Dyco Hotels Pty Ltd & Ors v Laundy Hotels (Quarry) Pty Ltd [2021] NSWCA 332 (Dyco) – Case Review
1. This is one of those cases where four judges considered the issues, they split 2:2 on the result, and the trial decision was reversed on appeal. The equal number of judges on either side of the outcome highlights the fact that the best minds can differ on these matters.
2. The appeal concerned a contract dated 31 January 2020 for the sale of the Quarrymans Hotel, situated in Pyrmont. The contract included a clause that the vendor/ respondent was to maintain the business ‘in the usual and ordinary course as regards its nature, scope and matter’ as at the date of the contract (cl 50.1). The contract also provided that the risk was not to pass until settlement (cl 57). The contract, in parts, was to settle on 30 and 31 March 2020.
3. On 23 March 2020 a public health order came into effect that significantly affected the trade of the hotel. It continued past the relevant settlement date and until the contract was terminated by the vendor.
4. There was various correspondence between the parties raising many issues, including frustration. At trial the court found there was no frustration, and this was not challenged on appeal. The issues raised by the purchasers included the inability of the vendor to complete. Ultimately, the vendor gave a notice to complete. On the same date, the purchasers commenced a proceeding in the Supreme Court claiming frustration, and alternatively, a declaration that the vendor was not entitled to issue a notice to complete, and in the further alternative, that while the business was not trading as going concern the vendor was not ready, willing and able to complete and issue the notice. The vendor then gave a notice of termination. The purchasers said that if the contract was not frustrated the notice of termination was a repudiation which was accepted.
5. At trial the Court held cl 50.1 was subject to an implied limitation to carry on the business to the extent permitted by law and awarded damages to the vendor on the basis of the purchasers’ refusal to settle and vendor’s termination.
6. The Court of Appeal allowed the appeal as:
a. it was not appropriate to imply the term limiting the obligation under cl 50.1;
b. the vendor gave a notice to complete when they were not entitled to do so because they were in breach; and
c. its purported termination was a repudiation which was accepted by the purchasers.
7. The reasoning of the majority, Bathurst CJ and Brereton JA, is illuminating (Bathurst CJ, [1] and Brereton JA, [141]; Basten JA [86], in dissent. There was an issue of severability which was dealt with and rejected by the Court but which is not dealt with herein).
Chief Justice
8. The Chief Justice said of cl 50.1 and the phrase ‘nature, scope and manner’:
‘[41] … 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.
[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.’
9. Bathurst CJ said with respect to the learned trial judge’s construction:
‘[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.’
10. His Honour also said that the implied term was not reasonable, nor in the context of the contract, one that went without saying: [51]. A significant factor in the Court’s reasoning was that when an illegality is temporary, the relevant obligation is suspended rather than discharged (which also depends on the construction of the contract): [64] and [71].
11. The Chief Justice said that the vendor wasn’t able to compel completion when it couldn’t deliver possession of the business as a going concern: [72]-[77]. Bathurst CJ also stated that there was no repudiation based on the appellants’ argument as to the construction of the contract, as they were willing to accept an authoritative exposition of the correct interpretation of the contract: [83]-[84].
12. In the result, the purchasers were entitled to rely on the vendor’s purported termination as a reputation and terminate the contract: [85].
Justice of Appeal Brereton
13. Brereton JA agreed with the Chief Justice’s reasons, however, given the differences in the Court, decided to state his essential reasoning.
14. Brereton JA said that the vendor was not entitled to give a notice to complete for two related reasons: they were in default of cl 50.1 and they were not ready, willing and able to convey a hotel business of substantially the same nature, scope and manner as at the date of contract: [146].
15. Justice Brereton said of the trial judge’s construction of cl 50.1:
‘[152] 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.’
16. His Honour also said of cl 57:
‘[158] 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. …’
17. Brereton JA said of the parties’ common intention and the issue of implication:
‘[160] 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. 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.’
18. Justice Brereton said that the vendor was in breach of cl 50.1 and not entitled to give notice to complete:
‘[164] 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. …’
19. Brereton JA said the same conclusion could be based on the reasoning that the subject matter of the contract which the vendors were obliged to convey upon completion was an operating hotel business of substantially the same nature, scope and manner as at the date of contract, and not some scaled down version: [166]-[168].
Conclusion
20. The construction of a contract ‘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’: [38] and High Court authorities therein. It is not always a straightforward or easy task. As was the case in Dyco, the agreed allocation of risk can be of assistance in the exercise.
Robert A. Quirk
Barrister-at-Law
Higgins Chambers and Bay Street Chambers
February 2022