When you enter into a contract to buy a business, it may involve a lengthy settlement period. During this time, anything could happen. In the case of Quarryman’s Hotel, Covid-19 happened. In the eyes of the buyer, the business was no longer what it was, is the buyer still obliged to settle? In the eyes of the seller, a binding contract was signed, can the seller require the buyer to settle despite what happened?
The Quarryman’s Hotel is located at a prominent place in Pyrmont, Sydney. The seller was Laundy Hotels and the buyer was Dyco Hotels.
The parties entered into a contract for the hotel on 31 January 2020. The contract had a staged settlement to occur on 30 and 31 March 2020.
Just before the completion date the NSW government imposed restrictive public health orders. The buyer abandoned the deal and sued the seller to recover the deposit of $562,500.
Clause 50.1 of the contract stated that for the period between exchange and completion, the seller was required to "carry on the Business in the usual and ordinary course as regards its nature, scope and manner".
During this period, a NSW public health order restricted the operation of pubs. They could only sell takeaway food and beverages. The seller complied with the public health order as any failure to comply would have constituted a criminal offence. The seller operated hotel within the confines of the public health order.
Prior to settlement, the buyer indicated to the seller that settlement is not going to happen because the seller was not ready, willing and able to complete the contract.
The buyer argued that clause 50.1 had not been complied with as the business was being operated in a manner far different to what it was at the time of exchange.
In response, the seller served a notice to complete, and later terminated after the buyer failed to comply.
The buyer then commenced legal proceedings arguing:
That the contract had been frustrated, or
That the seller was not entitled to issue a notice to complete and terminate the contract, and the seller’s conduct amounted to a repudiation of the contract by the seller that had been validly accepted by the buyer.
In the first instance, Justice Darke found that:
The contract had not been frustrated by Covid-19 and the restrictive public health orders
The seller was not in breach of clause 50.1 as the clause required the seller to carry on business within the confines of the law
Justice Darke held that the seller was entitled to serve a notice to complete on the buyer.
In the appeal, the Court held that the public health order was a supervening event.
The Court held that the seller’s obligation under clause 50.1 was therefore suspended as it would have been illegal to comply with the clause.
The Court also held that the seller was not "ready, willing and able" to complete when it issued the notice to complete and therefore the seller then repudiated the contract.
The High Court held that the obligation to "carry on the Business in the usual and ordinary course" meant that it is inherently required to do so only in accordance with the law.
The Court considered objectively from the position of the reasonable business person.
The seller "was to carry on the Business in the manner it was being conducted at the time of the contract to the extent that doing so was lawful".
The Court indicated that proper construction of clause 50.1 meant it "could never extend to an obligation on the Vendor to act illegally". Operating the hotel under the public health order was considered to be business "in the usual and ordinary course" in the context.
The two parties went through a three-year legal battle. Each party’s legal costs would have amounted to at least about $1.5 million. The legal battle ended at the High Court, which said, the buyer had no right to walk away from the $11 million deal. The Court also awarded costs against the buyer plus interest.
The requirement to operate a business in "the usual and ordinary course as regards its nature, scope and manner" inherently requires the operation to be lawful. This does not need to be expressed or implied in the clause, but exists inherently.
If circumstances change significantly between the period of exchange and settlement, you should not simply assume the transaction is unable to be completed. You should carefully consider your obligations under the contract before taking action that could be considered repudiation.
It is crucial to consider all the potential risks that may occur prior to completion in any transaction, especially if the settlement period is lengthy. A buyer may consider adding a clause allowing termination of a contract where a supervening event or material adverse change affects the asset value or the business operation.
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*
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