Compliance with the requirements of the exercise of an option was considered by the Court of Appeal of the Supreme Court of Queensland in JLF Corporation Pty Ltd v Matos [2016] QCA 355 (judgment delivered 23 December 2016).

Facts

The appellant and respondent were parties to a Put Option Agreement (“Option Agreement”) by which the respondent could exercise an option requiring the appellant to buy the respondent’s land. Clause 2.4 of the Option Agreement provided the option was to be exercised by the respondent delivering two signed copies of the Contract to the appellant. The Contract was defined to be a contract in the form of Schedule 1 to the Option Agreement. Schedule 1 contained an unexecuted copy of the eighth edition of the Real Estate Institute of Queensland/Queensland Law Society standard form of contract.

The respondent purported to exercise the option by delivering a signed contract in the form of the tenth edition. After some time a dispute arose as to whether the option had been exercised. The respondent applied to the Supreme Court for declarations that it had validly exercised the option.

The primary judge (Trial Division of the Supreme Court) found that the exercise of the option was not invalidated by delivery of the tenth edition rather than eighth edition of the standard form contract. The judge’s reasoning included:

  1. Clause 2.4 of the Option Agreement did not require the eighth edition standard form contract;
  2. The Option Agreement was not negotiated in a commercial setting requiring that the option could be exercised only by giving notice in the form in a schedule;
  3. The Option Agreement permitted attaching/using forms that replaced forms prescribed by the Property Agents and Motor Dealers Act 2000 (“PAMDA”) and it would have been absurd to send an obsolete form and where the tenth edition standard form contract contained information required by the Act that replaced PAMDA. This indicated that strict compliance with clause 2.4 was not envisaged;
  4. The intention of the parties was to use the edition of the standard form contract current at the time of the of the exercise of the option;
  5. Delivery of the eighth edition standard form contract was a machinery provision rather than a mandatory requirement;
  6. Strict compliance with the method of exercise of the option was not required;
  7. Additional terms in the tenth edition versus eighth edition standard form contract affected both buyers and sellers equally or affected sellers (the respondent) more;
  8. Every effort had been made to conform with the requirements of the exercise of the option because all of the essential terms were contained in the tenth edition standard form and the only substantial additions were in favour of the respondent (seller);
  9. The purported exercise on the option was absolute and unqualified and bound the respondent to perform the terms of the option;
  10. The communications between the appellant and the respondent after the appellant received the purported exercise of the option indicated the appellant understood the respondent had unequivocally exercised the option.

The appellant appealed.

Decision

The Court of Appeal allowed the appeal, set aside the declarations and ordered the respondent pay the appellant’s costs. In summary:

  1. The appeal turned on the proper construction of the Option Agreement determined by what a reasonable business person would have understood it to mean;
  2. It is the language of an agreement that provides that an option can only be exercised by giving a scheduled form;
  3. The Option Agreement was, in any event, a commercial transaction;
  4. There was no ambiguity about the meaning of clause 2.4;
  5. The Option Agreement defined the Contract to mean in the form at Schedule 1 to the Option Agreement which was the eighth edition standard form;
  6. It was an alternative possibility (to the finding by the trial judge that the parties intended to adopt the form of contract current at the time the option was exercised) that it was commercially unlikely that the parties intended that the form of contract would be determined by others (for example, by the REIQ/Queensland Law Society creating a later edition with different terms);
  7. The issue was not ‘strict’ compliance with requirements, only compliance;
  8. The attachment of forms to the Contract pursuant to PAMDA or a later Act was distinct to the requirement to deliver two signed copies of the Contract (that is, in the form of the eighth edition);
  9. Furthermore, the Act that replaced PAMDA did not require inclusion of information in the Contract because it was a contract formed by exercise of an option;
  10. The addition of new terms in the tenth edition standard form made it impossible to say that any difference between it and the eighth edition was immaterial and there was no evidence that the difference was commercially insubstantial;
  11. There was no explanation why the respondent did not use a copy of the form of contract in Schedule 1 of the Option Agreement;
  12. It was never argued by the respondent that a contract requiring the appellant to buy the respondent’s land came into existence otherwise than by exercise of the option in accordance with the requirements of the Option Agreement. Therefore, the communications between the parties after the respondent purported to exercise the option were not relevant.

Practical Considerations

Absent uncertainty as to meaning, it is the clear language of an agreement that creates essential requirements. Requirements may be essential irrespective of whether the agreement was negotiated in a non-commercial setting. Where parties have agreed to essential requirements, those requirements must be complied with. In this case, the exercise of the option was to be effected by signing and delivering the Contract. Signing and delivering a contract with different terms was not what the parties agreed to and, therefore, was not effective.

Conclusion

The giving of notice of an exercise of an option must be carried out with great care. Near enough will not be good enough.

Les Power Accredited Specialist (Commercial Litigation), Legal Practice Director, Wilson Lawyers 

 

 

This article is for general information purposes only. It is not legal advice and must not be relied upon.  Contact Wilson Lawyers or your solicitor for legal advice.