In the recent decision of Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd, 1 the NSW Supreme Court considered whether a party’s inability to carry on its business due to COVID-19 restrictions caused the seller to be in breach of its contractual obligations or the contract to be frustrated.
Dyco Hotels Pty Ltd (Seller) and Laundy Hotels (Quarry) Pty Ltd (Buyer) entered into a contract for the sale and purchase of The Quarrymans Hotel in Pyrmont, Sydney (Business) on 31 January 2020 (Contract). The Contract included, among other things, the transfer of the freehold hotel property, the business and its related licences. Settlement under the Contract was due to occur at the end of March 2020.
The Contract contained a number of boilerplate clauses for contracts of this nature, including, relevantly, clause 50.1, which imposed an obligation on the Seller to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner" from the contract date until completion of settlement.
On 23 March 2020 the Public Health (COVID-19 Places of Social Gathering) Order 2020 (Order) was made by the NSW Government and took effect from noon of that same date. Among other things, the Order forced the closure of all licensed premises, including hotels such as the Business, except for the purposes of providing takeaway food or beverages for consumption off-premises or to a person using the hotel for accommodation.
In compliance with the Order, the Seller ceased operations of the Business at noon on 23 March. However, in order to maximise sales and remain in operation as far as the Order permitted, the Seller re-opened for takeaway food and beverage sales and delivery on 26 March 2020.
Following these events, the Buyer claimed that:
Did the Seller breach the Contract?
Central to the case was to what extent, if any, clause 50.1 obliged the Seller to carry on the Business in a manner contrary to the Order, particularly as the Order was made after the contract was entered into.
In determining the scope and effect of clause 50.1, the Court considered what a reasonable business person in the position of the parties would have understood the clause to mean by reference to the wording of the clause, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the Contract.
The Court found that:
For the above reasons, the Court held that the Seller complied with its obligations under clause 50.1 and so did not breach the Contract.
Had the Contract been frustrated?
The Court considered whether the Order and the pandemic resulted in a fundamental commercial difference between the actual and contemplated performance of the Contract, or a fundamentally different situation, such that it would not be just to hold the parties to the Contract.
Applying the extrinsic evidence principal in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,2 the Court found that:
For the above reasons, the Court held that the Contract had not been frustrated and the parties remained bound by the Contract.
Some of the key takeaways of this case are:
If you would like to discuss how you might deal with COVID-19 implications in your contractual arrangements, please do not hesitate to contact us.