Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited ATF the Parras Family Trust & Ors

[2022] HCATrans 136

[2022] HCATrans 136

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S8 of 2022

B e t w e e n -

LAUNDY HOTELS (QUARRY) PTY LIMITED (ACN 159 364 342)

Applicant

and

DYCO HOTELS PTY LIMITED (ACN 100 275 974) ATF THE PARRAS FAMILY TRUST

First Respondent

QUARRYMAN HOTEL OPERATIONS PTY LIMITED (ACN 634 263 933)

Second Respondent

DAPHNE MARIA PARRAS

Third Respondent

COLIN MICHAEL PARRAS

Fourth Respondent

Application for special leave to appeal

KEANE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA BY VIDEO CONNECTION

ON FRIDAY, 19 AUGUST 2022, AT 9.30 AM

Copyright in the High Court of Australia

____________________

KEANE J:   In accordance with the Court’s protocol when sitting remotely I will announce the appearances for the parties.

MR B.W. WALKER, SC appears with MR B. DeBUSE for the applicant.  (instructed by JDK Legal)

MR N.C. HUTLEY, SC appears with MR C.D. FREEMAN for the respondents.  (instructed by AC Comino & Associates)

KEANE J:   Yes, Mr Walker.

MR WALKER:   May it please the Court.  This case raised what the Chief Justice described at the outset of his reasons as “difficult questions”.  Our special leave application is premised on this proposition which, we submit, emerges clearly from a consideration of all three sets of the reasons.  That is, that the kind of situation dealt with by resort to a notion of temporary suspension of obligations to complete a contract – which is executory – by reason of what has been called “supervening illegality” can bring about a situation akin to a form of temporary or provisional frustration, without discharging the contract completely but for an indefinite period, in cases where the contract has not been frustrated.

As your Honours know, frustration was fought below but not contended for on appeal and it would appear that there is most substantive reason for that, bearing in mind that the obligation to convey and the correlative obligation to pay the price after the time permitted for settlement and the expiry, if relevant, of a notice to complete was not prevented by any form of enactment or regulation.  There was no supervening illegality concerning the conveyance or the payment.

That, of course, makes the case somewhat resemble the straightforward rejection of frustration in cases as this Court famously held in another hotels case, namely Scanlon’s New Neon v Tooheys, to which I do not need to take your Honours.

GORDON J:   Mr Walker, may I ask just one question about that?  Is it that we are really faced with the construction of clause 50.1?  In the sense that ‑ ‑ ‑

MR WALKER:   No, your Honour.

GORDON J:   I ask that for two reasons.  The first is that the Chief Justice seemed to assume that it was to be read as a going concern clause.  That was the assumption that he made.

MR WALKER:   Yes.

GORDON J:   Is that right?  And the second is, once that construction question arises, then you have got the question, do you not, of this supervening suspension of rights and is it, in a sense, sort of an offer of a variation which is refused?  I mean is that, in a sense, the way it is looked at?

MR WALKER:   There is no analysis of what might be called a court‑hypothesised negotiation between the parties, not least because it is not for courts to make new bargains and there was, here, no extant controversy concerning implication.  It was interpretation.

I realise implications as to the lawful possibility of complying with 50.1 so far as its component concerning trading was argued below and has a certain presence in the Court of Appeal reasons, but it is not central.  The answer to Justice Gordon’s question is of course 50.1 needs to be looked at and it does appear that the Chief Justice construed that as one of the assurances of title concerning some passable resemblance of the state of trading as between contract and the time that is set for completion.  There is no such assurance of title at all.  There are express warranties which expressly exclude any warranty concerning the state of trade.  Warranties concerning compliance with licence conditions are of course a very sound indication that compliance with the law goes without saying.

As a matter of interpretation, plainly enough 50.1, as recognised by our opponents and the majority or all three judges in the Court of Appeal, cannot be understood as lending the force of contract law to a supposed obligation to breach the supervening regulation by means of the public health order.  That is a familiar, elementary and likely ever to recur situation in commerce.  The words appear to require things to be done by general description here:

carry on the Business in the usual and ordinary course –

which then fall to be interpreted as to what they mean and what obligation they import after there has been a supervening event; in this case, the promulgation of regulation sanctioned by criminal offence for breach with respect to conduct which is either necessary or highly desirable in running the business in question.

That is a recurrent situation.  It will not just be COVID, it will not just be natural disasters, it will not just be town planning which will bring about so‑called supervening illegality.  Now, as a matter of illegality analysis, the position seems to have been clearly accepted but then obscured in its consequence as to what that supervening illegality does to the words importing obligation in a clause like 50.1.  This case is not special to 50.1; it would apply to any words of obligation requiring certain conduct, either pro tem, before completion of the executory contract, or indefinitely, under a contract which is continuing.

That is why it has general importance to the law of contract.  The court, having correctly held that the effect of the Public Health Order was to dispense – that is, excuse – our client from carrying on trading activities which would be in breach of the public health order, whereby, of course, it is not in breach of 50.1, brings about the situation, familiarly, as to whether that produces a frustration.  So whether noise regulation, after a tunnelling contract has commenced, brings about frustration, is – thinking of Codelfa, in this Court, is a familiar example of that question.  This is a case where there has been both, necessarily qualitative consideration of the frustration possibility, and it is rejected and not persisted in.

Can there be a poor relation of frustration on some temporary and indefinite basis?  For an executory obligation – itself not illegal of performance.  Not touched in terms of any offence being committed by either party doing what the contract calls for, can there be a poor relation of frustration which picks one of the parties to get the benefit of what might be called the suspended animation of the contract?

I call it suspended animation, your Honours, because it is only by the acts and the subsequent dealings between the parties by their taking of positions – only one of which could be right – that this contract came to an end by the acceptance of a repudiation.  That is accidental and incidental, and this is not a case about the termination of contract by supervening illegality, this is a case whether some effect – when a contract has not been frustrated – puts a contract into a form of suspended animation.  We cannot be accused of breach of 50.1, because the law would not be so incoherent as to construe it as requiring us to behave illegally.

If 50.1 is a term, or obligation, as to part of which there is a rendering of impossibility of performance by reason of illegality, then questions of severability would arise.  This is a contract, in terms of which, looking forward to the possible ascertainment of judicial ascertainment of illegality, plainly showed the parties contemplating wholesale severance, making the Chief Justice’s description of the contract as an “indivisible whole” a rather startling approach.

That too is subsidiary to the main question, which is:  what happens when something occurs by reason of so‑called supervening illegality to prevent a party, hitherto required to do the thing now forbidden, from being held to be in breach of that obligation?  What happens, with respect to all the other obligations and, particularly, the main obligation to convey and pay, which themselves have not been affected by the illegality in any sense at all, just as in Scanlan’s New Neon v Tooheys?  Tooheys could not illuminate the sign, but there was no promise that that would be indefinitely available.  Scanlan’s had done what it required to be done and continued to make the signs available, hence Tooheys had to pay, no frustration.

In our submission, your Honours, there is a quality to this case making it an ideal vehicle because the supervening illegality comes about in a familiar fashion, that is, regulation of a general kind affecting specific businesses in particular ways, such as will always come when either quarantine preventing customers from coming to a vicinity, or restraint on forms of trade, such as preventing people crowding into a public bar, has an effect upon the multitude of business relations that will always exist concerning the conduct of such businesses – not just the sale of businesses, but the conduct of businesses.

That, in our submission, highlights a quality of such vicissitudes brought about by regulation, which is easily seen from the description that your Honours will have noted at page 73 of the application book in paragraphs 7 and 8, namely, the public health order that came right at the end of the 55‑day contract period, a bit less than a week before completion was due, was itself revocable; that is, it is for a specified period which may be shortened.

So this case arises in the context of an effect dispensing us from an obligation to do that which has temporarily become illegal, which is held by the majority in the Court of Appeal to bring about the situation where we cannot have the court compel performance.  We cannot hold the other party to the obligation to pay, correlative to our obligation to convey, when we were plainly ready, willing and able to convey – ready, willing and able, not of course referring to past matters such as the temporary cessation of a capacity fully to comply with 50.1, which has nothing to do with readiness, willingness and ability to complete.

There is here no issuance of title concerning the nature of the business being – bearing in mind the conduct of customers, regulators and competitors – in any state said to be equivalent to that which existed at the date of contract.  That is why, in our submission, this is a case which, if uncorrected, has in accordance with the majority reasoning – particularly the reasoning of the Chief Justice – the defect of proposing some state of contractual effect where the contract is not discharged by frustration but indefinitely remains on foot, notwithstanding that the executory obligations remaining to be performed are all unaffected by illegality.

Bearing in mind that it is the supervening illegality which is meant to bring about this old form of suspended animation, there is, in our submission, a lack of any principle foundation for such an approach, and, we submit, there is no authority but this case for such an odd outcome.  It is for those reasons, in our submission, that the case presents readily as a paradigm for what will be no doubt a multitude of executory obligations in contracts not frustrated by an illegality where the illegality prevents us from being regarded as being liable in damages for anything brought about in the train of the affected trading.

Now, your Honours appreciate that there is, as Justice Basten pointed out, a premise in particular of the Chief Justice’s reasons that would treat 50.1 as something in the nature of a condition precedent.  This is not to go to an argument that depends upon the particular wording of particular terms in a particular contract, thus not a candidate for special leave.  To the contrary, in our submission, there is here judicial method which is flawed in the majority reasons that this Court should correct.

When asking about the effect of a supervening illegality, the critical matter, correctly appreciated and ruled on by Justice Basten but mistakenly not observed by the majority, is to identify what it is about conduct remaining to be performed which might be said to have been affected – prevented, say – by the illegality that has been identified.  If there is no prevention of performance by the so‑called illegality, then there can be no so‑called suspending effect; that is, putting the contract into a state where:

by some of standstill neither party can require the other to do those things which the law does not prevent being done.

That, in our submission, is a rather large question not likely to reduce in its incidence in commercial life, bearing in mind the ubiquity and detail of the many forms of regulation that affect commercial trading.  For those reasons,

in our submission, the approach taken in this Court in Scanlan’s concerning frustration finds a solid basis in the concession, finding that there is no frustration here.  Executory obligations would remain on foot but for what we submit, with respect, is a form of invented new doctrine – the frustration you have when it is not frustration.

If one goes back to one of the cases you will find discussed in the reasons in this Court, Gerraty v McGavin 18 CLR 152, there the phrase can be found which correctly conjures the result of the illegality, namely, that we cannot be found in breach of 50.1, that the obligation which the supervening illegality addresses ceases to be contractually binding. The phrase in Gerraty v McGavin is that the counterparty can take no advantage from the failure to do that which, in my paraphrase, the new law forbids.  That being so, in our submission, there is no principled or authoritative basis for the majority to have dealt with this typical ongoing and executory relation as they did and, in our submission, the grant of special leave is appropriate.  May it please the Court.

KEANE J:   Thanks, Mr Walker.  Yes, Mr Hutley.

MR HUTLEY:   The case, in our respectful submission, your Honours, turned upon the true construction of the bespoke contract.  Whilst clause 50.1 – which is set out, of course, at judgment paragraph 6 of the application book 73 – is at the heart of the case, its construction and what was between the majority and the minority and the judge at first instance was whether the clause should be read as including a term insofar as carrying on the business was legal from time to time.  It is a matter which is of no – in our respectful submission – significance at a general level, as it turned – the principles applied were the common principles which were enunciated by this Court.  What that construction ‑ ‑ ‑

KEANE J:   Mr Hutley, I am sorry to interrupt, but Mr Walker has dropped out.  Mr Walker, are you still there on the line?

MR HUTLEY:   He is next door.  I might pop in and find out, if I might be excused.

KEANE J:   He is back.  Sorry, Mr Walker, you just dropped out for minute.  Mr Walker, are you back with us?

MR WALKER:   I am back with you, and I can now see my friend move.  I assume I will be able to hear him talk, but I have not been able to for the last minute or so.

KEANE J:   Well, he had not really got into his stride, so I think ‑ ‑ ‑

MR HUTLEY:   I was warming up.

KEANE J:   Thanks, Mr Hutley.

MR HUTLEY:   Thanks, your Honour.  The construction adopted by the majority was simply that the clause meant what it said.  The object – and that is found in ‑ ‑ 

KEANE J:   Mr Hutley, if the clause means what it says, it does not have the qualification which you say is to be implied.

MR HUTLEY:   No, our learned friends say the qualification is to be implied.  They say what is to be implied as the qualification is:

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

as the law permits from time to time.  That was what the ‑ ‑ ‑

KEANE J:   Whether you read in that implied qualification or not, if you just read it in its terms and then the law intervenes to prevent its performance in the case where you have interdependent or concurrent obligations in relation to completion, how can your side charge his side with non‑performance when the law has sterilised his obligation?  An obligation on which your side’s obligation depends.

MR HUTLEY:   The question is not whether we charge them.  We accepted that the obligation was suspended such that we could not complain of their failure to comply with the obligation – for example, by way of damages.  We also could not terminate the contract on that basis.  The question is whether, in a circumstance where the evident object – as the court found at paragraph 49 at application book 83 – the evident object of the contract was to convey a business which was a going concern, being the evident object, and there was a temporary – potentially temporary – suspension of business whether my learned friend’s client could terminate the contract, where, by reason of our non‑performance, whilst that temporary suspension was continuing.

Of course, if the suspension went on indefinitely for a lengthy period of time, an issue of frustration from both sides would arise.  As the Chief Justice observed, our learned friends’ position was that they could not supply to us a running business, and yet they wished us to pay and take the business and assets – not running – in default of which they would terminate the contract.  That was essentially a question of construction of this bespoke contract, and I will not go through all of the ‑ ‑ ‑

GORDON J:   Mr Hutley, it is inevitable that we are going to have to look, if we give grant of leave, at the terms of the contract and the proper construction of it, because the suspension argument – which has ultimately found favour with the majority with the Court of Appeal – builds on the construction.  I mean, it is inevitable that you are going to look at the question of construction in order to test this proposition that this suspension, in the face of supervening illegality, is a doctrine which exists.

MR HUTLEY:   When one speaks of suspension, there is a rather venerable House of Lords authority in the case of the bank cases, which were gone to by the Chief Justice, which had held that bank contracts, for example, are not frustrated in the event of supervening temporary illegality of a war.  In our respectful submission ‑ ‑ ‑

KEANE J:   Mr Hutley, were they cases where there were concurrent and interdependent obligations to tender performance on a day?

MR HUTLEY:   There was a bank’s obligation to pay upon demand of its customer its deposits.  So the ‑ ‑ ‑

KEANE J:   But these are not mutually dependent.  They are not concurrent, mutually‑dependent obligations of paying in return for performance, a tender of the title, and observance of clause 50.1.  They are not that kind of arrangement.

MR HUTLEY:   Quite.  One has to be ready, willing and able at the time of conveyance to – in our respectful submission – deliver that which you have promised.

GORDON J:   But there are two aspects, are there not, though, Mr Hutley?  There is the distinction that Justice Keane just drew – which is self‑drawn by the decision in Canary Wharf – between the different kinds of clauses that have to be looked at.  We know that we have that question.  Then the second question is – here we have got this question in itself, I think, about whether or not it is something which gives rise to non‑compliance, given the way in which – at least in Gerraty’s case, that the Court considered and construed the clause itself.  You have two problems.

MR HUTLEY:   I have been doing this long enough to know that in – but, essentially, when one gets down to this case – and I will not be much longer, having the sense of your Honours – what separated the majority from Justice Basten was solely a question of construction of the contract as to whether clause 50 was a condition or a substantial compliance with was required to require settlement.

That is what Justice Basten, in effect, found, and that is where he departed from the majority.  He said in his judgment, and one can see it – he identifies the issues at paragraph 97 on application book page 98.  He saw (ii) “a condition precedent” as critical.  That obviously is a question of construction, not the question of what you might call the suspensory effect by supervening illegality.  He thought it was purely a question of construction.

He then went on to deal with that question, and you can see the view he comes to in regard to that is at application book 112, paragraph 126.  That was a view as to the true construction; that is, that it, in effect, was conditioned by acting lawfully.  He then said, even accepting the construction arrived at by the majority he had an alternative view, which your Honours will see at 128 at paragraph 113, and he then goes from there through to 134.  Questions of construction where his Honour was directing himself to the peculiarities of this contract.  That is the disagreement between the majority and the minority.  Nothing about the question of suspensory effect of illegality.

That was common in their views as to its operation upon clause 50.1, namely, we could not sue for damages for failure to abide by it during that period.  That was common.  There is no issue on the two alternate views of their Honours about that issue.  What their Honours differed about is the true construction of essentially clause 50.1 and that was it, in the context of this particular contract, as appears from Justice Basten’s analysis of all the terms, the value and the like, between paragraphs 130 and 138.

That is why we say this suspensory effect of illegality does not really arise on the arguments.  It is purely because the principle when one thinks of it cannot mean in every case where there is a supervening prevention of complying with some executory obligation and of a temporary nature, the obligation falls completely, which is the position – and the Chief Justice observed, you cannot have a principle of that extremity.  The real question is:  when there is such suspensory effect, does the contract render the vendor here – or one party – not in a position to compel settlement during the period of that temporary suspension?  As both the majority and the minority agree, that is purely a question of construction, which is limited to the particular contract.

It was common ground what the principles of construction were and there is no question of general principle on the construction of contracts before your Honours.  The suspensory effect of illegality simply will not arise because it was common in both analyses of Justice Basten and the majority – and one will return to a question of construction of a particular contract of no, what you might call, long‑term significance of the variety which this Court would entertain your Honours and the Court in the

exercise of their appellate jurisdiction.  That is all we wish to say.  If the Court pleases.

KEANE J:   Thanks, Mr Hutley.  Mr Walker, anything in reply?

MR WALKER:   Only very briefly, your Honours.  This is not a case that can be consigned the particular quiddities of clause 50.1.  It has – with the methodological question, whether the identification of the effect of illegality on some aspects of the ongoing performance of 50.1 pending completion is such as to bring about a different kind of suspension, not of those former obligations, but rather of the obligation to complete by title on one side, price on the other, interdependent, neither of which is to the slightest degree affected by any illegality remaining outstanding and capable of being enforced without involving any aspect of the doctrine of illegality.  It is that kind of – we submit – new‑found suspension which is not frustration, that makes this a case apt for this Court to pronounce the proper doctrine on the basis of the facts, which are by no means atypical.  May it please the Court.

KEANE J:   Thanks, Mr Walker.  The Court will adjourn briefly to consider the course it will take in this matter.  Adjourn the Court, please.

AT 10.03 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.06 AM:

KEANE J:   There will be a grant of special leave in this matter.  Mr Walker, the matter would be completed within a day?

MR WALKER:   Comfortably, your Honour.

KEANE J:   Mr Hutley, do you agree?

MR HUTLEY:   I agree, your Honour.

KEANE J:   Very well.  There will be a grant of special leave in this matter, and the parties are required to abide by the requirements of the registrar in relation to the steps necessary to bring the matter to a hearing.  The Court will now adjourn.  Adjourn the Court, please.

AT 10.06 AM THE MATTER WAS CONCLUDED