Laundy v Dyco – 'carrying on a business' when the law changes suddenly

Contracts must account for changes in the legal environment 6 min read

The High Court, in recently considering the construction of a contract for the sale of the property and assets of a hotel business affected by the COVID-19 pandemic, unanimously found that the obligation to continue carrying on a business means that it must be conducted according to law, even if the law unexpectedly changes. We explain this important decision and its implications.

Key takeaways

• The High Court's decision in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd ¹ emphasises the importance of the terms of a contract and reiterates that contractual interpretation will, if it can be construed, consider legality at the time of the conduct.
• The meaning of 'carrying on a business' in its usual and ordinary course is an elastic concept that extends and retracts depending on changing circumstances.
• Commercial contracts must account for, and clearly explain, how changes in the legal environment affect the transaction, as this is an inherent risk in the conduct of any business that is regulated. Provisions can cover not only legislative changes but also broader regulatory changes, such as public health orders during a global pandemic.
• Parties to commercial contracts should be aware that wrongful termination and repudiation carry risks. While each case will turn on its facts, complying with lawful directions or mandated orders usually does not justify termination.

Who in your organisation needs to know about this?

Legal, risk and compliance teams will need to be aware of this decision, and the implications it has for the performance and termination of contracts.

The meaning of 'carrying on a business' according to law

Relevant facts 

On 31 January 2020, the appellant, Laundy Hotels (the vendor), entered into a contract for a sale to the respondent, Dyco Hotels (the purchaser), of the freehold hotel property of the Quarryman’s Hotel. The contract included the associated hotel licence, and the business assets such as electronic gaming machines and goodwill.²

'Vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner…' clause 50.1 of the sale contract

Completion was scheduled for 30 March 2020.³ However, seven days before completion, the relevant Minister made the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW) (the Public Health Order), and required hotels to be closed to the public, and their business restricted to the selling of takeaway food and alcohol.4 The vendor complied with the Public Health Order but, on 25 March 2020, was served notice that the purchaser would not complete the contract, as the vendor was not ready, willing and able to complete the contract due to a breach of clause 50.1, and the contract had been frustrated.⁵ In response, the vendor confirmed that it was able to perform its contractual obligations and called upon the purchaser to complete the contract.⁶

The decision at first instance

The Supreme Court of New South Wales found that the contract had not been frustrated and that clause 50.1, when properly construed, required the vendor to 'carry on the Business in the usual and ordinary course' as far as possible in accordance with law.⁷ As such, the vendor was not in breach of clause 50.1 and was entitled to serve notice on the purchaser to complete the sale.⁸ The purchaser, in failing to complete, qualified the vendor's right to terminate the contract and seek damages for loss of bargain.⁹

The decision on appeal  

The purchaser appealed the first instance decision and alleged that the primary judge misconstrued clause 50.1, arguing that from the date of the Public Health Order, the vendor was unable to comply with its obligations.¹⁰ Accordingly, the vendor was not ready, willing and able to complete the contract, and could not serve the notice to complete or terminate for the purchaser's failure to complete. Consequently, the vendor's termination was a repudiation of the contract.¹¹ The majority of the Court of Appeal allowed the appeal and set aside the primary judge's decision.¹²

The High Court's decision

The High Court unanimously allowed the appeal and restored the primary judge's decision, by finding that the vendor was 'ready, willing and able to complete' the sale, and was not in default of its contractual obligations at the time it served its notice to complete.¹³

'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.'¹⁴

By construing clause 50.1 from the perspective of a reasonable businessperson,¹⁵ in its context, the obligation on the vendor to 'carry on the Business in the usual and ordinary course as regards its nature, scope and manner' incorporated an inherent obligation to do so in accordance with law.¹⁶ Thus, the lawfulness of the business's operation was objectively essential and a commercial necessity to the parties, as without the hotel licence and associated gaming machine entitlements, there would be no 'Business'.¹⁷ Construing the clause in any other way would give effect to an inferred objective intention that the parties would expect the carrying on of business to be contrary to the law in force from time to time, and place risk on the hotel licence, giving rise to supervening illegality.¹⁸

The court also found that the requirement of legality did not need to be expressly stated in clause 50.1. Nor did it need to be implied, as legality could be inferred from a construction of the 'nature, scope and manner' in the context of the whole contract.19

The Public Health Order meant that the vendor was unable to carry on its business in the same way it had at the making of the contract; however, this did not mean it was not in compliance with clause 50.1.²⁰ The vendor was obliged to carry on the business in a way that was lawful and in compliance with the Public Health Order.²¹ Accordingly, it was not in default, and was 'ready, willing and able to complete',²² at the time it served the notice to complete. As time was of the essence, the purchaser was in breach of the contract, entitling the vendor to terminate the contract, keep the deposit and sue for damages.

Actions you can take now

• Review whether your existing commercial contracts contemplate changes in the legal environment through a 'change of law' clause or similar.
• Do not assume that a contract is frustrated or can be terminated where performance of a contract is affected by government action.