Introduction
The COVID-19 pandemic created an unprecedented disruption across the commercial landscape, raising fundamental questions about the doctrine of frustration in Australian contract law. In particular, parties queried whether government-imposed restrictions could justify termination of a contract. In Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6, the High Court of Australia considered whether such unforeseen circumstances frustrated a hotel sale agreement.
This landmark decision clarifies the limits of frustration in Australian contract law, particularly for businesses operating in New South Wales. It affirms that while external events may complicate performance, they do not automatically release parties from their contractual commitments.
Background to the Doctrine of Frustration in Australian Contract Law Dispute
In January 2020, Laundy Hotels agreed to sell the Quarryman’s Hotel in Pyrmont to Dyco Hotels for over $11 million. Settlement was scheduled for late March 2020. Under clause 50.1 of the contract, the vendor was required to carry on the business “in the usual and ordinary course as regards its nature, scope and manner” until completion.
However, in March 2020, New South Wales Public Health Orders required licensed venues to cease on-premises trading. Laundy complied by closing for one day and resuming operations on a takeaway-only basis. Dyco refused to complete the contract. It claimed Laundy breached clause 50.1. Alternatively, it argued the pandemic frustrated the contract.
High Court’s Decision
The High Court unanimously upheld the decision of the trial judge and reinstated the contract in Laundy’s favour. The Court held that:
- Laundy had complied with clause 50.1 by operating the hotel in accordance with applicable law, even if that meant modifying its business model to takeaway-only service.
- The obligation to carry on the business in the “usual and ordinary course” is inherently subject to lawful compliance. A reasonable businessperson would expect that such obligations cannot require illegal conduct.
- The public health restrictions did not render performance of the contract impossible or radically different in the legal sense. The doctrine of frustration did not apply.
The judgment affirms that temporary changes, even during a pandemic, do not easily discharge contractual obligations.
Legal Framework: The Doctrine of Frustration in Australian Contract Law
Under Australian common law, frustration occurs when an unforeseeable event, beyond the control of either party, makes performance of the contract:
- Impossible;
- Unlawful; or
- Radically different from what was agreed.
Critically, frustration is a narrow doctrine. Inconvenience, increased expense, or loss of anticipated benefit will not suffice. The High Court reinforced this principle in Laundy v Dyco, noting that the hotel sale contract remained capable of performance, the purchaser was still acquiring the same asset, albeit one temporarily restricted by external regulation.
Implications for NSW Businesses
The case provides a key precedent for businesses concerned about how external disruptions, such as public health orders or other government interventions, may affect contractual rights:
- Contractual language matters. General obligations to conduct business “in the usual course” are likely to be interpreted in the context of lawful compliance.
- Risk remains with the parties. Unless a contract includes provisions that allocate risk for regulatory change (such as force majeure or material adverse change clauses), courts will not rewrite the bargain.
- Frustration will rarely apply. Courts remain reluctant to allow parties to escape contracts due to unforeseen hardship unless the change is truly fundamental.
Final Thoughts
Laundy v Dyco reaffirms that commercial parties must live with the bargain they have struck, even amid turbulent circumstances. The High Court’s refusal to expand the scope of frustration serves as a cautionary reminder: absent very clear contractual language, businesses cannot assume that a downturn in value or regulatory interference gives rise to a right of termination.
Our firm is well positioned to assist in drafting and reviewing commercial agreements to ensure clarity around unforeseen events and business continuity obligations. If your business is revisiting its contractual frameworks in light of this decision, our team is here to help.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
