V Quattro Pty Ltd v Townsville Pharmacy No 4 Pty Ltd

The parties entered into a call option agreement. The agreement required the respondent to pay a $10 premium within 2 business days of the agreement’s execution. The respondent paid the $10 almost two years after the agreement was executed but before the call option expired. The respondent obtained a declaration that the call option had been validly exercised. The appellant sought to have that declaration overturned on the basis that strict compliance with the time specified for payment of the premium was required for the call option to be exercised. The Court of Appeal rejected the appellant’s argument, dismissing the appeal with costs. The Court of Appeal found the text of the agreement did not reveal an intention that the premium’s payment was a condition precedent to the creation of an enforceable contract, nor did it form part of the essence of the contract. The Court also observed that where consideration is for a nominal amount, it is the promise that forms the consideration and not payment of the nominal amount.

Mullins P, Bond JA and Kelly J

12 March 2024

The call option agreement

The parties agreed in writing to a call option for the respondent to purchase a pharmacy business from the appellant (“the call option agreement”). [2]. Clause 3.2 of the call option agreement provided that the appellant granted the option in consideration of receiving “the Premium” of $10 from the respondent, which was required to be paid “within 2 business days of the date of this Agreement”. [3]–[4].

The respondent did not pay the $10 premium until 12 September 2022, almost two years after that deadline. [5]. On that date, the respondent complied with clause 2 of the agreement – providing written notice to the appellant of the exercise of the call option. [16]. The call option was not, however, due to expire until 28 August 2023. [12].

The respondent obtained a declaration that the option had been validly exercised; the appellant sought to overturn that declaration. [6]–[7], [18].

The appellant argued the time stipulated for payment of the call option consideration was essential, both to the enforceability of the contract and the exercise of the option. [7], [19].

Court of Appeal decision

The Court of Appeal dismissed the appeal, with costs. [1]. [8], [30]–[31]. The Court held strict compliance was not required for the call option agreement to be effective.

The time stipulated for payment of the call option premium was neither a condition precedent to the creation of an enforceable contract, nor did it form part of the essence of the contract. [20]–[21]. There was nothing in the language of the parties to suggest that they intended no contract would become binding until the call option premium was paid. [22]–[23]. Rather, the words of the agreement recited an intention to be bound from the date the contract was signed. [23]. It is also not unusual for such contracts to be executed after the date signed, with the parties’ intentions usually assessed as being bound retrospectively to that date of signing; that applied here. [24].

Practically, the terms of the contract were impossible for the respondent to strictly comply with. [25]. The date of execution was on a Friday, yet the premium was required to be paid within two business days of that date, which would be Tuesday the following week. [25]. Thus, the parties had accepted they were legally bound, with clause 3.2 to come into effect later. [26]. The Court found the “parties could not possibly have intended that compliance with a clause which could not be complied with would form a condition precedent to an enforceable bargain coming into existence”. [25].

Additionally, the terms of the contract did not reflect an intention that time was of the essence in respect of the payment of the premium. [25]. While the contract provided for consequences for a failure to enter into and complete a contract for the purchase of the pharmacy and for failure to give notice of the exercise of the call option, there were no such consequences expressed for failure to pay the premium on time. [25]. The Court emphasised the above did not mean clause 3.2 was no promise at all, but simply meant it was an “inessential or innominate term … breach of which could sound in damages at most unless time was made of the essence”. [25].

The Court found that because the consideration in clause 3.2 was nominal then clause 3.1 should be regarded as “conveying that the grant of the option is in consideration of the promise to pay the $10 premium.” It was the promise to pay the premium, and not the payment itself being made, which operated as consideration. [27]. Their Honours affirmed the primary judge’s observations, citing Lydia Court Pty Ltd v Panousis (1973) 2 BPR 9178, Barba v Gas and Fuel Corporation (Vic) (1976) 136 CLR 120, and Himbleton Pty ltd v Kumagi (NSW) Pty Ltd (1991) 29 NSWLR 44, that:

“where the consideration is nominal, a statement in a contract that the consideration is an amount which has been paid should be construed, in the event the amount has not been so paid, as meaning the consideration was a promise to pay the amount”. [27].

There were no textual indications in the present contract that suggested a contrary intention. [27]–[28].

H Edwards of Counsel