Contracts and Frustration by COVID-19- Important decision
Recently, the New South Wales Supreme Court (NSWSC) in Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltddecided that a contract for sale was not frustrated by pandemic trading restrictions.
Lockdown and trading restrictions imposed by the government in response to COVID-19 has inevitably given rise to parties in sale contracts to claim frustration when a business or commercial venture is impacted. In order for a contract to be frustrated, the frustrating event must give rise to a “fundamental commercial difference” between contemplated and actual performance or to a “fundamentally different situation” arising for which the parties made no provision “so much so that it would not be just in the new situation to hold them bound to its terms” (Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at [64]).
Background
Very briefly, the parties entered into a contract for the sale of a freehold hotel property in Pyrmont together with a hotel licence, gaming machine entitlements and hotel business.
Clause 50 of the contract imposed various obligations on the seller. Clause 50.1 provided that from the date of the contract until settlement: “… the Vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner …”
The ability to perform clause 50.1 was affected by the introduction of the Public Health Act 2010 (NSW) which included the Public Health (COVID-19 Places of Social Gathering) Order 2020. The order commenced on 23 March 2020 and the hotel closed for trading on the same day. However, the hotel re-opened for takeaway and delivery on 26 March 2020. The takeaway service included food ‘according to demand.’
The key issue considered by the Court was whether the contract of sale was discharged by frustration as a result of the orders.
Findings
The NSWSC held that:
- the unexpected situation did not give rise to frustration (at [110])
- the essential nature or purpose of the contract was a sale and transfer of particular asset for an agreed price
- the obligation to carry on business was ancillary to the main purpose
- the reference to ‘the usual and ordinary cause’ under clause 50.1 suggested that the business would continue to be carried on in a lawful manner
- there were no warranties about future income of the business
- the seller succeeded in their claim for termination as the contract was not frustrated
- the obligation was to carry on the business in the usual and ordinary course as far as it remained possible to do so in accordance with the law
- the Court it held that the contract had not been frustrated and the parties remained bound by the contract. The Vendor was entitled to retain the deposit and received $900,000 in damages for loss of bargain.
Takeaway
While there was some impact of a lockdown on the hotel business the impact was not significant enough to reach the benchmark of making performance of the contract fundamentally different to the performance expected under the contract.
The seller was still able to deliver title to the property, the hotel licence, gaming entitlements and a functioning business. There were no warranties in the contract about future turnover of the business or downturn due to unforeseen events.
In any case, the success of a frustration claim depends upon a construction of the terms of the contract, the nature of the contract and any relevant surrounding circumstances: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 358.
It is critical that both parties to a contract understand the event in which frustration can occur and its consequences. The case highlights it is a high onus to prove frustration of a contract.
More Information
Please contact our Commercial Law team at Matthews Folbigg Lawyers on 9635 7966 if you would like advice or assistance in respect of your rights and obligations relating to your contract.
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Anna Zdrilic Principal T 02 9635 7966 annaz@matthewsfolbigg.com.au |
DISCLAIMER: This article is provided to readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as a definitive or complete statement of the relevant law. Liability limited by a scheme approved under Professional Standards Legislation.
