defendant, and that this and other financial information provided by the defendant formed the basis of the offers made by the plaintiffs (with the aid of advice from their accountant, Mr Morrison). There was also evidence that Mr Robertson’s valuation of the hotel on 4 February 2020 was based upon an assessment of “Maintainable Net Profit”, and the finance approval given by St George Bank contained financial covenants that were based upon notions of “Actual EBITDA” and “Valuation EBITDA”. Mr Maguire agreed in cross-examination that he believed the EBITDA figure contained in the Information Memorandum to be important to potential purchasers because “they would get their valuation out of the earnings”. He also agreed that he believed the EBITDA figure would be relevant for valuation purposes if finance was needed. Finally, both the draft contract and the contract as executed contained provisions requiring the hotel business to be carried on by the defendant in the usual and ordinary course until completion.
The contract is one for the sale and purchase of various assets that together comprise the Quarrymans Hotel, for a price of $11.25 million. The hotel business may be considered to be an important component of the transaction. The sale of the other assets is conditional upon the sale of the Business Assets. Whilst not definitive, a $750,000 portion of the purchase price was allocated to the goodwill of the business. The provisions of the contract that required the defendant to carry on the business in the usual and ordinary course until completion were evidently intended to serve the object of preservation of the goodwill during the period between the date of the contract and completion. That period was intended to be approximately 8 weeks.
I think it can be safely assumed that at the date of the contract (31 January 2020) none of the parties contemplated that during the period up to completion a public health emergency would arise and have the effect that at least for a time it would no longer be lawful to carry on the business in the usual and ordinary manner. The parties can be taken to have shared an expectation that it would remain lawful during that the relatively short period to carry on the business in the usual and ordinary manner.
That expectation proved to be mistaken on about 21 March 2020, approximately 10 days before the settlement of the contract was to occur. A situation quickly emerged in which performance of the defendant’s obligations concerning the carrying on of the hotel business was significantly affected. That is to say, the general imposition of legal prohibitions upon hotel trading had the consequence that the obligations would henceforth be discharged by carrying on the business in a much more limited manner. To that extent the actual performance of the obligations departed from that which the parties contemplated would occur.
It is necessary to consider whether these unexpected events gave rise to a fundamental commercial difference between the actual and contemplated performance of the contract, or a fundamentally different situation for which the parties made no provision, such that it would not be just to hold the parties bound to the terms of the contract. Or, as Lord Reid put it, the question can be posed as whether the contract is on its true construction wide enough to apply to the new situation.
The plaintiffs emphasised that the public health orders had a dramatic adverse effect upon the ability of the hotel business to earn revenue. It was submitted that without an operational hotel able to earn revenue as it had done in the past, the situation was radically different from what was contemplated when the contract was made. Reference was made to the valuation evidence which suggested that in April and May 2020 the value of the hotel had fallen by about $1 million. It was put that the requirement to carry on the business in the usual and ordinary course was “the basis” of the contract, and that the purchase of a hotel business that was trading as a going concern was fundamental to the transaction. The plaintiffs submitted that as matters turned out the business was not trading and its goodwill “had been wiped out”.
I should say at once that I do not accept that submission about the goodwill. Whilst it is undeniable that the restrictions imposed by the public health orders had a dramatic effect upon the trading of the hotel, the evidence concerning the takeaway trading from 26 March 2020, and especially the trading from 1 June 2020 following the re-opening for restricted on-premises trading, suggests that the business retained a good measure of goodwill.
Reference was made by the plaintiffs to the decision of Hamilton J in Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095. It was submitted that the case was similar to the present case. Lindsay-Owen v Associated Dairies Pty Ltd (supra) concerned rights for the purchase of a dairy business. The business, as defined in the agreement, comprised three elements, namely, the dairy farming activity, the farm property, and a milk quota “attached to the dairy farming activity”. The milk quota was for a quantity of milk that could be supplied to the drinking milk market, fixed under the provisions of the Dairy Industry Act 1979 (NSW). After the making of the agreement, legislation was passed so as to abolish the milk quota scheme. The agreement was construed as containing an obligation to dispose of all of the elements of the business together (see at [10]). The question thus arose as to whether the supervening abolition of the milk quota scheme operated to frustrate the agreement. Hamilton J, after referring in particular to the speech of Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (supra), held (at [16]) that the obligations under the agreement, which included an obligation to dispose of the three elements of the business together, had been radically altered such that the agreement had been frustrated.
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.
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.
As submitted by the defendant, the plaintiffs agreed to pay that price on terms that precluded complaint about future income return to be derived from the hotel property or business (see Additional Clauses 38.1(b)(iv) and 38.1(d)). I would add that Additional Clause 55.2 stated that the defendant gave no warranties whatsoever about any future matters, including the future financial position or performance of the Business. These provisions indicate that insofar as the public health orders may have had an adverse effect upon the financial performance of the Business after settlement, that is a risk of a type the plaintiffs were apparently prepared to take, even if the actual circumstances that unfolded were not foreseen by them at the time of contract. Accordingly, the main focus of the case on frustration must necessarily be upon the unexpected effect the public health orders had upon the actual performance of the defendant’s obligations to carry on the hotel business until completion.
As I have said, that performance was affected, significantly, from about 23 March 2020, about eight days before completion was to occur. From 26 March 2020 the hotel traded in a restricted fashion, as far as the public health orders would allow, until 15 May 2020. From that day, very limited trading for consumption on the premises was permitted, but Mr Maguire said (and I accept) that it was not economically feasible to take up that option. The business continued with takeaway sales only until 1 June 2020 when it re-opened for on-premises trading following a further easing of restrictions. By that time the contract had been terminated (if it had not earlier been discharged by frustration).
On 27 March 2020 the plaintiffs asserted that the contract had been frustrated, and maintained that position thereafter. Both Daphne Parras and Colin Parras gave evidence to the effect that they were concerned about on-going restrictions upon trade following settlement, making it difficult to satisfy the covenants under the proposed finance facility. However, risks of that type were apparently undertaken by the plaintiffs in accordance with the terms of the contract.
I have not overlooked the valuation evidence to the effect that in April and May 2020 the value of the hotel had fallen by about $1 million. That is a considerable amount, but it is less than 9% of the purchase price. Again, a reduction in value due at least in part to perceived uncertainty concerning the future trading of the hotel is a risk of a type the plaintiffs were apparently prepared to take.
In all the circumstances I am not prepared to conclude that the unexpected situation the parties found themselves in from about 21 March 2020 gave rise to such a fundamental commercial difference between actual and contemplated performance, or such a fundamentally different situation for which the parties made no provision, that it would not be just to hold the parties bound to the terms of the contract. I consider that the terms of the contract, in particular 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, are wide enough to apply to the new situation that emerged.
This view obviously involves questions of degree. As Stephen J stated in Brisbane City Council v Group Projects Pty Ltd (supra) at 162-3:

It is no doubt true, as critics complain, that the various expositions of the true basis of the doctrine of frustration leave imprecise its actual operation when applied to the facts of particular cases. How dramatic must be the impact of an allegedly frustrating event? To what degree or extent must such an event overturn expectations, or affect the foundation upon which the parties have contracted, or, again, how unjust and unreasonable a result must flow or how radically different from that originally undertaken must a contract become (to use the language of some of the various expositions), before it is to be regarded as frustrated? The cases provide little more than single instances of solutions to these questions. These difficulties of application of the doctrine of frustration were keenly appreciated both by Latham C.J. and by Williams J. in their consideration of the doctrine in Scanlan’s New Neon Ltd. v. Tooheys Ltd.. They are, perhaps, inevitable in questions of degree arising when a broad principle must be applied to infinitely variable factual situations.

Whilst one may sympathise with the predicament that faced the plaintiffs from about 21 March 2020, and one can readily understand their reluctance to proceed to completion in the uncertain circumstances that prevailed, I do not think that an application of the principles of frustration leads to the conclusion that at any time from about 21 March 2020 until 21 May 2020 (when the defendant terminated the contract) the parties should be excused from further performance under the contract. In my opinion, the contract was not frustrated. The parties remained bound by the contract.

Termination of the contract

I have concluded that the defendant was not in breach of either Additional Clause 50.1 or Additional Clause 58.2 due to the manner in which it carried on the hotel business after the public health orders came into effect. It was not otherwise suggested that the defendant breached the contract. In these circumstances, it seems to me that the defendant was in a position to serve a Notice to Complete when it did on 28 April 2020. The Completion Date under the contract had passed, and the defendant could be described as an innocent party, not relevantly in default, and ready, willing and able to perform its obligations as and when required up to and including completion (see McNally v Waitzer [1981] 1 NSWLR 294 at 296-7 and 303-4; Carrapetta v Rado (2012) 16 BPR 30,997; [2012] NSWCA 202 at [20]-[27]; Barrak Corporation Pty Ltd v Jaswil Properties Pty Ltd (2016) 18 BPR 35,759; [2016] NSWCA 32 at [33]-[35]). The requirements of Additional Clause 51.7 were also satisfied.
The plaintiffs did not suggest that if the defendant was entitled to serve the Notice to Complete, the notice itself was invalid or ineffective for some reason. It follows that service of the notice was effective to make time for completion of the contract essential. For reasons which are set out later, I do not accept that the defendant was precluded by any estoppel from, inter alia, maintaining that it was entitled to issue the Notice to Complete, or maintaining that the plaintiffs were required to complete the contract within the times set out in the Notice to Complete.
In the face of the notice, the plaintiffs took the position that they were not obliged to complete, and failed to do so within the times specified in the notice. That failure amounted to a failure to comply with the contract (or a notice under it) in an essential respect within the meaning of Additional Clause 63.1. The defendant, which evidently remained ready, willing and able to complete, thus had a right to terminate the contract by serving a notice. It did so on 21 May 2020. In my opinion, service of the Notice of Termination was effective to terminate the contract. There was thus no repudiation of the contract by the defendant.

The defendant’s claims for recovery of the deposit and damages

I turn now to consider the defendant’s claims for monetary relief.
Additional Clause 63.1 provides that where the Vendor terminates the contract for the Purchaser’s failure to comply with the contract in an essential respect, the Vendor can keep or recover the deposit and sue the Purchaser (and the Guarantors) to recover damages for breach of the contract. The defendant pursues those remedies by way of its Cross-Claim.
Where a contract for sale is terminated due to the purchaser’s breach, the vendor is entitled to seek damages for loss of the bargain. The general principle is that the innocent party is to be placed in the same position as if the contract had been performed (see Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13]). Damages for breach of contract are generally assessed as at the date of breach. In the context of a claim for loss of bargain damages upon termination for breach, the date of breach should be understood as the date of termination for breach (see Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146; [2014] NSWCA 389 at [26] and [44]). The right to loss of bargain damages only arises at that time (see Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260; Ronnoc Finance Ltd v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 633-4).
In this case, the contract was terminated on 21 May 2020. If damages are assessed as at that date, the prima facie measure of damages would be the difference between the purchase price under the contract (which the defendant would have received had the contract been performed) and the value as at 21 May 2020 of the assets the subject of the contract (which the defendant retained because the contract was not performed).
On that basis, the defendant claims damages in the sum of $1 million. The defendant submitted that the valuation evidence (of Mr Hall, called by the defendant, and Mr Robertson, called by the plaintiffs) established that as at 21 May 2020 the hotel assets were worth $10.25 million, a figure $1 million less than the purchase price.
The plaintiffs submitted that the evidence showed that the hotel assets were worth something more than that amount as at 21 May 2020. However, the plaintiffs’ primary argument in relation to damages was that damages should be assessed as at the date of hearing. It was submitted, based on the evidence of Mr Robertson, that the value of the hotel assets at that time was $11,010,000, a figure only $240,000 below the purchase price.
The plaintiffs submitted that the principle that damages be assessed at the date of breach is not inflexible, and that it would be appropriate to adopt a later date in this case. It was further submitted that as the defendant, by not disposing of the hotel, took action that in fact mitigated its loss, the plaintiffs should in any event receive an allowance for the benefit thereby obtained from that action. In this regard, reference was made to Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443 at [40] and the so-called avoided loss principle.
As stated by Giles JA in that case at [44], the avoided loss principle only applies so far as the innocent party in fact gained a compensating advantage, and the guilty party bears the onus of proving not only that loss had been avoided, but also the extent to which loss was avoided. The plaintiffs submitted that they had established that a compensating advantage had been obtained by the defendant, consisting of an increase in the value of the hotel assets after the termination of the contract and the earning of profits since that time.
The defendant submitted that it was not appropriate to depart from the general rule that damages be assessed at the date of breach. It was submitted that the rule serves the important end of bringing finality and certainty to commercial dealings (see Clark v Macourt (2013) 253 CLR 1; [2013] HCA 56 at [110], cited by Gleeson JA in Ng v Filmlock Pty Ltd (supra) at [51]), and it was not a case where a departure was necessary to ensure adequate compensation to the innocent party (see Johnson v Perez (1988) 166 CLR 351 at 355-6, 367, 371 and 386; Ng v Filmlock Pty Ltd (supra) at [52]-[53]). It was submitted that the hotel was a tradeable asset for which there was always a functioning market notwithstanding the uncertainties produced by the public health emergency, and it was put that there were no special circumstances that would justify a departure from the usual rule. The defendant further submitted that there was no relevant compensating advantage to it in the circumstances.
I am not satisfied that it would be appropriate in this case to depart from the general rule that damages are assessed as at the date of breach. That is so even if it is accepted that at the date of hearing the value of the hotel assets was greater than at the date of termination of the contract. This is not a case where assessment at a later date is necessary to provide adequate or fair compensation to the wronged party. Neither is it a case where it is necessary to select a later date in the interests of justice or fairness as between the parties, or to better accord with the governing principle that the innocent party be placed in the same position, so far as money can do it, as if the contract had been performed.
The loss suffered by the defendant (and the loss claimed by the defendant) was the loss of the contractual bargain, which occurred when the contract was terminated for the plaintiffs’ breach on 21 May 2020. No losses of a continuing nature are claimed. The application of the governing principle calls for a comparison between the position the defendant was then in and the position the defendant would have been in had the contract been performed. Prima facie, the measure of loss is the difference between the contract price that would have been received if the contract had completed and the value of the assets retained by the defendant because the contract was not completed. Undertaking the comparison at the time the bargain was lost serves the purpose of giving the defendant the economic value of the performance of the contract at the time that performance was promised (see Clark v Macourt (supra) at [109]).
The fact that the value of the assets retained by the defendant may subsequently change (and in fact rise) does not seem to me to provide a good reason to depart from the general rule. The interests of justice do not suggest that the amount of loss of bargain damages should depend upon the selection of some later date, divorced from the time the contract should have been performed. No later date appears to be more logical or appropriate than any other, let alone more logical or appropriate that the date the bargain was lost. A different conclusion may have been reached if the evidence showed that there was no effective market for the retained assets at the date the bargain was lost. However, the valuation evidence, which is referred to in more detail later in these reasons, suggests that despite the considerable uncertainty that then prevailed, there was a market for the hotel and it was possible to identify its value in that market. For the above reasons, it is my view that the plaintiffs have failed to discharge the onus that is upon them to show why there should be a departure from the general rule (see Baguley v Lifestyle Homes Mackay Pty Ltd [2015] QCA 75 at [53], cited in El Ali v Tritton [2019] NSWCA 111 at [47] per Payne JA, with whom Macfarlan and Leeming JJA agreed).
I am also not satisfied that the circumstances give rise to the operation of the so-called avoided loss principle. That principle operates where a wronged party takes a course of action as a consequence of the wrong, and the course of action produces a benefit to the wronged party. Here it is said that the defendant took action to mitigate its loss by deciding not to dispose of the hotel assets. Mr Maguire gave evidence that he did not take any steps to re-list the hotel for sale because he did not want to sell at “a discount of around 10%”, and his main reason for selling was a lifestyle change involving travel, which was now “off the cards obviously”. I took that as a reference to the restrictions upon travel due to the COVID-19 pandemic. It can thus be seen that Mr Maguire’s position was largely based on personal reasons that are independent of the plaintiffs’ breach of the contract. There was no evidence of the position taken by any other person with an interest in the defendant. As noted earlier, a small majority of the ordinary shares in the defendant are owned by a company associated with the Laundy family. In these circumstances I do not think it has been established that the defendant took a particular course of action (namely, a decision to continue to hold the hotel assets) as a consequence of the plaintiffs’ breach of the contract, so as to bring into play the principle of mitigation of damage (see Ruthol Pty Ltd v Tricon (Australia) Pty Ltd (supra) at [50]). The fact that the hotel assets have remained in the hands of the defendant since the plaintiffs’ breach of the contract is not in my view attributable to a decision made in consequence of the breach. I therefore do not think that any benefits obtained from the continued holding of those assets must be allowed for in the assessment of damages.
It is appropriate to assess the defendant’s damages on the basis of the difference between the contract price that would have been received had the contract completed, and the value of the hotel assets retained by the defendant because the contract was not completed. The date of assessment is 21 May 2020. I turn then to consider the relevant valuation evidence.
The defendant adduced valuation evidence from Mr Paul Hall. In his report dated 28 October 2020, Mr Hall assessed the market value of the hotel property (a fee simple interest in possession as a going concern) to be $10.25 million as at 21 May 2020. His primary valuation rationale was based upon a capitalisation approach; that is, the application of a capitalisation rate range (of 8.75% to 9.25%) to an assessed EBITDA figure (of $1,012,810, derived from trading up to the end of 2019), from which a capital adjustment was subtracted to reflect the risk to trade of the COVID-19 outbreak. The capital adjustment was assessed as equivalent to the EBITDA figure of $1,012,810. Mr Hall also undertook a direct comparison approach, which he considered gave a valuation range of $10 million to $10.5 million.
The plaintiffs adduced valuation evidence from Mr Scott Robertson. Mr Robertson provided a valuation of the Quarrymans Hotel as at 4 February 2020 of $11.25 million. This was based on both a capitalisation approach and a direct comparison approach. As to the former, Mr Robertson applied a capitalisation rate range of 8.6% to 9.0% to a maintainable net profit figure (which Mr Robertson deposed was equivalent to an EBITDA figure) of $978,771 derived from trading up to the end of 2019. As to the latter, Mr Robertson produced a valuation range of $11 million to $11.4 million.
Mr Robertson produced an addendum to the valuation on 22 April 2020 “to take into consideration the impact of COVID-19”. The addendum included the following:

The Coronavirus (COVID-19) pandemic has recently escalated to become the major risk to licenced premises/clubs/tourism/accommodation revenues for the foreseeable future. On 23 March 2020, licenced premises, clubs, restaurants, casinos, cinemas, places of worship and gyms were ordered to close indefinitely in an effort to control the spread of the virus. The subject property falls within this category and the hotel is no longer trading. There remains uncertainty as to when this ruling will be lifted.
The real estate market is being impacted by the uncertainty that the COVID-19 outbreak has caused. Market conditions are changing daily at present. As at the date of the original valuation there was minimal market uncertainty, we now consider that there is significant market uncertainty.
…
Given the fluidity of the current situation surrounding the pandemic it is considered prudent that a discretionary capital adjustment be made to our “unaffected” current market value to reflect the risk to earnings should significant disruption be experienced in these going concern business assets.
…
Adopting one year’s maintainable earnings which in our prior valuation and pre COVID-19, was deduced at $978,771 per annum, we then deduct this figure from the capitalised value assessed in that valuation of $11,250,000…
From the above calculations, the deduction of one year’s maintainable earnings results in a valuation range of $9.90 to $10.40 million.
Based on our original adopted valuation of $11,250,000 and thus deducting one-year’s maintainable earnings or net operating profit, this results in an adopted value of $10,250,000.

Mr Hall, in a supplementary report dated 20 November 2020, expressed his general agreement with the analysis and valuation contained in Mr Robertson’s 22 April 2020 addendum, noting that Mr Robertson had also adopted “an under the line adjustment of 12 months EBITDA to reflect the trading risk associated with COVID-19 and the effect of the NSW Public Health Orders”.
Mr Robertson produced a third report dated 5 March 2021. This report included some criticism of Mr Hall’s 21 May 2020 valuation, in particular that it did not take into account some information that was available at that time in relation to the possible re-opening of hotels for trading. In this regard, Mr Robertson referred to advice provided by the Australian Hotels Association to members on 15 May 2020 and 22 May 2020. Mr Robertson stated that the relevance of this information is that “hotels had a clear sign of reopening considerably earlier than first thought at the height of the panic surrounding COVID-19”. Mr Robertson expressed the view (at paragraph 64 of the report) that the discount to be applied as at May 2020 “would have been 70% of the amount being $1,012,810 ($708,967)” less an amount for Job Keeper payments of about $36,000 up to the date of valuation. Mr Robertson stated that this would result in a rounded valuation figure of $10.575 million.
Both valuers were cross-examined. Mr Robertson agreed that he considered Mr Hall’s 21 May 2020 valuation to be within the range for the market value of the hotel as at that date. When questioned about the 70% discount referred to in paragraph 64 of his third report, Mr Robertson seemed to agree that this was in some way based upon trading information in respect of the period June to November 2020. However, that answer is difficult to reconcile with paragraph 64 itself, which refers to figures available as at May 2020.
Mr Hall was asked about the Australian Hotels Association information provided on 15 May 2020 and 22 May 2020. He agreed that people were hopeful on 15 May 2020, when the “ten person rule” came in, that it would be first stage of a further opening up of hotels. He described it as “Step 1, subject to qualifications”. Mr Hall agreed that by 15 May 2020 some of the pessimism that was present in April “had subsided somewhat”, although a later answer given by Mr Hall suggested that was not the case. When asked about Mr Robertson’s suggested 70% discount, Mr Hall said that he did not think this was within a reasonable range for an under the line deduction, but he accepted that a reasonable range would be about 80% to 100%. Mr Hall said that when the announcement was made (on 22 May 2020) that 50 customers would be allowed inside hotels, “pessimism improved significantly”, whereas the announcement of 10 persons being allowed in did not cause a substantial improvement. Mr Hall conceded that as at 15 May 2020 the likelihood of a 6 month closure of hotels was at least in his view “less probable”.
The totality of the evidence seems to me to support a finding that the value of the hotel as at 21 May 2020 falls within a range to be derived following the making of a capital reduction (or under the line discount) of between 80% and 100% of Mr Hall’s EBITDA figure of $1,012,810. That is, a value calculated in accordance with Mr Hall’s capitalisation approach, save for the making of a slightly smaller capital reduction. Adopting a capital reduction of $911,529 (being 90% of Mr Hall’s EBITDA figure) would produce a value between $10,663,471 and $10,038,471. The mid-point of those figures is about $10,350,000. In my opinion that approach is a reasonable one to adopt based on Mr Hall’s evidence, which I generally accept. In particular, it takes into account the concessions properly made by Mr Hall in cross-examination in relation to the somewhat improved outlook for hotel trading that had emerged in May 2020. By 21 May 2020 hotels were allowed to have 10 customers on the premises, and the evidence suggests that a further step towards more normal trading was seen as likely to occur in the near future (even if that step was not officially announced until 22 May 2020).
On this basis, the difference between the contract price of $11.25 million and the value of the hotel assets was about $900,000 as at 21 May 2020. I assess the defendant’s damages for loss of the bargain in that amount.
By Additional Clause 63.1 the defendant is entitled to keep or recover the deposit and sue to recover damages for breach. The assessed amount of damages ($900,000) exceeds the amount of the deposit ($562,500). Credit must be given against the amount of damages to the extent the deposit is recovered, so as to prevent double recovery.
In circumstances where the contract has been terminated following the failure of the plaintiffs to comply with the contract in an essential respect, and the defendant has established an entitlement to recover damages in an amount that exceeds the amount of the deposit, there is no sound basis for any order for the return of the deposit under s 55(2A) of the Conveyancing Act. In accordance with the principles applicable to s 55(2A), as summarised in Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) (2017) BPR 37,025; [2017] NSWSC 866 at [68]-[71], it would not be unjust or inequitable to allow the defendant to forfeit the deposit and apply it towards the damages it is entitled to recover.

Other matters

It remains necessary to deal with the plaintiffs’ contentions that the defendant is precluded by estoppel from, inter alia, maintaining that the plaintiffs were required to complete the contract. I have already stated (at [114]) that I did not accept that any such estoppel exists. My reasons for that conclusion can be stated relatively briefly.
Two varieties of estoppel are pleaded. The first estoppel is an estoppel by convention based on an alleged common assumption, held from the date of entry into the contract, that the hotel business would be carried on by the defendant up to and including the date of completion in the usual and ordinary course as regards its nature, scope and manner as at the date of the contract. The assumption is said to arise from Additional Clauses 50 and 58 of the contract (and an earlier draft of provisions to the effect of Additional Clause 50). It is alleged that the plaintiffs would suffer detriment if the defendant was permitted to depart from the common assumption yet require the completion of the contract.
The second estoppel is an equitable estoppel based on an alleged representation made by the defendant that it would carry on the hotel business up to and including the date of completion in the usual and ordinary course as regards its nature, scope and manner as at the date of the contract. The representation is said to have been made in writing in the form of Additional Clauses 50 and 58 of the contract. It is further said that by agreeing to Additional Clauses 50 and 58, and entering into the contract, the defendant created or encouraged an expectation in the plaintiffs that they would not be required to complete the contract in circumstances where the hotel business was not being carried on in the usual and ordinary course as regards its nature, scope and manner. It is then alleged that the plaintiffs relied upon the representation or the expectation in entering into the contract, as intended by the defendant, and would suffer detriment if the defendant was able to resile or depart from the representation or expectation.
I am unable to accept that any such common assumption was held, that any such representation was made by the defendant, or that any such expectation was created or encouraged by the defendant.
The only common assumption suggested by the circumstances in which the contract was negotiated and ultimately made is an assumption that the parties were bound by the terms of the contract, properly construed. It was not shown that the parties adopted and shared any other assumption as the conventional basis of their legal relationship. That is so even if both parties may have expected, at the time of the contract, that the defendant would be able to lawfully carry on the hotel business in the usual and ordinary manner until completion of the contract.
Further, by agreeing to Additional Clauses 50 and 58, and entering into the contract, the defendant represented no more than it was prepared to be contractually bound by such terms, properly construed, and perhaps that it was capable of performing its obligations under such terms, properly construed. Moreover, that conduct of the defendant could not have reasonably created or encouraged an expectation on the part of the plaintiffs that if for any reason the hotel business was not carried on in the usual and ordinary manner (including because it became unlawful to continue to carry on the business in that manner) they would not be required to complete the contract.
For these reasons, the defendant was not precluded by any estoppel from maintaining, as it did, that the plaintiffs were required to complete the contract.

Conclusion

The plaintiffs have failed to establish that the contract was discharged by frustration as alleged. The plaintiffs have also failed to establish that the defendant was not entitled to serve the Notice to Complete on 28 April 2020. The Amended Statement of Claim will thus be dismissed.
The failure of the plaintiffs to complete the contract amounted to a failure to comply with the contract in an essential respect. The defendant validly terminated the contract for the plaintiffs’ breach on 21 May 2020 and became entitled to forfeit the deposit. Declarations to that effect will be made.
The defendant has also established an entitlement to damages in the sum of $900,000. Judgment should be given for that sum (plus pre-judgment interest) against each of the plaintiffs. It was not suggested that the guarantors were in any different position to the purchasers in this regard. Pre-judgment interest should be calculated at the rates prescribed for the purposes of s 100 of the Civil Procedure Act 2005 (NSW) for the period from 22 May 2020 until the date of judgment. It will be noted that the judgment will be taken to be satisfied to the extent that the defendant recovers the deposit (and any interest that has been earned on the deposit).
The defendant has successfully defended the claims made by the plaintiffs and has succeeded on its Cross-Claim. Costs should follow the event. Accordingly, the Court will also order that the plaintiffs/cross-defendants pay the defendant/cross-claimant’s costs of the proceedings.
The parties are directed to confer concerning an appropriate form of orders (including the calculation of interest) to give effect to these reasons, and to submit Short Minutes of Order within 7 days. If the form of orders cannot be agreed, the parties are directed to separately submit their preferred form together with a brief submission in support. The form of orders will be settled in Chambers.

**********

Decision last updated: 10 May 2021

Medium Neutral Citation:	Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWSC 504
Hearing dates:	12-14 April 2021
Date of orders:	10 May 2021
Decision date:	10 May 2021
Jurisdiction:	Equity
Before:	Darke J
Decision:	Contract held not to have been frustrated. Vendor held to have terminated contract for breach by purchasers. Vendor entitled to forfeit deposit and recover damages for loss of bargain.
Catchwords:	CONTRACTS – construction – agreement for sale of hotel property and business – vendor obliged to carry on business in usual manner until completion of contract – public health orders made in response to COVID-19 pandemic limited ability to operate business – whether vendor in breach of obligation to carry on business in usual manner – obligation construed as not requiring the carrying on of business in any manner contrary to law – vendor held not to be in breach CONTRACTS – discharge by frustration – agreement for sale of hotel property and business – vendor obliged to carry on business in usual manner until completion of contract – public health orders in response to COVID-19 pandemic limited ability to operate business – actual performance of obligation departed from that which the parties contemplated would occur – whether contract frustrated – essential purpose of contract was for sale and transfer of particular assets for agreed price – vendor’s obligation to carry on business until completion designed to further this essential purpose – no warranties given as to future performance of business – unexpected events did not give rise to such a fundamentally different situation that it would not be just to hold the parties bound to the terms of the contract – held that contract not frustrated CONTRACTS – damages – assessment – date for assessment of damages – vendor terminated contract for purchaser’s breach – damages for loss of bargain – held that damages should be assessed as at date the bargain was lost – no justification to assess damages at later time – avoided loss principle – whether vendor obtained compensating advantage by retaining assets the subject of sale – not established that retention of assets is attributable to a decision made in consequence of the purchaser’s breach – mitigation of damage principles not engaged
Legislation Cited:	Civil Procedure Act 2005 (NSW) s 100 Conveyancing Act 1919 (NSW) s 55(2A) Liquor Act 2007 (NSW) Liquor Regulation 2018 (NSW) Public Health Act 2010 (NSW), ss 7, 10 Public Health (COVID-19 Gatherings) Order 2020 Public Health (COVID-19 Places of Social Gathering) Order 2020 Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 2) 2020 Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 3) 2020
Cases Cited:	ASIC v Atlantic 3 – Financial (Aust) Pty Ltd (No 2) [2007] 2 Qd R 399; [2006] QCA 540 Baguley v Lifestyle Homes Mackay Pty Ltd [2015] QCA 75 Barrak Corporation Pty Ltd v Jaswil Properties Pty Ltd (2016) 18 BPR 35,759; [2016] NSWCA 32 Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 Carrapetta v Rado (2012) 16 BPR 30,997; [2012] NSWCA 202 Clark v Macourt (2013) 253 CLR 1; [2013] HCA 56 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 El Ali v Tritton [2019] NSWCA 111 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Gerraty v McGavin (1914) 18 CLR 152 Global Network Services Pty Ltd v Legion Telecall Pty Ltd [2001] NSWCA 279 Johnson v Perez (1988) 166 CLR 351 Krell v Henry [1903] 2 KB 740 Langley v Foster (1906) 4 CLR 167 Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095 McNally v Waitzer [1981] 1 NSWLR 294 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146; [2014] NSWCA 389 oOH! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255; [2011] VSCA 116 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 Ronnoc Finance Ltd v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) (2017) BPR 37,025; [2017] NSWSC 866 Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8
Texts Cited:	K Lewison and D Hughes, The Interpretation of Contracts in Australia (Lawbook Co, 2012)
Category:	Principal judgment
Parties:	Dyco Hotels Pty Ltd (First Plaintiff/First Cross-Defendant) Quarryman Hotel Operations Pty Ltd (Second Plaintiff/Second Cross-Defendant) Daphne Maria Parras (Third Plaintiff/Third Cross-Defendant) Colin Michael Parras (Fourth Plaintiff/Fourth Cross-Defendant) Laundy Hotels (Quarry) Pty Ltd (Defendant/Cross-Claimant)
Representation:	Counsel: Mr C D Freeman (Plaintiffs/Cross-Defendants) Dr C J Birch SC with Mr B DeBuse (Defendant/Cross-Claimant) Solicitors: A C Comino & Associates (Plaintiffs/Cross/Defendants) JDK Legal (Defendant/Cross-Claimant)
File Number(s):	2020/126628
Publication restriction:	None