Illegality as an Excuse for Non-Performance: Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd

By Mark Skermer, Principal, and Darsh Chauhan, Law Clerk

Introduction

On 8 March 2023 the High Court of Australia delivered judgment in the matter of Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6. The Court unanimously held that the vendor party to the contract was not in breach of a provision requiring it to ‘carry on the Business in the usual and ordinary course as regards its nature, scope and manner’ by its failure to fully operate the hotel business following a declaration by the Minister restricting trading hours in response to the COVID-19 pandemic.

Background

The parties entered a contract for the sale of a hotel business. Clause 50 of the contract required the vendor to ‘carry on the Business in the usual and ordinary course as regards its nature, scope and manner’ until completion.

Between the date of execution of the contract and the date of settlement, the vendor reduced the operation of the hotel business in compliance with a direction issued by a State Minister in response to the COVID-19 pandemic. The purchaser refused to settle under the contract because it claimed that the vendor was in breach of clause 50.

On the settlement date the vendor issued the purchaser with a notice to complete and said that it was ready, willing, and able to effect the transaction. The purchaser did not respond but later received an updated valuation of the hotel for $1,000,000 less than its original valuation. It subsequently brought proceedings seeking a declaration that the contract had been frustrated or that the vendor was not entitled to issue the notice to complete. The vendor responded by serving on the purchaser a notice of termination for its failure to complete the purchase.

Issue and Decision

The Supreme Court of NSW found for the vendor at first instance and held that the vendor was entitled to loss of bargain damages by reason of the purchaser not settling. The purchaser appealed to the Court of Appeal of NSW and succeeded.

The vendor then appealed the decision of the Court of Appeal of NSW to the High Court.

By way of summary, the issue the High Court had to determine was whether the vendor was in default by failing to operate the business in its usual course in the lead-up to settlement.

The High Court unanimously allowed the appeal and held that the vendor could not be expected to carry on the business unlawfully during the period between the execution of the contract and the settlement date by reason of the COVID-19 restrictions.

The High Court held that the purchaser could not avoid completion of the contract simply because the valuation of the hotel had decreased between the date of the contract and the date of completion. In effect, the reduction in the scope of trade by the vendor was not treated as a basis to permit one of the contracting parties to abandon performance given the unique COVID-19 circumstances.

Takeaways

This case is authority for the proposition that if you enter into a contract, you will be obliged to perform it even if it no longer becomes in your commercial interests to do so. It is a good reminder for parties to maintain a healthy dialogue when communicating about performing their respective contractual obligations.

If you have any questions regarding this decision or any matters raised by it, please feel free to get in contact with Mark Skermer of the MST Dispute Resolution and Litigation team on (03) 8540 0262, or by email at mark.skermer@mst.com.au.