Carrying on a business in the usual and ordinary course is a fundamental principle in commercial contracts. It requires a party to continue operating a business in the same manner as it was conducted at the time of the contract. Great protection for a buyer of a business.

However, it can’t be overlooked that the interpretation of what constitutes the usual and ordinary course will depend on each case’s specific facts and circumstances, including the terms of the contract, the need to comply with laws, licences, permits and approvals, and the regulatory environment in which the business operates.

Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6

Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 (8 March 2023) involved a vendor’s obligation in a business and property sale contract to carry on a hotel business “in the usual and ordinary course as regards its nature, scope and manner until completion.

The problem that the High Court of Australia had to deal with stemmed from the vendor pivoting the hotel business to a public takeaway business as the result of COVID-19 public health orders. Naturally, the purchaser wasn’t too pleased about this and claimed that this changed the nature of the “Business” so much that the contract was no longer tenable – it had been frustrated. The capital B “Business” was defined as the hotel business trading as the Quarrymans Hotel which operates pursuant to the Licence (i.e. the liquor licence and associated gaming machine entitlements).

In a unanimous judgement, the High Court found that a purchaser must complete a business purchase even if it cannot operate as it did during the contract due to a COVID-19 public health order.

The High Court’s interpretation of the contract

The Court held (at para 28):

“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 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 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.”

The contract further clarified that the vendor made neither gave warranties about the pub’s future financial state or performance, nor that the value of the assets would remain the same between until completion. It also stated that the title and risk of the pub’s assets would pass to the purchaser once the contract is completed.

Takeaways

Essentially the High Court upheld that not only contract is king but also that the ‘usual and ordinary course’ includes, in this instance, operating through the changes in legislation relating to the COVID-19 public health order. The Court reminded everyone that businesses are always subject to changes in the law, which needs to be considered when signing a contract.

The concept is dynamic and elastic unless appropriate contractual safeguards have been built in, such as well-designed warranties and pre-completion obligations and conditions). So, if you’re worried about legal changes messing with your business deal, make sure the contract says something about it, like:

  • including a material adverse change warranty says that nothing significant will change before everything is done; and
  • adding a change of law clause to deal with regulatory changes.