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Terminating a business sale contract for failing to carry on business in the “usual and ordinary course as regards its nature, scope and manner”

Contract terms

Between signing a contract to sell a business and settlement a Seller will, usually in most standard contracts, have a contractual obligation to “carry on the business in the “usual and ordinary course as regards its nature, scope and manner”

This obligation has been challenging in a pandemic environment where businesses have been subjected to mandated lockdowns and restricted trading.

In what circumstances can a buyer terminate a contract where the business is affected by such measures?

 

Caselaw

The High Court’s recent decision of Laundy Hotels (Quarry) Pty Limited v Dyco Hotels Pty Limited [2023] HCA 6 is the most instructive and a “common sense” approach.

In the period of time between the signing and settlement of the sale of a Hotel, a Public Health Order-PHO was issued by the Health Minister restricting the trading hours of the business under contract.

The order directed that pubs (meaning licensed premises under the Liquor Act) “must not be open to members of the public … except for the purposes of … selling food or beverages for persons to consume off the premises”.

The Buyer sought to terminate relying upon the Seller’s contractual obligations to carry on the business in the “usual and ordinary course as regards its nature, scope and manner”.

The Buyer’s case argued on appeal was that as the Vendor could not comply with cl 50.1, the Vendor was not ready, willing, and able to complete the contract, and therefore could not serve the notice to complete or terminate for the Purchaser’s failure to complete.

 

No Obligation to carry on business unlawfully

The High Court rejected the Buyer’s arguments, stating:

“It is not necessary to do more than construe cl 50.1 in its context to conclude that the obligation on the Vendor to “carry on the Business in the usual and ordinary course as regards its nature, scope and manner” incorporated an inherent requirement to do so in accordance with the law. That is, the obligation imposed on the Vendor was to carry on the Business in the manner it was being conducted at the time of the contract to the extent that doing so was lawful. There was no obligation (and could not have been an obligation) imposed on the Vendor to carry on the Business unlawfully. It is not necessary to have recourse to either the doctrine of implied contractual terms to impose on the Vendor an obligation to carry on the business to the extent that it was lawful, or the possible consequences of supervening illegality resulting in suspension rather than the frustration of the contractual obligation imposed by cl 50.1.”

In taking this view-the Court looked at what a reasonable business person would understand the clause to mean.

 “Accordingly, a reasonable businessperson in the position of the parties would have understood cl 50.1 to mean that from the date of the contract until Completion, the Vendor was required to carry on the Business “in the usual and ordinary course as regards its nature, scope and manner” in accordance with the law. The past, current, and anticipated future lawfulness of the operation of the Business was objectively essential and a commercial necessity to the parties. Without the Licence and associated Gaming Machine Entitlements, there would be no “Business”. The Vendor’s obligation to “carry on the Business in the usual and ordinary course as regards its nature, scope and manner”, on the proper construction of that provision, could never extend to an obligation on the Vendor to act illegally. The Vendor’s obligation was necessarily moulded by, and subject to, the operation of the law from time to time.”

 

Summary

A Seller’s obligations between the contract date and settlement date were only to carry on business lawfully in the usual and ordinary course as regards its nature, scope, and manner.

Compliance with lawful directions or orders affecting the business will not usually be a ground for termination, but each case will turn on its own merits.

Termination of a commercial transaction requires careful thought and consideration and legal advice should be taken before any such action.

Contact us for advice concerning any issues with the Termination of contracts.

 

The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.

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