Dyco Hotels Pty Ltd & Ors v Laundy Hotels (Quarry) Pty Ltd

1. [1]

   BATHURST CJ: This appeal raises difficult questions as to the effect of a Public Health Order on a contract for sale between the appellants, Dyco Hotels Pty Ltd (Dyco) and Quarryman Hotel Operations Pty Ltd (Quarryman) (collectively called the appellants) as purchasers and the respondent as vendor of a hotel and associated business, known as the Quarrymans Hotel, situated at 214-216 Harris Street, Pyrmont. Although there was a single contract it involved the separate sale of the hotel property, the liquor licence and gaming machine entitlements to Dyco for a consideration totalling $9 million, and the goodwill, plant and equipment and what were described as Business Assets to Quarryman for a consideration of $2,250,000.

The background to the proceedings

1. [2]

   The contract for sale was dated 31 January 2020. It provided for completion of that part of the contract relating to assets to be purchased by Quarryman 55 days after the contract date, and those to be purchased by Dyco 56 days after that date. Because the 56 day period expired on a Saturday, it was agreed that settlement of the sale and purchase of the Business Assets would take place on 30 March 2020, and the settlement of the purchase of the property, licence and gaming machine entitlements take place on 31 March 2020.

2. [3]

   Clause 59.1 of the contract provided that if completion of the contract did not take place on the date specified due to default of the purchaser, interest at a rate of 7 per cent per annum would be paid on so much of the purchase price as remained outstanding from the date completion was due to take place until the date of actual completion.

3. [4]

   The contract also provided that if completion did not take place on the completion date, a party which was ready, willing and able to complete and not in default was entitled to serve the other party with a notice requiring completion not less than 10 business days after the date of that notice and making time of the essence.

4. [5]

   In an Information Memorandum, which it was acknowledged was made available to Dyco prior to the contract, the hotel was shown as trading on three levels with trading hours from 11.00am to midnight Monday to Saturday, and 11.00am to 10.00pm on Sunday. It was stated the average weekly revenue was $65,188 for the 2019 financial year.

5. [6]

   The contract made provision for management of the hotel prior to completion. Because it was at the forefront of the dispute between the parties, it is convenient to set out this provision (cl 50.1) at this stage of the judgment:

6. [7]

   On 23 March 2020 the Public Health (COVID-19 Places of Social Gathering) Order 2020 (the Public Health Order) came into effect. The order, which was made under the Public Health Act 2010 (NSW), relevantly provided that pubs must not be open to the public except for the purpose of selling food and beverages for persons to consume off the premises. “Pub” was defined as a licensed premises under the Liquor Act 2007 (NSW).

7. [8]

   Section 7(5) of the Public Health Act provides that orders made under the Act expire after a period of 90 days unless revoked earlier. On 14 May 2020, a substitute order was made: the Public Health (COVID-19 Restrictions on Gatherings and Movement) Order (No 2) 2020. The order relaxed the restrictions somewhat by providing that in addition to selling food and drink for consumption off the premises, licensed premises could sell food or drink to not more than 10 persons at any time but only if liquor was sold ancillary to food service.

8. [9]

   From 30 March 2020 up to the date on which the contract was terminated, the hotel sold craft beer from a takeaway window but food was only offered on select days because demand was minimal. Mr Patrick Maguire, the licensee of the hotel, gave evidence that alcohol sales for April were a little over $11,000 and food sales a little over $1,000, whilst in May alcohol sales were just over $7,000 and food sales were around $750. He stated that the hotel managed to retain six staff, compared to the previous period where, in addition to Mr Maguire, there were four full-time employees including three managers and a head chef, with up to 16 casuals as and when needed. There appears to have been no increase in trading as a result of the second Public Health Order.

9. [10]

   As I indicated settlement was due to take place on 30 and 31 March 2020. On 25 March 2020, the solicitors for the appellants wrote to the solicitors for the respondent asserting the respondent was not ready, willing and able to complete the contract because of the breach of Special Conditions cll 50.1, 58.1 and 58.2.

10. [11]

    On 27 March 2020, the solicitors for the appellants again wrote to the solicitors for the respondent asserting the contract had been frustrated or, alternatively, they were entitled to serve a Notice to Complete and terminate because of the respondent’s inability to complete the contract.

11. [12]

    On 27 March 2020, the solicitors for the respondent wrote to the solicitors for the appellants asserting that compliance with cl 50.1 was illegal because of the Public Health Order and the provision was severable by virtue of cl 63.7 of the contract. In a letter written on the same day they asserted the contract was not frustrated. On 31 March 2020 they supplied settlement figures to the solicitors for the appellants and on 6 April 2020 they wrote again asserting their client was ready, willing and able to complete.

12. [13]

    On 8 April 2020, the solicitors for the appellants wrote to the solicitors for the respondent again asserting the contract was frustrated. They also asserted cl 50.1 was not severable and as a consequence the respondent was not ready, willing and able to complete the contract.

13. [14]

    On 17 April 2020, the solicitors for the respondent wrote rejecting the assertions made on behalf of the appellants. However, the letter made what was described as an open offer to extend the time for completion to a date 14 days after the removal of the existing Public Health Order. It requested the appellants indicate their position by Monday 20 April 2020.

14. [15]

    On 21 April 2020, the solicitors for the respondent wrote demanding arrangements for settlement be made within the next two days and stating that if those arrangements were not made by 5.00pm on 23 April they envisaged they would be instructed to serve a Notice to Complete. On 22 April 2020, the solicitors for the appellants claimed the respondent was not entitled to serve such a notice. However, on 28 April 2020 a Notice to Complete was served.

15. [16]

    On the same day the appellants commenced the proceedings the subject of the appeal. The relief sought included a declaration that the contract was frustrated, a declaration that the defendant was not entitled to issue a Notice to Complete or alternatively, a declaration that whilst the Public Health Order was in force and the business was not trading as a going concern, the defendant was not ready, willing and able to complete the contract and not entitled to issue the notice requiring completion.

16. [17]

    On 21 May 2020, the solicitors for the respondent served a Notice of Termination of the contract on the solicitors for the appellants.

17. [18]

    On 23 May 2020, the solicitors for the appellants wrote to the solicitors for the respondent stating that if the Court held that the contract was not frustrated, the Notice of Termination issued on behalf of the respondent constituted a repudiation which was accepted.

The contract

1. [19]

   Basten JA, whose judgment in draft I have had the privilege of reading, has set out a number of the relevant provisions of the contract and I shall only add to them to the extent necessary to explain my reasoning.

2. [20]

   The contract was structured in such a way that Quarryman was to purchase the goodwill, plant and equipment and any remaining Business Assets for $2,225,000. “Business Assets” were defined as Business Records, Goodwill, the Contracts, Stock, Business Name, Domain Name, Facebook and Instagram accounts and the Lease.

3. [21]

   “Contracts” were defined in cl 33.1 as all agreements relating to the business, excluding employee contracts. “Goodwill” was defined as the goodwill of the Business including the exclusive right for the purchaser to represent itself as carrying on the Business as the vendor’s successor. “Business” was defined as the hotel business trading as the “Quarrymans Hotel”. “Lease” was defined as the lease in the same or similar form as the lease in Sch 10. In this regard cl 65.6 obliged the respondent on completion of the sale of the Business Assets to enter into a lease of the property with Quarryman as lessee.

4. [22]

   As I indicated, the completion of the sale of the Business Assets was to take place one day prior to the completion of the sale of the property, licence and gaming machine entitlements. To give effect to this proposal, on the date of the contract the respondent, Dyco and Quarryman entered into a Condition Subsequent Deed which provided for the manner in which the Business Sale Completion would take place. It involved, in effect, notional vendor finance being provided by the respondent to Quarryman to be repaid on settlement of the Property Sale and obliged Quarryman between the Business Sale Completion and the Property Sale Completion to occupy the property strictly in accordance with the Property Lease. The Property Lease was in identical terms to the lease in Sch 10 of the contract. It provided in cl 9.2 for the lessee to keep the business open during the usual hours of trade and actively conduct the business.

5. [23]

   Clause 48.8 of the contract contained a number of warranties given by the respondent in respect of the Liquor Licence. Of relevance are the following provisions:

6. [24]

   I have set out cl 50.1 above. Clauses 50.2 and 50.3 contained a number of the exceptions to that provision. Those provisions were in the following terms:

7. [25]

   Clause 50.4 provided that the obligation in cl 50.1 did not apply if the purchaser had given its prior written consent to the vendor in respect of a failure to comply with the obligation.

8. [26]

   Clause 51.7 provided that if a completion did not occur on the Completion Date, a party which was ready, willing and able to complete may serve a Notice to Complete.

9. [27]

   Clauses 57.1 and 57.2 provided that the title and risk to the assets would pass to the purchaser on completion.

10. [28]

    Clause 58.2 was in the following terms:

11. [29]

    Clause 63.7 dealt with severance. It provided as follows:

12. [30]

    Clause 65 provided that the sale of the property, licence and gaming machine entitlements was conditional on and interdependent with the sale of the Business Assets.

The primary judgment

1. [31]

   The primary judge concluded that the obligation in cl 50.1 was limited to the carrying on of the hotel business according to law. He summarised his conclusion as follows:

2. [32]

   His Honour rejected the claim that the contract was frustrated. Although there was no appeal from that decision, his reasoning explains his approach on the question of construction. Referring to the decision in Lindsay-Owen v Associated Dairies Pty Ltd [2000] NSWSC 1095, he made the following remarks:

3. [33]

   In light of these conclusions the primary judge held that the respondent was entitled to terminate the contract and assessed damages and interest in its favour in an amount of $937,044.11.

The issues in the appeal

1. [34]

   In the appeal the appellants challenged the conclusion of the primary judge that cl 50.1 was limited to require the respondent only to carry on the business to the extent permitted by law. They contended that it ought to have been held that from the date of the Public Health Order the respondent was unable to carry on the business as provided by cl 50.1 (Issue No 1 on the appeal).

2. [35]

   The second issue was whether it followed that the respondent was not entitled to issue the Notice to Complete or terminate the contract based on non-compliance with it. It was contended the purported termination amounted to a repudiation of the contract by the respondent (Issue No 2 on the appeal).

3. [36]

   By notice of contention the respondent contended that the primary judge should have implied a term into the contract to the effect that the obligation of the respondent to trade between exchange and settlement was to trade according to law (Issue No 1 on the notice of contention).

4. [37]

   The respondent also contended that the primary judge should have found that cl 50.1 was severable to the extent it required the respondent to trade in contravention of the Public Health Order (Issue No 2 on the notice of contention).

5. [38]

   The respondent also contended that the primary judge should have found the respondent lawfully terminated the contract following the appellants’ repudiation by asserting that the contract had been discharged by frustration, refusing to co-operate to settle and commencing the proceedings in the Court below (Issue No 3 on the notice of contention).

The construction of cl 50.1 (Issue No 1 on the appeal and Issue No 1 on the notice of contention)

1. [39]

   The principles of construction relevant in determining these issues are not in dispute. Clause 50.1, like any other provision in a contract, is to be construed by what a reasonable person would understand it to mean. That requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or object to be served by the contract: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18], [78]; Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392 at [51].

2. [40]

   Clause 50.1 required the Business to be conducted in its usual and ordinary course. As I have indicated, “Business” was defined as the hotel business trading as the Quarrymans Hotel. In interpreting the expression “usual and ordinary course”, reference was made by the appellants to the interpretation of the expression “ordinary course of business” in the context of bankruptcy and insolvency legislation. Thus in Taylor v White (1964) 110 CLR 129; [1964] HCA 11, Dixon CJ at 136 described the expression “in the ordinary course of business” in the following terms:

3. [41]

   However, it must be remembered that what was referred to in cl 50.1 was the usual and ordinary course of the defined Business. The clause was focusing on how the particular business was conducted, not the usual course of a hotel business generally, much less the usual course of businesses referred to in statutes of general application.

4. [42]

   That is also made clear by the succeeding words in cl 50.1, “as regards its nature, scope and manner”. “Nature” refers to the type of business, a hotel business, “scope” refers to the extent that business is carried on and “manner” refers to how it is carried on. It can be readily inferred that all these matters were known to the parties having regard to the terms of the Information Memorandum.

5. [43]

   That does not mean that cl 50.1 required that the Business be carried on between the date of contract and the date of completion in an identical manner to the way it was carried on pre-contract. There may be variations in the manner or extent the Business was carried on due, for example, to economic or regulatory requirements. Provided the Business can still be seen to be carried on in the usual or ordinary course having regard to its nature, scope and manner, the obligations in cl 50.1 will be complied with.

6. [44]

   By contrast, the primary judge construed the clause as obliging the respondent to carry out the Business in the usual and ordinary course as regards its nature, scope and manner, so far as it was permitted to do so according to law.

7. [45]

   There are, with respect, a number of difficulties with this construction. First, it is not what the clause says. Second, it ignores the fact that cl 50.4 provided the obligation in cl 50.1 could be varied with the written consent of the purchaser. Third, it carries with it the possibility that cl 50.1 could be complied with irrespective of whether what is carried out as a result of the restriction imposed bears any resemblance to the usual or ordinary course of the business of the Quarrymans Hotel as regards its nature, scope and manner. In my opinion, that does not conform with the objective intention of the parties having regard to the purpose of the transaction.

8. [46]

   The present case falls within this category. Selling craft beer in takeaway vessels (referred to as “Growlers” or “Squealers”) from a takeaway window and food on limited occasions from the same window with a skeleton staff, could not be said to amount to the carrying on of the business of the Quarrymans Hotel as regards its nature, scope and manner. Trading in that fashion bears no resemblance to trading in food and liquor from a three storey hotel open to the public.

9. [47]

   The construction of cl 50.1 which I prefer is supported by context, in particular the warranties in cl 48.8(f) and cl 48.8(r) which emphasised the importance of the licence permitting the trading activities to be carried on.

10. [48]

    Contextual support is further provided by the Lease, which provides an express obligation that the lessee will keep the premises open during the usual hours of trading.

11. [49]

    The construction of cl 50.1 preferred by the primary judge may have been influenced by his conclusion on the frustration issue that the Assets (as defined) and the Business (as defined) remained able to be transferred, even if the conduct of the Business was affected by the Public Health Orders. It also may have been influenced by his conclusion that the essential nature of the contract was the sale and transfer of the particular assets at an agreed price: see PJ [104]-[105] referred to at [32] above. Whilst in one sense that may be correct, it is evident that the purpose of the transaction was to sell the Business as a going concern not simply as a group of assets which, if the Public Health Order was revoked, gave the owner the capacity to operate a hotel of the nature of that envisaged in cl 50.1.

12. [50]

    It also must be remembered that cl 57.2 provided that risk passed on completion not on contract. Such risk was described by Dixon J in Fletcher v Manton (1940) 64 CLR 37 at 48; [1940] HCA 32 (in circumstances where risk passed on contract) as whatever loss or detriment may fortuitously befall the property or be placed by law upon the person filling the character of owner. Such risk would include the significant restriction on trading resulting from the Public Health Orders.

13. [51]

    Nor is it appropriate to imply a term to the effect that the obligation in cl 50.1 was limited to the extent permitted by law. As senior counsel for the appellants pointed out, it is not reasonable. The effect would be that any legal limitations on the ability of the hotel to trade, no matter how serious or how prolonged, would have no effect on the purchasers’ obligation to complete the contract irrespective of whether the restraint could otherwise be said to frustrate the contract or deprive the purchasers of the substantial benefit of it. It seems to me that such a clause is not only unreasonable, it is not one in the context of the present transaction where the risk remained with the purchasers until completion that is so obvious that it goes without saying.

14. [52]

    For this reason cl 50.1 was not limited in the manner suggested by the primary judge, nor is there an implied term to that effect.

Severability – Issue No 2 on the notice of contention

1. [53]

   I have set out the severability provision, cl 63.7 above. The question is whether the provision operates to sever cl 50.1 in the context of what might be described as a temporary supervening illegality.

2. [54]

   The first thing to note is that the provision is contingent on a court declaring any part of a contract void, voidable, illegal or unenforceable. No application for such a declaration has been made. The respondent has contended that the clause should be read down, whilst the appellants accept that the effect of the Public Health Order was to suspend the necessity for complying with the obligation whilst contending that the inability of the respondent to transfer the hotel as a going concern meant it was not able to require completion at the time of the service of the Notice to Complete or at the time of termination.

3. [55]

   The second matter to note is that the effect of the Public Health Order was to render cl 50.1 unenforceable during the course of the Public Health Order at least to the extent described in [73] below. It does not seem to me that cl 63.7 can operate to effect a temporary severance. Thus, in the circumstances of the present case, if the Public Health Order expired or was revoked prior to the date fixed for completion the severed obligation in cl 50.1 would not again become operative and the respondent would be free to ignore the provision if it regarded it as in its interests to do so.

4. [56]

   The third matter is this. Although the provision is broadly expressed, I do not think it was intended to operate irrespective of the effect severance of a particular provision would have on the rights and obligations of the parties of the contract. In the well-known passage in the judgment of Jordan CJ in McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345, he set out one of the conditions for severance in the following terms:

5. [57]

   In the present case it seems to me that the obligation to carry on the Business up to completion formed part of an indivisible whole by which the property and business of the hotel was to be transferred to the appellants as a going concern. Notwithstanding the width of cl 63.7 I do not consider this provision was severable from the balance of the contract.

Was the respondent entitled to issue the Notice to Complete and terminate the contract (Issue 2 on the appeal)

1. [58]

   It was not disputed that the primary judge was correct in his conclusion that the contract was not frustrated. In so concluding, the primary judge found that terms of the contract, particularly the promises to sell and transfer the assets in return for the agreed price in circumstances where no warranties were given as to future financial performance, were wide enough to apply to the new situation as it emerged (PJ [110]).

2. [59]

   The primary judge reached this conclusion in circumstances where he had held that cl 50.1 only obliged the respondent to carry on the Business to the extent permitted by law. It was not necessary for the primary judge to consider the issue if cl 50.1 was not limited in that way.

3. [60]

   Although there is no appeal from the conclusion of the primary judge on the question of frustration, it is necessary to consider the effect of the supervening illegality of cl 50.1 and particularly whether the appellants were obliged to complete the contract in circumstances where what was being transferred to them was not a going concern.

4. [61]

   The appellants contended that the obligation under cl 50.1 was suspended by the Public Health Order, and that whilst the hotel could not trade in the manner provided for by that clause, the respondent could not compel completion. They relied on cases involving the enforcement of contracts between citizens of warring countries during the currency of war.

5. [62]

   The first of the cases relied upon was Arab Bank Ltd v Barclays Bank (Dominion, Colonial & Overseas) Ltd [1954] AC 495. The proceedings involved the right of the appellant to be paid money due on a current account frozen as a consequence of the 1948 Arab-Israeli War. The appellant sued the respondent for monies due on the account as money had and received on the basis that the contract between it and the respondent was frustrated. The House of Lords rejected this claim, stating the liability to pay the monies held on the current account had been suspended, not terminated: see Lord Morton at 527, 529; Lord Reid at 530.

6. [63]

   The second of the cases relied upon, Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728, involved a dispute concerning monies due on a call account in circumstances where payment would have been illegal. The plaintiff sued the defendant in debt or damages, or alternatively, for money had and received on the basis the contract had been frustrated. Staughton J rejected the submission that the principle in Arab Bank Ltd v Barclays Bank was limited to cases concerning the outbreak of war. In rejecting the submission that the contract was frustrated and that money was recoverable as money had and received, he made the following remarks (at 772):

7. [64]

   That decision is cited in Heydon on Contract at [23.120] as authority for the general proposition that when illegality is temporary, the relevant obligation is suspended rather than discharged. In Chitty on Contracts (34th ed, 2021, Sweet & Maxwell), it is cited at 26-098 as authority for the proposition that English law recognises that in certain circumstances the contractor may have a partial excuse for non-performance of a contractual obligation, whilst in Trietel on The Law of Contract (15th ed, 2020, Sweet & Maxwell) it is cited at 19-053 for the proposition that where temporary illegality does not discharge the contract, it provides an excuse for non-performance for so long as the prohibition lasts.

8. [65]

   The appellants placed particular reliance on the decision of Marcus Smith J in Canary Wharf (BP 4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch). The facts were complex, but in broad outline the defendant contended a lease between it and the claimant of premises at Canary Wharf in London had been or would be frustrated as a result of immunities lost by the defendant consequent on the withdrawal by the United Kingdom from the European Union. In the course of his judgment, Marcus Smith J made the following remarks (at [41]):

9. [66]

   The principle that supervening illegality can constitute an excuse for non-performance of a contractual obligation whilst not frustrating the contract is demonstrated by a number of cases concerning covenants in leases.

10. [67]

    In Gerraty v McGavin (1914) 18 CLR 152; [1914] HCA 23, a lease of land contained a covenant that the lessee would “cause the baking business now carried on to be still carried on and kept alive”. Because of certain legislation introduced during the term of the lease, it became impossible to use the bakehouse. The lessor was held not entitled to rely on the breach of covenant to forfeit the lease. Griffith CJ made the following remarks (at 162):

11. [68]

    Both parties relied on this decision. The appellants relied on it in support of the proposition that the effect of the primary judge’s reading down of cl 50.1 resulted in the creation of a new or different obligation on the vendor and the loss of a right by the purchasers. It was relied upon by the respondent as demonstrating that the unenforceability of a covenant due to illegality did not lead to the suspension of other obligations absent frustration.

12. [69]

    In Cricklewood Property & Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 the lessees obtained a lease of land of 99 years at a peppercorn rent until the lessors gave notice that the erection of shops on the land might proceed, after which an annual ground rent would be payable. The lessors gave the requisite notice, but the lessees claimed that the obligation to pay the ground rent had been excused or discharged by frustration as wartime restrictions made it impossible to erect the shops. It was unanimously held that even if the doctrine of frustration applied to leases, the lease was not frustrated and the lessees remained liable to pay the ground rent. Lord Russell of Killowen made the following remarks at 233:

13. [70]

    It can be seen that Lord Russell’s conclusion was based on his view of the proper construction of the contract. Likewise in the present case, whether the appellants were required to complete the contract depends on whether as a matter of construction the appellants were obliged to accept a transfer of the property and other assets where the hotel was not being operated in the manner envisaged by cl 50.1.

14. [71]

    A similar conclusion with that reached in Cricklewood was reached in John Lewis Properties plc v Viscount Chelsea [1993] 2 EGLR 77 at 82.

15. [72]

    The critical question thus is whether on the proper construction of the contract, the respondent was entitled to demand completion in circumstances where it was not able to deliver possession of the hotel as a going concern. An affirmative answer to this question may seem surprising. It would involve the respondent not only being excused from liability for contravention of cl 50.1, but to be able to take advantage of that by compelling the appellants to accept a conveyance of the property in circumstances quite different to what was envisaged at the time of contract.

16. [73]

    I do not think this result follows. The contract on its proper construction requires the hotel licence and other assets to be conveyed as a going concern, which at the time of the Notice to Complete and termination was prevented by the Public Health Order. Although the respondent was excused from any liability for damages for non-compliance with cl 50.1 and the appellants would not have been entitled to terminate on this ground, it does not follow that at the time the respondent was ready, willing and able to complete the contract, a necessary pre-condition for serving the Notice to Complete both at law and pursuant to cl 51.7: see McNally v Waitzer [1981] 1 NSWLR 294 at 303-304 (where Hutley JA described the correct rule as “that a vendor who is in default in respect of things which up until then should have been done cannot give a notice to complete, but he can give notice to complete prior to performing all those other things which he has to perform in order to complete the contract”).

17. [74]

    This is for the following reasons. First, it is evident from the terms of cl 50.1 itself that the parties’ expectation was that the hotel be transferred as a going concern. Clause 50.1 was designed to preserve this position between contract and completion. It seems to me that cl 50.1 of the contract was an essential term in that a purchaser would not have entered into the contract without the contractual assurance that the business would be maintained until completion: see Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642; Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 337; [1951] HCA 24.

18. [75]

    Second, the purchase price was apportioned as the $2,500,000 for the Licence and Gaming Machine Entitlements, $750,000 for goodwill and $1,500,000 for plant and equipment. Leaving aside the hypothetical possibility of the Licence and Gaming Machine Entitlements being transferred to another hotel, these assets would be of no benefit to the purchaser unless and until the hotel was operational.

19. [76]

    Third, as I have pointed out, the risk up to completion remained with the respondent. Requiring the appellants to complete the transaction in circumstances where a risk had materialised between contract and completion and to bear the loss flowing from that risk, is contrary to that provision.

20. [77]

    In these circumstances I am of the view that the respondent was not ready or able to complete the contract at the time of the Notice to Complete or at the time it purported to terminate the contract in reliance on that notice. The purported termination amounted to a repudiation of the contract which, subject to Issue No 3 on the notice of contention, entitled the appellants to accept the repudiation and treat the contract at an end.

Repudiation by the appellants (Issue No 3 on the notice of contention)

1. [78]

   This matter can be dealt with shortly. The respondent contended that three matters demonstrated that the appellants repudiated the contract. The second and third of these matters, namely, refusing to settle and commencing the proceedings the subject of the appeal, could not amount to repudiation as the respondent was not entitled to call upon the appellants to complete the contract.

2. [79]

   The other matter relied upon was the contention made by the solicitors for the appellants in the correspondence leading up to the respondent’s purported termination of the contract that the contract was frustrated. Although the appellants’ solicitors in their letter of 27 March 2020 asserted the contract was frustrated, that was accompanied by a statement that their clients did not wish to resort to “contractual remedies” and proposed a method of resolution. It also stated that if legal proceedings were necessary, the letter would be tendered on an application for a special costs order.

3. [80]

   The assertion that the contract was frustrated was repeated in the letter from the solicitors for the appellants of 8 April 2020. That letter set out the basis the claim of frustration was made and indicated that if the contract was not frustrated, the respondent was not ready, willing and able to complete the contract. It also stated the appellants’ rights were reserved.

4. [81]

   The proceedings were commenced on 28 April and the relief sought included declaratory relief that the contract had been frustrated and that the parties’ obligations had been discharged. Importantly it sought the following alternate relief:

5. [82]

   I do not think this conduct amounted to repudiation of the contract. A party repudiates a contract when he or she evinces an intention no longer to be bound by the contract or fulfil it in a manner substantially inconsistent with that party’s obligations. The test is whether the conduct of one party is such as to convey to a reasonable person in the position of the other party renunciation either of the contract as a whole or a fundamental obligation under it: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 647; [1989] HCA 23; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61 at [44].

6. [83]

   However, repudiation is not to be inferred lightly. As was pointed out by the plurality in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432; [1978] HCA 12, although there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he or she will not perform the contract according to its terms, there are others in which a party, though asserting a wrong view of the contract because he or she believes it to be correct, may be willing to accept an authoritative exposition of the correct interpretation. The plurality stated that in those circumstances an intention to repudiate will not be attributed to that party.

7. [84]

   The present case falls within the latter category. The appellants were correct in asserting that they were not required to complete the contract and sought a declaration raising that question in addition to the question of frustration. There is no reason to suggest they would not have accepted the Court’s conclusion on these issues. In these circumstances their conduct did not amount to a repudiation of the contract.

Conclusion

1. [85]

   The appellants were entitled to accept the respondent’s purported termination of the contract as a repudiation and terminate the contract. In these circumstances they had no liability to the respondent for damages and are entitled to a return of the deposit. The appeal should be allowed and the following orders made:

   1. (1)

      Appeal allowed.

   2. (2)

      Set aside the orders made by the primary judge and in lieu make the following orders:

   3. (3)

      Order the respondent pay the appellants’ costs of the appeal and have a Certificate under the Suitors’ Fund Act 1951 (NSW) if eligible.

2. [86]

   BASTEN JA: This case involves a question as to the effect of a public health order on an uncompleted contract for the sale of a hotel and associated business as a going concern, in March 2020. Contracts were signed on 31 January 2020, with a completion date for the transfer of the hotel business on 27 March 2020. At midday on 23 March 2020 the Public Health (Covid-19 Places of Social Gathering) Order 2020 commenced, limiting the hotel to take-away orders for a period of 90 days. Settlement did not take place because the purchasers asserted that either there was a breach of the vendor’s obligations, or the contract had been frustrated, because the effect of the public health order was to prevent the vendor carrying on business in the usual and ordinary course up until settlement, as required by a term of the contract.

3. [87]

   On 25 May 2020 the purchasers, Dyco Hotels Pty Ltd (“Dyco”) and Quarryman Hotel Operations Pty Ltd (“Quarryman”), commenced proceedings in the Equity Division (Real Property List) seeking a number of declarations and consequential orders. The primary declaration sought was that the contract had been frustrated; the purchasers sought return of the deposit. In the alternative, the purchasers sought a declaration that the vendor, Laundy Hotels (Quarry) Pty Ltd, had repudiated the contract or that it was not ready, willing and able to complete the contract and was not entitled to issue a notice to complete on 28 April 2020, as it had done.

4. [88]

   In response, the vendor filed a cross-claim seeking a declaration that the contract had been terminated by the service of a notice of termination on the purchasers on 22 May 2020, a declaration that the deposit was forfeit and damages.

5. [89]

   The matter was heard by Darke J in mid-April 2021. On 10 May 2021 Darke J delivered judgment, holding that (i) the contract had not been frustrated; (ii) the vendor was not in breach; (iii) the vendor had been entitled to terminate the contract for breach by the purchasers and was therefore entitled to retain the deposit and recover damages. Damages were assessed at $900,000.

6. [90]

   On 2 August 2021 the purchasers filed an appeal challenging the findings that the vendor was entitled to issue a notice to complete on 28 April 2020 and had validly terminated the contract, and sought an order for repayment of the deposit. The appeal did not seek to renew the claim that the contract had been frustrated, which had been rejected by the trial judge, but asserted that the effect of the Public Health Order was to prevent the vendor complying with the condition of the contract as to the continued running of the business and was thus unable to deliver the property and business the subject of the contract. Although it was not said to be in breach of the contract, it was not entitled to enforce performance by the purchaser.

7. [91]

   For the reasons set out below, in my view Darke J was correct in his analysis and in the orders made. The appeal should be dismissed.

Sale contract

1. [92]

   The contract adopted the NSW standard form contract for the sale and purchase of land (2019 edition), together with lengthy additional clauses necessary for the sale of the hotel business with the land. The purchase price was $11,250,000. [1] The contract was in two parts: in addition to the standard form contract with additional clauses, there was a “Condition Subsequent Deed” (“the Deed”) executed on the same date and between the same parties. The property sale contract provided that the property would be transferred to Dyco and the business assets to Quarryman. The Deed provided that Quarryman would take a lease of the property from the vendor which would entitle it to possession and required it to carry on the hotel business “in a good and businesslike manner.” [2] The lease accompanying the Deed was expressed to be for a period of two years with three further options each for a term of three years. The starting rent was identified as $390,000 per annum. The effect was that, although the goodwill of the business was transferred as a business asset to Dyco, the business itself was transferred to Quarryman.

2. [93]

   The date of the contract was 31 January 2020; completion was fixed to occur in two stages. First, the completion date for the sale of the “Business Assets” was 55 days after the contract date and the completion date for the property, licence and gaming machine entitlements was the following day. Although the original dates for completion would have been Friday 27 and Saturday 28 March 2020, by agreement reached on 13 February 2020 settlement was postponed until Monday 30 March and Tuesday 31 March respectively. [3]

3. [94]

   Central to the purchasers’ case was the proper construction and operation of cl 50. The clause was entitled “Management Prior to Completion” and provided:

4. [95]

   The structure of the clause involves several discrete obligations imposed on the vendor by cl 50.1, subject to exceptions in cl 50.2, and prohibitions in cl 50.3. Both the obligations and the prohibitions could be varied by consent: cl 50.4.

5. [96]

   There were in effect three categories of obligation in cl 50.1, namely (i) carrying on the business, (ii) repairing and maintaining the Assets and (iii) using reasonable endeavours to maintain the inventory. The obligations were encompassed by four defined terms, which were defined in cl 33.1 as follows:

6. [97]

   Three questions arose as to the meaning and operation of the first limb of cl 50.1, namely (i) did it impose an obligation to carry on the business in a manner which was unlawful; (ii) did compliance involve a condition precedent to completion, and (iii) to the extent that it could not be lawfully complied with, was it severable? Although much time was spent debating the first point and the third, the critical issue, which underlay the appellants’ case, was the second. Relevantly to that question, cl 35 provided:

7. [98]

   Item 13 of Schedule 1 identified two conditions precedent, namely:

8. [99]

   The term “Lease” was identified as a lease in the same or similar form to the lease set out in Schedule 10. Schedule 10, consistently with the Condition Subsequent Deed, identified the lessor as Laundy Hotels (Quarry) Pty Ltd, the vendor under the sale contract, and the lessee as Quarryman Hotel Operations Pty Ltd, which was the purchaser of the goodwill, plant and equipment and any remaining business assets under the sale contract. [4]

9. [100]

   Clause 66 disclosed a notification by Ausgrid requiring work to be done to repair pipes and sewer lines located on the property or on the footpath in Pyrmont Bridge Road adjacent to the property. Clause 66.2 commenced:

10. [101]

    Clause 66.3 stated that the parties were agreed that condition 66.2 would be deemed to be satisfied if the vendor procured a letter from Sydney Water and Ausgrid confirming that the issue identified in the notification had been resolved. Clause 66.4 provided for deferral of completion in the event that the vendor was unable to satisfy cl 66.2.

11. [102]

    Clause 50 is not identified in Schedule 1, item 13, as a condition precedent to completion for the purposes of cl 35. While this omission is not conclusive, it is significant that an additional clause dealt expressly with conditions precedent, identified two matters, but did not identify the obligations of the vendor under cl 50.1, or any of them, nor the prohibitions contained in cl 50.3.

12. [103]

    Another formula used in the contract was the identification of “an essential provision of this contract”; thus cl 36 provided as follows:

13. [104]

    Clauses 9 (Purchasers default) and 19 (Rescission of contract) are provisions found in the standard terms. Although cl 33.5 of the additional clauses expressly varied a number of clauses in the standard terms, cll 9 and 19 were unaffected. Clause 9 was as follows:

14. [105]

    In relation to cl 19.2, the word “Normally” is defined in cl 1 to mean “subject to any other provision of this contract”. Additional cl 13.5 omitted that word from a number of clauses in the standard terms, but not cl 19. Nevertheless, cl 33.5(b) provided that if there were any inconsistency between the standard terms and the additional clauses, the additional clauses would prevail. However relevantly for present purposes, there was no language in cl 50 identifying its terms as an essential provision of the contract. It followed that, if compliance with cl 50.1 (first limb) were to be identified as a condition precedent to completion, it had to be by way of implication in circumstances where other matters had been dealt with in precise detail with, where considered appropriate, express identification of what was a condition precedent.

15. [106]

    Clause 38 of the additional clauses excluded any warranties by the vendor (other than those provided for by statute or regulation) and, in particular, as to the present and future financial income to be derived from the property or the business: cl 38.1(b)(iv). Clause 38.1(d) provided:

16. [107]

    Clause 63 contained a variety of provisions. In particular, reference may be had to the following:

17. [108]

    Finally, cl 65 dealing with “Interdependency and Completion” provided as follows:

18. [109]

    Clause 65.3, consistently with cl 35, required only satisfaction of condition precedents in item 13 of Schedule 1 as necessary preconditions to completion of the sale. Clause 65.6 obliged the parties to enter into the lease, prior to completion, again consistently with the terms of cl 35 and Schedule 1, item 13. It may thus be understood that entry into the lease was critical to the ability of the purchaser to carry on the business of the hotel.

Appellants’ submissions

1. [110]

   The appellants’ written submissions identified the basis of the appeal in the following terms, namely that the judge erred in:

2. [111]

   The matters which were not in dispute were identified as follows:

3. [112]

   The appellants’ case was that the operation of the Order was a “supervening illegality” which prevented the vendor from operating the hotel in accordance with the terms of cl 50.1. The appellants further stated that they had “never contended that the [vendor] was required to carry on business in an unlawful manner.” That may be so, but the trial judge noted that the “central issue” in the case was whether the contract for sale was discharged by frustration. [13] Where there is a supervening illegality which does not affect the creation of the bargain, nor render the bargain as a whole unable to be performed legally, but rather precludes some part of the contractual obligations of one party, it is necessary to identify with some care the basis on which it is said that the other party is excused from performance of its obligations, where the contract is not frustrated. For example, the position of the vendor which is not in breach of any obligation cannot be worse than it would have been if it had breached the contract and some guidance may be obtained from cases dealing with breach. On the other hand, the effect of the event may bear a close relationship with the concept of frustration, so that the event would be unlikely to discharge the purchaser’s obligations in circumstances where that would be the result of a finding of frustration. Further, the appellants did not submit that failure to complete some part of the vendor’s obligations under the contract would necessarily discharge the purchaser from its obligations. As expressed in the written submissions, non-compliance with cl 50.1 defeated the “commercial purpose of the clause”, which was described in the following terms: [14]

4. [113]

   So expressed, it is by no means clear that the factual premise was established on the evidence. Nor was the Court invited to make a factual finding as to the requirements of financiers. As noted by the trial judge, the evidence revealed that the purchasers had obtained a conditional offer of a $6.5 million bill facility on the basis that “[a]ctual EBITDA [would be] not less than 80% of Valuation EBITDA used in the last going concern valuation.” [15] The judge noted that the evidence included a recent valuation based upon an adjusted net profit figure for the business, but which “does not specify any particular EBITDA figure”. [16] There was no reference in the judgment to any valuation of goodwill, or variation in the value of goodwill as a result of the commencement of the Order.

5. [114]

   The appellants’ written submissions did not formulate the issue in terms of inability to comply with a condition precedent for completion, or an essential term of the contract, as opposed to a warranty.

6. [115]

   In the course of oral submissions senior counsel for the appellants contended that the effect of limiting the obligation to continue to trade as restricted to lawful conduct was to reallocate the risk from the vendor to the purchasers, which was not an outcome which would be contemplated by an objective and reasonable party. [17] While not accepting that an implied limitation as to lawful conduct should be imposed on cl 50.1, the appellants contended that compliance with cl 50.1 was, by implication, a condition precedent to completion.

7. [116]

   Nevertheless, counsel further submitted: [18]

8. [117]

   In reply, counsel returned to the fact that the appellants did not challenge the finding that the contract had not been frustrated. Noting that frustration was “an extreme remedy”, the submission continued: [20]

9. [118]

   It will be necessary to return to these propositions. However two points may be noted at this stage. First, the “extreme remedy” was in fact what the appellants sought. That is, they sought to be discharged from their obligations to complete the contract and sought to have the deposit returned to them. Secondly, the evidence did not demonstrate that the damages recovered by the vendor at trial represented the loss in value of the property and business as at the date of completion. Indeed, on one view the failure to complete was quite unlikely to be attributable to the fact that the business had been running on a dramatically reduced basis for five days prior to the dates fixed for completion, as opposed to the likelihood that it would continue to run on that basis thereafter. The point is not to identify an actual motivation of one or other party, but to identify the importance of defining the nature of the supervening illegality and its likely period of operation. On one view, the appellants’ case was encapsulated in the proposition (whether correct or not) that what was sought to be conveyed at settlement was “just not the same business”. That is very much the language of frustration, though not perhaps a total failure of consideration.

10. [119]

    In the light of these submissions, it is necessary to have careful regard to the legal principles engaged.

Relevant legal principles

1. [120]

   The appellants drew attention to the judgment of Marcus Smith J in the Chancery Division, Canary Wharf (BP4) T1 Ltd v European Medicines Agency. [21] They did so in order to identify a discussion of two types of frustrating events. One was identified as “frustration of common purpose”, the other as frustration by “subsequent legal changes and supervening illegality”. The issue in Canary Wharf was the ongoing operation of a lease held by an agency of the European Union in the face of Britain’s exit from the European Union (Brexit). Marcus Smith J, in considering the latter category, extracted a statement of Lord Simon LC in Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd, [22] to the following effect:

2. [121]

   In some respects, statements at a high level of generality are unhelpful in a particular case. Thus, in the present case, there was nothing illegal in the performance of the purchaser’s obligations under the contract: all that was required was that it pay money. The subject matter of the contract remained perfectly legal and the receipt of the money by the vendor remained perfectly legal. The only element of illegality was the constraint imposed on the operation of the business by the Public Health Order. What is more, the argument that the business being conveyed was simply not the business which the purchaser had contracted to buy has little to do with breach, or even faultless non-compliance with cl 50.1 of the contract. Indeed, if the argument set out below is correct and there was no non-compliance with the clause according to its proper construction, it would still be true that the business being conveyed was in a sense different from the business that the purchaser intended to acquire, if restrictions on operating the business during a pandemic could properly be characterised as having that effect.

3. [122]

   The language adopted by the purchasers reflects that of the long standing statement of principle articulated by Lord Radcliffe in Davis Contractors Ltd v Fareham, [23] that “frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.” In the present case, the purchasers were saying, “this is not the business we contracted to buy.” In this Court, though not in the court below, the appellants eschewed reliance on the doctrine of frustration. There may have been good reason for that, but the language of frustration was invoked.

(a) requirement of lawful conduct

1. [123]

   Properly understood, the appellants’ case turned on two (not entirely consistent) propositions based on construction of the contract, and in particular the scope and operation of the first limb of cl 50.1. The first issue concerned the finding made by the trial judge that the vendor’s obligation was limited to carrying on the business in a lawful manner, a finding expressed as follows:

2. [124]

   The appellants submitted that this conclusion involved the addition of an implied term in circumstances where as a matter of principle no term could be implied, either because it could not be said that had such a term been proposed they would have accepted it as of course, or because the term was inconsistent with the clear language of the contract. In short, it did not comply with the requirements identified by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings. [24] On the other hand, there is a fine line between the so-called implication of a term and the orthodox exercise of contractual construction. [25]

3. [125]

   The hotelier business is highly regulated. Because it involves the sale of food and liquor, it is subject to requirements which are variable and may be stringent, under the Liquor Act. Recent events, which would have been well known to those in or entering the business, included the restrictions on opening hours imposed in particular areas as a result of violent misbehaviour by patrons. The resultant restrictions included requirements for serving liquor in plastic cups, rather than in glass containers. Thus, detailed provisions were included in relation to the liquor licence including warranties by the vendor that there were no current or proposed police actions or proceedings, no proposed or issued infringement notices, no undisclosed or likely to be recorded assaults and so on. [26] As noted by the trial judge, the vendor expressly warranted:

4. [126]

   In short, the parties expected and understood that the business was one which was being carried on lawfully. It was entirely consistent with this understanding of the operation of the contract that the usual and ordinary course of the business referred to in cl 50.1, “as regards its nature, scope and manner” referred to the nature, scope and manner permitted by law. There could be a claim by the purchaser for breach of contract if it turned out that the earnings were being inflated by sly-grog running, or some other unlawful activity. It follows that when all hotels in the geographical area covered by the Public Health Order were required to operate according to reduced hours and reduced activities, those constraints applied with respect to the business and affected the operation of the business for the purposes of cl 50.1. It also followed that, as a matter of construction of the contract, at the date of proposed completion, the vendor, operating in accordance with the requirements of its liquor licence and the Public Health Order, was not in breach of cl 50.1, nor was there non-compliance with cl 50.1.

5. [127]

   That conclusion, together with the rejection of the proposition that the business being transferred was radically different from the business the purchaser had contracted to buy, means that the appeal must fail.

Whether cl 50.1 imposed a condition precedent on completion

1. [128]

   Even if the reading of cl 50.1 accepted above were incorrect, there was another necessary step in the appellants’ argument, namely that compliance with the clause was an essential condition of the contract and a precondition to the obligation on the purchaser to complete.

2. [129]

   Unlike the trial judge’s acceptance of the scope of cl 50.1 (which did not require the implication of a term) the appellants’ argument did require the implication of a term. Clause 50.1 does not expressly state that it imposes a precondition of completion. This submission should be rejected for a number of reasons.

(a) terms of contract

1. [130]

   First, as noted above, other provisions do impose such a condition. Thus cl 35 requires that each of the obligations specified in item 13 of Schedule 1 must be satisfied or waived or there is no obligation to complete the transaction. The terms of Schedule 1, item 13, are noted at [98]-[101] above. They do not include cl 50.1 (or any other part of cl 50). Nor do the express terms for rescission of contract, expressly apply to cl 50.

2. [131]

   Secondly, as counsel for the respondent submitted, there were good reasons why cl 50.1 was not to be considered an essential condition for completion. As noted above, it contained three limbs. It is not plausible to think that completion could have been delayed or the contract rescinded for failure to maintain the equipment, subject to fair wear and tear. Consequently, as senior counsel for the appellants accepted, not all events of non-compliance with cl 50.1 would engage a right of rescission. As an example, he gave a failure to repair which might be corrected within a reasonable time. However, that example suggests the implausibility of the conclusion. If the purchaser wrongly declined to complete on such a basis, it would potentially be incurring interest at the rate of 7% on more than $11 million. The absence of any clear basis in the text for identifying which aspects of cl 50 constituted an essential term, and what kind of breach or even mere non-compliance without breach, triggered a right of the purchaser to rescind precludes the implication of such a term. The resultant uncertainty would defy commercially desired certainty.

3. [132]

   Importantly in this context, the operation of cl 50 should be determined by reference to the text as understood when executed by the parties. The range of possible forms of non-compliance over a period of 55 days, and the concededly differing potential consequences militate against the proposed implication.

4. [133]

   Thirdly, the claim of essentiality turned on the importance of the continuing business operation for the viability of the purchasers’ business. However, there is an important difference between maintaining the current business until settlement and meeting expectations as to future returns. This was recognised by the express exclusion of vendor warranties in cl 38, including an exclusion as to “the present and future financial or income return to be derived from the Property or the Business”. [28]

5. [134]

   Fourthly, the commercial benefits of the ongoing business may have been reflected in part in the value for goodwill, but they would have been directly reflected in the value of the business operation, which was transferred by way of the lease. Completion of the sale of the business assets was a condition to the completion of the sale of the property and the gaming machine entitlements. In a carefully structured provision, the Deed obliged the vendor to grant a lease, but cl 35 did not render either the grant by the vendor or entry into the lease by the purchaser a condition precedent to completion. The lease provided for a term of two years with options to renew and a starting rent of $390,000 per annum. What was transferred under the sale contract was the property and the business assets. The value of the business may well have affected the profitability for the lessee under the lease, but the preconditions to the execution of the lease were expressly identified and contained no reference to cl 50.1.

(b) Nature of the transaction

1. [135]

   Apart from possible changes in licensing requirements and laws regulating the operation of licensed premises, including laws relating to gaming, there were various risks of interruption faced by the operator of such a business. These were insurable risks. Whether the particular risk which materialised was covered by insurance or not, the fact that such interruptions were foreseeable supports the conclusion that no unspecified conditions precedent to completion were envisaged, nor to be included by implication. Nor does the fact that the vendor may have been aware of the terms of the vendor’s finance (for a little under 60% of the purchase price) affect that conclusion.

2. [136]

   Whilst it may be accepted that the circumstances of the Public Health Order materially affected the operation of the business in the latter days of the period between execution of the contract and completion, that did not provide a basis for rescission by the purchaser.

3. [137]

   Having regard to the appellants’ submissions set out above, the suggestion that the effect of the Public Health Orders was to reduce the value of the business by 10% can only be accepted subject to two qualifications. First, the loss which the vendor suffered as a result of the sale going off was a reduction in 10% of the value of the property; it did not follow that that loss was to be attributed to any non-compliance (if that were the proper construction of the contract) with cl 50.1.

4. [138]

   Secondly, such a reduction in value might constitute hardship for the purchaser; however, a 10% reduction denies substance to the claim that the business which would have been transferred would have been quite different from the business for which the purchaser contracted. Rather, the business which would have been transferred was precisely the same business subject to a temporary diminution in value due to the constraints imposed by the Public Health Order and subsequent orders.

5. [139]

   Finally, in considering whether to imply a further condition precedent to completion, weight must be given to the final step in completing the sale contract. The final step, which was conditioned on the transfer of the business assets and satisfaction of the conditions precedent in item 13 of Schedule 1, was the conveyance of the land. Entry into the sale contract gave the purchaser an equitable title to the land, subject to the identified conditions precedent. Quite apart from the detail with which the contract dealt with contingencies, the Court should be slow to imply further contingencies, thereby creating uncertainty as to the ownership of the land.

Conclusions

1. [140]

   For the reasons set out above:

   1. (1)

      the contract was not frustrated by the promulgation of the Public Health Order;

   2. (2)

      the requirement of cl 50.1 (with respect to carrying on the ordinary course of the business) encompassed such alterations as might occur through changes in the legal regime under which the business operated;

   3. (3)

      as a result of these conclusions, there was no non-compliance with the terms of cl 50.1; and

   4. (4)

      in any event, compliance with cl 50.1 was not an essential condition or a condition precedent to completion of the contract.

2. [141]

   BRERETON JA: On 31 January 2020, the respondents (“the Vendors”) agreed to sell and the appellants (“the Purchasers”) agreed to buy, for a price of $11,250,000, a freehold hotel property in Pyrmont known as the Quarrymans Hotel, together with the associated hotel licence, gaming machine entitlements, and hotel business. A deposit of $562,500 was paid on exchange. Under the contract, completion was to take place on 27 March 2020 (as to the business assets) and on 28 March 2020 (as to the real property, licence and gaming machine entitlements), but by agreement this was deferred to 30 and 31 March respectively. Additional Clause 50.1 provided that from the date of the contract until completion “…the Vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner…”. With effect from 23 March 2020, performance of that obligation by the Vendors would have contravened various orders under the Public Health Act 2010 (NSW), s 7, made in response to public health risks associated with the outbreak of COVID-19, including the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW), which commenced operation at midday on 23 March 2020. The Purchasers contended that the contract was thereby frustrated. On 28 April 2020, the Vendors served a Notice to Complete, requiring completion by 12 and 13 May 2021 for the business and the other assets respectively. On the same day, the Purchasers commenced proceedings, claiming a declaration that the contract was frustrated and alternatively that the Vendors were not entitled to issue a Notice to Complete. On 21 May 2020, the Purchasers not having completed, the Vendors served Notice of Termination. On 23 May 2020, the Purchasers responded that, if contrary to their position, it was held that the contract was not frustrated, then the Notice of Termination was a repudiation, which the Purchasers accepted.

3. [142]

   At first instance, Darke J dismissed the Purchasers’ claim, holding that the contract was not frustrated, and that the Vendors were entitled to and had validly terminated the contract. His Honour assessed the Vendors’ damages at $900,000, being the difference between the contract price of $11.25 million and the true value of the assets as at 21 May 2020. Judgment was given for the Vendors for $937,044, inclusive of interest and the deposit. The Purchasers appeal to this Court.

4. [143]

   I have had the considerable benefit of reading in draft the judgments to be delivered by Bathurst CJ and Basten JA, in which the provisions of the contract and the dealings between the parties and their lawyers are more fully recited. I respectfully agree with the Chief Justice that the appeal should be allowed, for the reasons his Honour gives. However, given the difference between the other members of the Court, I state below my essential reasoning.

5. [144]

   The essential question is whether the Vendors were entitled, on 28 April 2020, to serve the Notice to Complete, and consequently to terminate the contract on 21 May 2020 for failure to complete in accordance with that notice. If they were not entitled to give that notice, then the purported termination was a repudiation, which the Purchasers have accepted.

6. [145]

   The giver of a notice to complete must, when it is given, be ready, willing, and able to proceed to completion, and not itself be in default. Thus, first, only a party who is or will be, on the date nominated for completion, ready, willing, and able to complete and perform its own obligations under the contract can give a notice to complete. [29] And, secondly, the party issuing the notice must also be free of breach – at least, one relevant to or connected with the securing of completion [30] – although the judgment of Barwick CJ and Jacobs J in Neeta (Epping) Pty Ltd v Phillips, [31] which enunciates the general principles governing the circumstances in which time for completion can be rendered essential by serving a notice to complete, suggests that it is any breach at all, although this would not deny that a notice might be given by a party which has remedied an earlier default (emphasis added):

7. [146]

   In any event, in the present case the contract expressly made the entitlement of a party to give a notice to complete conditional upon its not being in default. Additional Clause 51.7 provided (emphasis added):

8. [147]

   In my view, for two related reasons, the Vendors were not entitled to give a Notice to Complete when they purported to do so. The first is that they were in default of Additional Clause 50.1, and the second is that they were not ready, willing, and able to perform their obligation upon completion to convey, inter alia, a hotel business of substantially the same nature, scope and manner as that which existed at the date of the contract.

9. [148]

   Clause 50.1 of the Contract was as follows;

10. [149]

    Additional Clause 50.2 provided some specified exceptions, which did not encompass the situation that arose as a result of the Public Health Order.

11. [150]

    The references in Additional Clause 50.1 to the “nature, scope and manner” of the business – which were described in the Information Memorandum provided to prospective purchasers including the Purchasers – mark out the content of the Vendors’ obligation to “carry on” the business in a continuous manner in its usual and ordinary course. The reference to “scope” comprehends the amplitude of the business.

12. [151]

    In no way could it be said that, after the commencement of the Public Health Order on 23 March 2020, and continuing as at 23 March 2020 when they gave the Notice to Complete (the latter being the relevant date for present purposes), the Vendors were “carry[ing] on the Business in the usual and ordinary course as regards its nature, scope and manner”. They were carrying on only a very limited, scaled-down version of the former business. The impact of this on goodwill can be gauged by the quantum of damages assessed by the primary judge. Unless Additional Clause 50.1 can be construed as if it contained the words “so far as is legally permissible from time to time”, or can be severed, the Vendors were in default of their obligations under it, and remained in default when they gave the Notice to Complete.

13. [152]

    The primary judge held that the Vendors’ obligation under Additional Clause 50.1 was not absolute but confined to carrying on the business in a lawful manner: [32]

14. [153]

    In my judgment, words to the effect “so far as is legally permissible from time to time” cannot be read into Additional Clause 50.1. The purpose of the clause was to ensure that upon completion the Purchasers acquired a business in the same condition “as regards its nature, scope and manner” as it was at the date of contract. The primary judge’s construction involves the reading into Additional Clause 50.1 of words which do not appear in it and which have a radical impact on its operation in assuring to the Purchasers the transfer of a business in the condition in which it was sold.

15. [154]

    In Scanlan’s New Neon Ltd v Tooheys Ltd (“Scanlan’s”), during the currency of the hiring for a period of neon advertising signs, orders were made under the authority of the National Security Act 1939 (Cth) which prohibited illumination of the signs. The High Court held that this did not frustrate the contracts, and the hirers’ liability to pay rent continued. Latham CJ said: [33]

16. [155]

    At common law, risk passed to the purchaser on exchange of contracts. [34] This meant that, absent want of reasonable care by the vendor, the purchaser bore any diminution in the value of the property after exchange. This included not only damage by fire and analogous natural disasters, [35] and the interventions of third parties, [36] but also, relevantly, supervening legal impediments, as in Fletcher v Manton, where, in respect of a contract for sale of land including a terrace house, it was held that, risk having passed to the purchaser on exchange of contracts, the coming into effect after contract of an order to demolish the terrace house afforded no reason for refusing to accept the vendor’s title, and the purchaser had to bear the loss. Starke J said: [37]

17. [156]

    Dixon J, as he then was, characterised the risk which so transferred to the purchaser as including one imposed by law (emphasis added): [38]

18. [157]

    The effect of a provision allocating risk was considered in Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd: [39]

19. [158]

    Additional Clause 57 provides that risk in the subject matter of the sale passes to the Purchasers only on completion:

20. [159]

    The purpose of provisions such as Additional Clause 57 is to reverse the position that obtained at common law, so as to visit such risks, if they materialise before completion, on the vendor. The effect of deferring the passage of risk until completion may be seen in the divergent outcomes as to fixtures (in respect of which risk passed, with the property, on exchange) and chattels (in respect of which risk passed on completion) in Stenner v Sterling Homes Northside Pty Ltd. The purchaser sued the vendor after completion for damages for loss (through burglary) of fixtures and chattels (curtains). Staunton DCJ held that the loss was incurred without the vendor’s fault, and that pending completion, fixtures were at the purchaser’s risk, but chattels remained at the vendor’s risk. The purchaser therefore recovered damages in respect of the curtains, as the vendor retained the risk of their loss up to the date of completion and was obliged to deliver them on completion, but was unable to do so. [40]

21. [160]

    The effect of deferring the passage of risk until completion (as is now enacted by Conveyancing Act 1919 (NSW), s 66K) [41] is thus that the vendor bears the risk of loss or damage to the property between contract and completion, and on completion is bound to convey to the purchaser the property agreed to be sold in its condition at the date of the contract. This is expressly reflected in Additional Clause 57.4 as to Plant and Equipment, and is no different in respect of the other assets comprehended by Additional Clause 57.2. Where the parties intended to qualify an obligation by a possible future legal constraint, they made specific provision, as in clause Additional Clause 48.8(r), by which the Vendors warranted that (emphasis added):

22. [161]

    Additional Clause 50.1 was not expressed to be subject to any similar qualification. Given the prima facie position described by Latham CJ in Scanlan’s, and the agreement that risk would pass upon completion, it would not accord with the objective common intention of the parties to read into Additional Clause 50.1 words that limited the Vendors’ obligation to carry on the business to oblige them to do so only to the extent that it was lawful. As the Purchasers submitted, it could not be said that, had a term to that effect been proposed, the parties would have accepted it as of course, and it would be inconsistent with the tenor of the contract. [42] While the exercise of contractual construction is not the same as that of finding an implied term, the former still involves the ascertainment of the objective common intention of the parties, and those considerations tell against reading into Additional Clause 50.1 such words. In short, there is no reason to attribute to the parties a common intention that, inconsistently with the purpose of Additional Clause 50 of assuring to the Purchasers the business in its condition as sold, and inconsistently with the allocation of risk to the Vendors by Additional Clause 57, the Purchasers were to bear the risk of a supervening legal impediment to the performance of Additional Clause 50.1.

23. [162]

    As to whether Additional Clause 50.1 may be severed, Additional Clause 63.7 provides as follows:

24. [163]

    Construing Additional Clause 50.1 as I would, it is not “void, voidable, illegal or otherwise unenforceable” within the meaning of Additional Clause 63.7. Additional Clause 63.7 is addressed to the contract as made, and speaks to its status as at the date of the contract. It is not addressed to what is sometimes called “supervening illegality”, the divergent effects of which were referred to in Canary Wharf (BP4) T1 Ltd v European Medicines Agency by Marcus Smith J: [43]

25. [164]

    Marcus Smith J referred to the following statement of Viscount Simon LC in Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd: [44]

26. [165]

    In the present case, the “terms and surrounding circumstances” enable the question to be resolved by their allocation of the risk of supervening illegality prior to completion, consistently with Additional Clause 57, to the Vendors. In other words, the supervening illegality did not excuse the Vendors from performance of Additional Clause 50.1 if they wished to insist upon completion by the Purchasers. For these reasons, in addition to those given by the Chief Justice for holding that Additional Clause 50.1 is not severable, Additional Clause 67 is not engaged.

27. [166]

    It follows that, in my opinion, the Vendors were in default under Additional clause 50.1 when they purported to give the Notice to Complete, and were therefore not entitled to give that notice.

28. [167]

    The alternative basis on which I reach the same conclusion is that, viewed as a whole, the subject matter of the contract which the Vendors were obliged to convey to the Purchasers upon completion was an operating hotel business of substantially the same nature scope and manner as at the date of contract. This follows from:

    1. (1)

       The “agreement” clause at the beginning of the standard conditions which, as amended by Additional Clause 33.5(a)(i), provided:

    2. (2)

       The following definitions of “the Assets” in Additional Clause 33.1: [45]

    3. (3)

       The Vendors’ obligation under Additional Clause 50.1, set out and considered above, to “from the date of this contract until Completion, … carry on the Business in the usual and ordinary course as regards its nature, scope and manner”;

    4. (4)

       The express deferral under Additional Clause 57.2 of the passage of risk until completion, with the consequence that the Vendors were bound to convey to the Purchasers the assets sold in the condition in which they were at the date of the contract;

    5. (5)

       The essentiality to the transaction of the sale of the ‘Business Assets’, including ‘Goodwill’, as confirmed by Additional Clause 65, which provides that the sale of the property, liquor licence, and gaming machine entitlements is conditional on and interdependent with the sale of the ‘Business Assets’; and

    6. (6)

       The allocation, in Item 3 of Schedule 1, of $750,000 of the price to ‘Goodwill’.

29. [168]

    The Purchasers contracted to acquire an operating hotel business of a nature, scale, and manner of that in operation on the date of the contract. Because risk passed only upon completion, it was the Vendors’ obligation to convey upon completion the business in the condition in which it was at the date of contract. When it gave the Notice to Complete, the Vendors were in no position to convey that subject matter to the Purchasers: they could convey only a modified, reduced, and scaled-down version. For the reasons already advanced, the contract required the Vendors, not the Purchasers, to bear the risk of that reduction.

30. [169]

    Accordingly, for that reason also, the Vendors were disqualified from giving the Notice to Complete when they purported to do so. This is not a case in which the Vendors were in a position to resolve the impediment between serving the notice and completion. [46]

31. [170]

    It follows that the Notice to Complete was not validly given. The Vendors were not entitled to insist on completion, and were not entitled to terminate for the Purchaser’s failure to complete. Their purported termination was a repudiation, which the Purchasers have accepted. The Purchasers are entitled to the return of the deposit. I agree with the orders proposed by the Chief Justice.