Ordinary course of business in extraordinary circumstances – Laundy v Dyco

The war in Ukraine and COVID-19 are examples of how unexpected events can place economies, supply chains and commercial arrangements under great strain. In these circumstances, parties to a contract will often look to the force majeure or extension of time provision for a remedy.

These circumstances also emphasise how clear drafting and the rules of contractual interpretation can have a huge impact on the obligations of each party, as the case of Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 has demonstrated.

Facts

• In January 2020, Dyco (Purchaser) signed a contract to purchase The Quarryman’s Hotel in Pyrmont, NSW from Laundy (Vendor) for $11,250,000 including a 5% deposit of $562,000. Completion was meant to take place at the end of March 2020.

• Under clause 50.1 of the contract, Laundy was obligated to ‘carry on the business in the usual and ordinary course as regards its nature, scope and manner’ from the time of signing until completion.

• One week before settlement (ie 23 March 2020 onwards) the business was only able to sell take-away food and drinks due to the introduction of government imposed public health orders.

• At settlement, the Purchaser claimed that the contract was frustrated. The argument advanced was that the public health orders prevented the business from operating in the usual and ordinary manner, as set out in the contract.

• The Vendor issued a notice to complete, however the Purchaser maintained that the contract was frustrated.

• The Vendor subsequently issued a notice to terminate for breach, and the Purchaser sued for a return of 5% deposit. Ultimately, the Vendor counter-claimed for breach of contract and recovery of damages for loss of bargain.

Judgments

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

In the Supreme Court, it was held that the:

• Sale contract was not frustrated.

• Vendor had validly served a notice to complete.

• Vendor had not defaulted on its obligation to carry on business in the usual and ordinary course.

• Vendor was entitled to terminate the contract due to the Purchaser’s failure to complete.

Darke J held that the Vendor was still carrying on business in the usual and ordinary course within the scope of the law.

Court of Appeal decision (Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWCA 332)

The majority of the Court of Appeal overturned the primary judge’s decision.

It was held the primary judge erred by limiting the obligation of the Vendor under clause 50.1 to the bounds of the law. In other words, the primary judge had erred by stating that the public health orders introduced by the government meant that the Vendor could not carry on business in the ‘usual and ordinary course’ despite the fact that if it were to carry on business as usual, it would be illegal.

As a result, the Court of Appeal looked to the remaining provisions under clause 50 and held that the sale and transfer of the hotel could not be a going concern. The Purchaser would not have been able to terminate the contract for the Vendor’s non-compliance with its obligation under clause 50.1. However, because of that non-compliance the Vendor was not ‘ready, willing and able’ to complete the sale at the time it served the notice to complete. Being ‘ready, willing and able’ was a pre-condition to the notice to complete (both at law and in the contract), and as such, the Vendor repudiated the contract because it was not entitled to terminate.

The Court of Appeal ordered that the security deposit be returned to the Purchaser.

High Court (Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited [2023] HCA 6)

The High Court unanimously allowed the Vendor’s appeal and overturned the Court of Appeal’s decision.

To the High Court, it was an issue of contractual interpretation – particularly of the obligation to ‘carry on business in the usual and ordinary course’.

The High Court, referring to well-established contractual interpretation principles, held that the obligation to ‘carry on business in the usual and ordinary course’ inherently meant that performance of the obligation must fall within the ambit of the law at any relevant time. Moreover, the High Court enunciated that it was not necessary to imply any terms into the contract.

Our interpretation

While this case arose as a result of an extreme and unforeseen circumstance – COVID-19 – it seems that the actual COVID-19 ‘event’ had little bearing on the matter at hand. Had the contract been drafted differently, then perhaps the outcome would have been different.

Nonetheless, this case serves as a strong reminder that when drafting contracts, the language used should be unambiguous, especially where any two people may interpret a clause differently.

In our view, the issue caused by clause 50.1 could potentially have been remedied by:

• Inserting words along the lines of ‘in accordance with applicable law’, to ensure that there is no uncertainty (ie so that even in extreme circumstances, the obligation to continue operating the business would apply, so long as the business could operate within the confines of the law); or

• Inserting a provision which makes the contract contingent on there being no material change to the circumstances.

Key takeaway

Ultimately, this case demonstrates that when drafting contracts, it is crucial to accurately convey the parties’ intentions in specific terms. While it’s never possible to think of every risk or issue that can arise in a contract, the parties and their lawyers should turn their mind to them and endeavour to use unambiguous language. In turn, this could eliminate the need for a potentially costly and time consuming dispute, as demonstrated by the Laundy v Dyco case.

Authors: Michael Cossetto, Robert Lee and Maja Samardzic