Your option or mine? - Contracts and Commercial Law

The New South Wales Court of Appeal has recently confirmed that an option to extend a contract which did not specify which party had the benefit of the option could be exercised unilaterally by either party.¹

Additionally, the primary judge held that a term was not implied into the contract which would render the option not capable of being exercised if the party seeking to exercise the option was found to be in breach of the contract. This issue was not revisited on appeal.

THE BACKGROUND OF THE CASE

Diveva Pty Ltd trading as Mid Coast Road Services (MCRS) was the successful tenderer for the Supply and Lay of Asphalt Concrete for Port Macquarie-Hastings Council (the Council).

Under the contract entered into by MCRS and the Council, MCRS agreed to supply, deliver and lay asphalt for a period of two years. The contract contained an option clause which stated the period of the agreement was 'for a 24 month period with a future 12 month option available'.

In or about May 2012, part of the Ocean Drive works completed by MCRS started to show signs of failure. An issue then arose regarding whether the works had been completed in accordance with the contract specification.

In March 2013, the Council decided that an alternative specification was to be employed for future works. The Council then decided that it would not exercise the one year option to extend the contract with MCRS and announced that a new tender would be advertised in the coming weeks.

On or about 4 April 2013, MCRS gave notice to the Council that it had exercised the option to extend the contract for a further 12 months.

THE KEY ISSUES

The key issues were:

Whether the option provision contained within the contract was exercisable unilaterally by MCRS; and
If it was, whether a term ought to be implied into the contract that the option was not to be exercisable by MCRS if the works performed by MCRS were found to be in breach of the contract specifications.

THE JUDGMENT

Who had the benefit of the option provision?

On Appeal, the Court held that the clause stating 'with a further 12 month option available' was to be determined objectively and within the context of the contract.

The Council contended that the provision was exercisable by the Council only or, at the very least, by mutual agreement.

This argument was not accepted by the Court. The words 'option' and 'available', as well as the omission of a qualifying phrase within the provision expressly limiting the option's availability, led the Court to find that the option provision was capable of being exercised unilaterally by MCRS.

The Court confirmed that the inclusion of the words 'option available', which had also been recorded in the request for tender, operated as a commercial incentive for prospective tenderers (providing the potential to extend the period of contracted services to three years).

Would qualifying words have made a difference?

At trial, the primary judge stated that clear words would be required to exclude MCRS from exercising the option.²

The option provision in the contract was not qualified by any phrase such as 'Council reserves the right' or any other words which would have unequivocally conferred the option to extend the contract exclusively upon the Council. The omission of such a phrase was considered to be of particular significance by the primary judge, as it had identified numerous other clauses within the contract that did contain such qualifying phrases.

Was there an implied term?

The second issue determined at trial was whether a term ought to be implied into the contract that would render the option not capable of being exercised by MCRS if MCRS was in breach of the contract.

There was no express provision limiting the exercise of the option in the event of a breach, but the Council contended that such a term was necessary to give business efficacy to the contract.

The Court did not agree. The Court held that an implied provision prohibiting the exercise of an option did not satisfy any of the five principles for the implication of contractual terms as stated in BP Refinery (Westernport) Pty Ltd v Hastings Shore Council (1977), and therefore should not be implied into the contract.³

The Council did not appeal on this issue.

WHAT ARE THE IMPLICATIONS?

Option provisions that do not expressly limit the exercise of the option to one party can be found to apply for the benefit of both contracting parties.

If this is not the intended outcome, however, clear words are necessary. This is because an option provision (particularly if included in a request for tender) that does not specify the particular party to whom the option applies can be construed as being a commercial incentive to tenderers (to extend the term) rather than a provision to be exercised at the sole discretion of the principal.

A term limiting the exercise of that option such that it cannot be exercised in the event of a breach will not be implied.

Footnotes

¹Port-Macquarie-Hastings Council v Diveva Pty Ltd [2017] NSWCA 97 (12 May 2017).

² Diveva Pty Ltd v Port Macquarie-Hastings Council [2016] NSWSC 1790 (13 December 2016), [74].

³ 180 CLR 266.

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