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Covid-19 Contracts – were you “ready, willing and able” to carry on the business?

Did you enter into a contract during the Covid-19 pandemic?  If so, was your ability to complete any obligations under the contract impeded by the public health orders?  Finally, three years since the Covid-19 pandemic completely changed the way the business world operates, we have a High Court decision that clarifies how contractual obligations to carry on a business in its usual course are to be construed in the context of disruptions posed by the pandemic.

The High Court of Australia recently considered the construction of a contract for the sale of property and assets of a hotel business. The High Court found that the Vendor was obliged to carry on the business of the hotel in the manner it was being conducted at the time of signing the contract to the extent that doing so was lawful.

 What is the ordinary course of business when we are in extrordinary times: redefining the ordinary

On 31 January 2020, Laundy Hotels (the Vendor) and Dyco Hotels (the purchaser) entered into a contract for the sale of the Quarryman’s Hotel in Pyrmont, Sydney.  The contract contained a clause, 50.1, stating that the “Vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner…”.

The completion of the sale was originally set for 30 March 2020.  However, just seven days before the scheduled completion, the relevant Minister made the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW), which mandated the closure of hotels to the public and limited their operations to the sale of takeaway food and alcohol.  The Vendor complied with this order but received a notice on 25 March 2020 from the purchaser stating that they would not complete the contract.  The purchaser claimed that the Vendor had breached clause 50.1 and argued that the contract had been frustrated.  In response, the Vendor confirmed it was ready, willing and able to perform its contractual obligations and implored the purchaser to complete the contract.

The High Court allowed the appeal from the Court of Appeal of the Supreme Court of New South Wales and restored the primary judge’s decision by finding that the Vendor was “ready, willing and able to complete” and was not in default of its contractual obligations at the time it served the notice to complete.[1]

The High Court found that the crux of the matter came down to the proper construction of the contract it is context.  It referred to a passage in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd[2] where the Court reaffirmed that:

It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.”

By interpreting clause 50.1 from the perspective of a reasonable businessperson and considering its context, the High Court held that the Vendor had an inherent obligation to carry on the business in accordance with the law.  Moreover, the High Court noted that the lawfulness of the business’ operation was crucial for the parties involved, as the hotel license and gaming machine entitlements were essential components of the business itself.  Interpreting the clause differently would give effect to an inferred objective intention that the parties would expect that, from time to time, the carrying on of the business would be contrary to the current law – which would place at risk the continuation of the license.

The High Court determined that the requirement for the parties to carry out their obligations in a lawful manner did not have to be explicitly stated in clause 50.1 nor implied.  It found that legality could be inferred from the overall construction of the clause, considering the nature, scope, and manner of the business.

Although the Public Health Order prevented the Vendor from operating the business in the same manner as at the time of contract formation, it did not mean that the Vendor was in breach of clause 50.1. The Vendor was obligated to conduct the business lawfully and in compliance with the Public Health Order. Consequently, the Vendor was not in default and was prepared to fulfill their obligations at the time they served the notice to complete. Given the time-sensitive nature of the contract, the purchaser’s failure to comply constituted a breach, allowing the Vendor to terminate the contract, retain the deposit, and pursue damages.

 

You can read the full judgment here.

 

Did you enter into a contract during the Covid-19 pandemic?  If so, was your ability to complete any obligations under the contract impeded by the public health orders?  Finally, three years since the Covid-19 pandemic completely changed the way the business world operates, we have a High Court decision that clarifies how contractual obligations to carry on a business in its usual course are to be construed in the context of disruptions posed by the pandemic.

References

  1. Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6, [2].
  2. (2017) 261 CLR 544 at 551 [16], citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-657 [35] and the cases therein cited at fnn 58 and 60.