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[2023] QSC 105
General information, not legal advice.
Supreme Court of Queensland
2023-05-17
Henry J, Gilbert J
Original judgment source is linked above.
[1] The respondent company, V Quattro, granted the applicant company, Townsville Pharmacy, an option to purchase its business. The consideration identified in the agreement for doing so was the payment of $10 within two business days of the agreement.
[2] The $10 was not paid within that time. It was not paid until about 21 months later, when Townsville Pharmacy exercised the option. V Quattro returned the payment, asserting the purported exercise of the option was ineffective because of the failure to pay the $10 within the time required.
[3] Townsville Pharmacy now seeks a declaration that its exercise of the option to purchase the business was valid.
[4] Townsville Pharmacy submits time was not of the essence in respect of the clause requiring the payment of the consideration, $10 being an obviously nominal amount. It contends that at worst for it, the failure to make the payment in the stipulated time merely gave V Quattro a right to elect to terminate if the amount remained unpaid after making time of the essence by first writing to Townsville Pharmacy calling for the making of the payment within a specified reasonable time. It did not do that at any time before the occurrence of the eventual payment and exercise of the option.
[5] V Quattro, on the other hand, contends the payment of consideration in the time stipulated was of existential importance to the contract. It goes beyond contending time was of the essence in respect of the condition, submitting the condition was not merely a condition precedent to the performance of the contract but a condition precedent or "gateway" to the formation of an enforceable contract. As a result, it is submitted Townsville Pharmacy's failure to pay the consideration on time deprived it of any enforceable contractual right.
[6] Therefore, the main questions for determination are:
(a) Was payment of the $10 consideration within two business days essential to the existence of an enforceable contract?
(b) If it was not, and was simply a condition of a contract which commenced on execution, was its payment in the time stipulated of the essence?
[7] For the reasons which follow, the answer to both questions is "no" and the declaration should be made. The answers are so substantially informed by features of overlapping relevance to each question that it is convenient to progress these reasons by reference to those features.
What needed to be done pursuant to the contract?
[8] The written contract, styled "Call Option Agreement", commenced with the statement, "THIS AGREEMENT is made on the 27th day of November 2020". The evidence suggests it might not have been executed until about 3 December 2020.[2] The prospect of the execution process taking some days might explain the parties' choice of requiring the nominal consideration to be received within two days of the date of the agreement as stipulated by it, rather than on that date. In any event, the point was of no suggested consequence to the parties' approach to argument in the matter.
[10] The contract's terms required Townsville Pharmacy to meet the following obligations:
(a) pay V Quattro $10 consideration, called the "premium", for the grant of the call option, within two business days of the date of the agreement - per cl 3.2;
(b) enter into a so-called Star Pharmacy contract within one month from the date of the agreement, complete the purchase of Star Pharmacy within six months from the date of the agreement and give V Quattro written notice of satisfaction of both those requirements as soon as practicable - per cl 2;
(c) if exercising the call option, serve a notice of exercise of call option on V Quattro by 5pm on the call option expiry date of 28 August 2023 - per cl 3.3.
[11] As to obligation (b), Star Pharmacy is defined in the agreement as meaning the business known as Star Discount Chemist Smithfield conducted from Shop 65 Smithfield Shopping Centre. The Star Pharmacy contract is defined in the agreement as meaning a contract between Smithfield Pharmacy No 1 Pty Ltd and Smithfield Pharmacy No 2 Pty Ltd as seller and Townsville Pharmacy as buyer, for the sale and purchase of the Star Pharmacy. Obligation (b) was complied with in time, including the giving of the written notice.
[12] There is no evidence that on its receipt of the written notice V Quattro then alerted Townsville Pharmacy that it need not have bothered giving notice of having completed the acquisition of Star Pharmacy because the call option agreement had supposedly been rendered unenforceable weeks earlier when the $10 had not been paid in time. I accept it was not legally obliged to. Also, this is not a case in which determinative reliance was placed upon V Quattro's conduct in allowing Townsville Pharmacy to continue with the acquisition without telling it the call option agreement was allegedly no longer on foot. However, the disparity in importance of the Star Pharmacy purchase as an assurance of V Quattro's commitment, as compared to its payment of a mere $10, is reflected consequentially in the terms of the contract in a way discussed later.
[13] Obligation (c) was met in time, with the notice of exercise being served on 12 September 2022, long before the call option expiry date of 28 August 2023. The stipulated result of that compliance was supposed to be, per cl 3.4, that V Quattro and Townsville Pharmacy entered into an agreement for the sale and purchase of the business per cl 3.4, on terms per the agreement's sch 1.
[14] Obligation (a) was not met in time; the $10 not being paid until the date on which notice of exercise of the call option was given. It is that failure to pay the premium in time, albeit that it was eventually paid, which founded V Quattro's attempt at the last to avoid its contractual obligation to enter into the agreement for the sale of its business. Hence the present controversy.
What general interpretative principles are relevant here?
[15] Before turning to a closer consideration of the terms of the call option agreement it is timely to briefly consider the general interpretative principles which may assist in the interpretation of such a document.
[16] None of this was particularly in issue, the parties being content to approach the interpretative exercise as one of construction of the agreement without material recourse to extrinsic evidence. Indeed, the slight evidence before the Court only went in a neutral way to the sequence of events which culminated in the dispute.
[17] The starting point is that the nature of the document is a contract. As is explained in Thomson, Warnick and Martin's Commercial Contract Clauses, Principles and Interpretation, in respect of the requirements for the valid creation of options:[4]
"The first requirement for validity is that the option-holder must give consideration for the grant of the option, unless it is granted by deed. Consideration is required on normal contractual principles, whichever conceptual approach to the analysis of an option is adopted: either to support the conditional contract, or to support the collateral contract not to revoke the offer."
[18] Next, because the document is a contract, it is well established it should be interpreted:
[19] Finally, and most materially, because it is a commercial contract, it is well established it should be interpreted:
[20] Other principles were advanced, of purportedly more specific application to interpretation in the present case, but they will be dealt with as these reasons progress. I next turn to closer consideration of the content of the contract which was highlighted in argument and how it assists the contract's interpretation.
[21] The call option agreement referred to V Quattro as the grantor and Townsville Pharmacy as the grantee. Its recitals state:
The "premium" referred to in recital C is defined in cl 1 as meaning the sum of $10.
[22] V Quattro relies on recital C in support of its argument that the actual making of the payment of the premium was a condition precedent to the formation of the contract.
[23] Before testing that it is timely to note the trite foundational principle that consideration is an element of an enforceable contract. That might explain why, in their desire for the business certainty of a contract, parties to an agreement to grant an option sometimes require the payment of only nominal amounts of money as consideration for granting the option. However, while consideration is undoubtedly an essential element of an enforceable contract it is not the law that the agreed benefit underlying the consideration must first be received for an enforceable contract to commence. To the contrary, it would be common that it is received much later, during the ensuing operation of many contracts.
[24] V Quattro emphasises its agreement "to be bound" in recital C literally occurs in consideration of "receiving" the premium. The supposed temporal implication is there is no binding agreement to grant the option until V Quattro receives the premium.
[25] However, recital C says V Quattro's agreement to be bound is given "in consideration of" receiving the premium. It says nothing as to when the payment of consideration is to be received relative to the point in time when the agreement becomes binding. That does not mean V Quattro's urged interpretation of recital C, that the agreement does not become binding on V Quattro until it receives the premium, is not open. Considering the words of recital C in isolation, it is open. But so is another interpretation, namely recital C merely identifies that V Quattro's agreement to be bound is a result of consideration being an element of the agreement. In other words, the agreement to be bound derives from the fact there is consideration, via the agreed premium of $10, not from when the benefit of that consideration will be received. In short, recital C is ambiguous on the temporal point that is at the very foundation of V Quattro's argument.
[26] While recitals can assist in the interpretation of the operative instrument, their power to do so is confined to instruments in which ambiguity arises. The basic rules governing the relationship between recitals and the operative parts of an instrument were stated by Lord Esher in Ex parte Dawes; re Moon:[8]
"If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous, and the operative part is clear, the operative part must prevail. If both the recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred".
[27] Given those principles, it does not bode well for V Quattro's reliance on recital C that the critical aspect of its urged interpretation is premised on an inference only arguably, rather than clearly, supported by the recital's words.
[28] Turning to the operative terms, it should first be observed there is no clause making time of the essence of the agreement.
[29] Next, it is convenient to consider the key operative clause, cl 3, before then looking to other potentially relevant clauses.
[30] The grant of the call option, the raison d'être of the agreement, is found in cl 3. It is that clause which requires payment of the premium. It relevantly provides:
3.1 In consideration of the payment of the Premium, the Grantor grants to the Grantee [or its permitted assignee] an option to purchase the Business for the Purchase Price and on the terms described in the Contract.
3.2 The Grantee must pay the Premium to the Grantor within 2 Business days of the date of this Agreement.
3.3 The Grantee must in order to exercise the Call option serve the notice of exercise of Call option on the Grantor by 5.00pm on the Call option expiry date or the Call option will expire worthless;
3.4 Upon the exercise of the Call option there will be simultaneously entered into between the Grantor and the Grantee ... an agreement for the sale and purchase of the Business ...
3.5 Following receipt of the document referred to in clause 3.3 the Grantor and Grantee will, as a matter of convenience and as soon as reasonably practicable execute a document in the form of the Contract but the failure to do so will not affect the validity of this Agreement or the enforceability of the Contract.
3.6 The Call Option may only be exercised during the Call option period." (Emphasis added)
[31] Clauses 3.1 and 3.2 are clearly expressed. Clause 3.1 expressly grants the call option by the words "grants to the grantee". It indicates the grant is made in consideration of the payment of the premium. Recital C admittedly speaks of receipt rather than payment but cl 3.1 is largely consistent with recital C in identifying that V Quattro's agreement to be bound is a result of there being consideration which will be constituted by the payment of the $10. However, it does not link the payment with reference to agreeing to be bound, let alone agreeing to be bound only after the receipt of the premium occurs.
[32] Clause 3.1 does not say at what point the payment, in consideration of which the grant is made, is to be paid. It does not say the payment must first be made in order for the contract to become an enforceable contract. Nor does it say it must first be made in order for the grant to become operative. Indeed, cl 3.1 evidently makes the grant notwithstanding that the consideration for it may not yet have been received. Clause 3.2 clearly contemplates as much because it requires payment of the premium to occur within two business days after the making of the contract. This trends in favour of Townsville Pharmacy's urged interpretation that cl 3.2 is a condition precedent of performance of the contract, not of the creation of the contract.
[33] Given payment was permitted after the date of the agreement, an agreement in which the grant of the option was made, it is striking that V Quattro's present position - that the contract was not to be become enforceable without the payment being made on time - was not manifested in any of the other conditions of the contract.
[34] Even within cl 3, the content of cl 3.3 suggests by contrasting implication that the time for payment of the premium in cl 3.2 is not of the essence. That implication arises from the fact cl 3.3 uses the clearly consequential words "or the Call option will expire worthless" but cl 3.2 does not. The context that such words appear at the end of cl 3.3's temporal condition for Townsville Pharmacy's notice of exercise of the option but not at the end of cl 3.2's temporal condition for Townsville's payment, implies that time is of the essence for cl 3.3 but not cl 3.2.
[35] Counsel for V Quattro argues that cl 3.2 is in the nature of a limitation rather than a condition, so that non-compliance with it is a frustrating event bringing the contract to an end automatically.[9] It was effectively submitted cl 3.2 is a condition only in the sense that it defines the only way in which the grantee may exercise the option.[10] But that contorts the text of the contract, for cl 3.2 clearly does not regulate the exercise of the option. Clause 3.3 does that. Clause 3.2 merely provides for when the nominal consideration for the contract in which the option is granted is to be paid. It is illogical to reason backwards on the premise, simply because time is plainly of the essence in respect of the contract's condition in cl 3.3 providing for the exercise of the option, that all earlier applicable conditions are also of the essence.
[36] Obviously, the text of those earlier applicable conditions matters to whether temporal compliance with them is essential. The ensuing examination of one such condition, cl 2, well illustrates that compliance with it was identified as of the essence in a way which did not occur in respect of cl 3.2.
2.1 This Agreement is subject to and conditional on the Grantee:
(1) entering into the Star Pharmacy Contract within one month from the date of this Agreement; and
(2) completing the purchase of the Star Pharmacy within six months from the date of this Agreement.
2.2 The Grantee must give the Grantor written notice of satisfaction of clauses 2.1(1) and (2) as soon as practicable." (emphasis added)
[38] Townsville Pharmacy emphasises cl 2 of the agreement, the only clause referring to a condition precedent, makes no reference to the payment of the premium. Clause 2 is specifically targeted at the Star Pharmacy requirements and does not per se preclude the existence of other conditions precedent arising by implication. Nonetheless, the use of a device of this kind in respect of the payment of the premium is obviously an example of the kind of device which answers a question rhetorically posed in argument by V Quattro's counsel.
[39] That question was, "How much more could the draftsman spell out the criticality, the centrality, the necessity, the essentiality of the requirement in cl 3.2 than stating that it is consideration for the call option agreement proper?"[11] It has already been explained why the position contended for by V Quattro is not clearly supported by such a statement. As to the rhetorical question, one obvious answer, already discussed, is that the drafter could have added at the conclusion of cl 3.2 the same words which the drafter did add to the conclusion of the words at 3.3, namely "or the call option will expire worthless". Another obvious answer would have been to deploy the same approach as used in cl 2.1 in respect of the Star Pharmacy arrangements, namely, to expressly stipulate that the agreement "is subject to and conditional on" the premium being paid within the time provided and put it under the heading "Condition Precedent".
[40] That the contract did not deploy such drafting methods in respect of the payment of the premium, in a context where they were deployed in respect of both the Star Pharmacy arrangements and the exercise of the granted option, tells strongly against V Quattro's argument.
[41] Townsville Pharmacy also emphasises that upon the occurrence of acts of default, identified in cl 6, the innocent party is empowered by cl 7 to terminate the agreement. The non-payment of the premium in time is not identified as an act of default in cl 6. However, the range of events targeted in cl 6 is narrow, only relating to the potential insolvency or financial distress of either party. Clauses 6 and 7 do not meaningfully inform resolution of the present controversy.
[42] It was not seriously contended that any other clause of the contract was of material relevance. Some clauses of the contract assume the payment of the premium would have been made. For example:
[43] However, the assumption the premium would have been paid in those contexts is no more or less contextually consistent with one side's argument than the other.
Do cases provide more specific interpretative guidance?
[44] The interpretative exercise to this point trends, for the reasons explained, powerfully in favour of Townsville Pharmacy's characterisation of the contract and the non-essentiality of the time stipulation for the payment of consideration. As explained in Louinder v Leis,[12] where time is not of the essence in respect of a contractual obligation to do a particular thing by a particular day, equity treats that time stipulation as non-essential unless made essential by the giving of a notice requiring performance of that obligation within a stipulated reasonable time. It is not suggested that occurred here, so the consequence of the interpretative exercise to this point is that the exercise of the option by V Quattro appears to have been valid.
[45] It remains however to consider the parties' further arguments premised on cases advanced by them as providing specific interpretative guidance.
[46] V Quattro sought to distinguish the principle in Louinder v Leis, submitting the call option agreement here created an arrangement in the nature of an irrevocable offer, a unilateral contract under which the grantee does not actually promise to do anything in an immediate and unqualified sense.
[47] It may immediately be observed that submission is at odds with the fact the grantee did assume the obligation of relatively prompt performance of significant obligations in respect of the Star Pharmacy purchase in cl 2. That shows this was not an agreement in which a credulous grantor was unilaterally committing to an option to purchase exercisable long in the future without requiring there to be material, as distinct from nominal, contractual obligations to be fulfilled by the grantee to preserve that option in the meantime.
[48] The premise of V Quattro's submission was that an option agreement involves a contract of a very specific kind to which "more than a century of case law" in respect of unilateral or "if contracts" has application. As the following discussion of that case law shows, the principle for which it stands is pertinent to demonstrating the essentiality of the time stipulation for a grantee's actual exercise of the option, which is not the issue here.
[49] United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd[13] involved some aircraft companies selling aircrafts to a finance company which let them on hire purchase. The aircraft companies signed an undertaking to the finance company offering to repurchase them. Its main condition precedent was that the finance company call on the prospective repurchasers to repurchase within a reasonable time of termination of the hire purchase agreements. The call was only exercised belatedly. It also required the finance company to notify the aircraft companies of any default by the hirers within seven days. That requirement was not met either. It was held that the repurchase undertaking was a unilateral contract by which the prospective repurchasers made an irrevocable offer to repurchase, but only if the conditions in it were fulfilled. Lord Denning MR observed:
"It has been shown, quite correctly, that the agreement to repurchase was not an ordinary bilateral contract. It was a unilateral contract of the kind which does not become binding on both sides until a condition precedent has been performed."[14]
[50] His Honour then drew on the example of lease cases where the lessee is given an option to renew and cited a line of cases where options had not been exercised as stipulated for. He then observed:
"In point of legal analysis, the grant of an option in such cases, is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer."[15]
[51] Lord Denning did not reach a determinative view regarding the consequence of non-compliance with the proviso requiring notice of default. He reasoned that the failure to call for the repurchase within a reasonable time of termination meant a condition precedent to the repurchase offer becoming irrevocable had not been fulfilled, with the consequence that the obligation to repurchase never came into being.[16] In the present context, United Dominion's failure to call for the repurchase in time equates to a failure to exercise the option in time; it does not equate to a failure to pay the consideration in time.
[52] One of the line of cases referred to by Lord Denning, Hare v Nicoll,[17] was also cited by V Quattro's counsel. In that case the plaintiff sold the defendant shares in a private company with an option to repurchase half of them for £4,687 10s. The terms of the option to repurchase required the plaintiff to give the defendant notice in writing of his desire to repurchase before May 1 1963 and, on payment of the sum of £4,687 10s before June 1 1963, the plaintiff could at any time thereafter, by deed, revoke the trust which had been the vehicle for the holding of the shares. The plaintiff gave notice of the desire to repurchase by letter which was not written before May 1 and tendered the relevant payment sum on June 7, after the due date of June 1. It was held the exercise of the option had not been validly exercised because the two conditions as to date had to be strictly complied with. Winn LJ went so far as to describe the case as one of privilege rather than an option, observing of the option to repurchase provision:
"The whole provision represented a restraint or clog upon the respondent's freedom to dispose for her own advantage of property sold to her in the initial stage of the transaction after the end of April, 1963, capable of being extended throughout May, 1963, by a duly given notice. It was of manifestly essential importance to her that she should know precisely the duration of that restraint, and should be free from it unless the conditions upon which it was accepted by her were strictly complied with."[18]
[53] Those observations, in referring to the significance of the grantor's restricted commercial freedom in respect of the subject of the grant pending its potential exercise, well explains why the time stipulation for its exercise is essential to the enforceability of the grant. Again though, we are not here concerned with the essentiality of time stipulations for the actual exercise of the granted option.
[54] V Quattro's counsel also relied upon United Scientific v Burnley Council,[19] where Lord Diplock observed that in the Court of Chancery and in the courts of common law the rules that have been developed about particular stipulations not being of the essence or not being conditions precedent applied to synallagmatic contracts only and not to unilateral or "if contracts".[20] His Honour observed the most germane example of such contracts were options to purchase. He cited the aforementioned reasoning of Lord Denning MR in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd,[21] that the grant of an option to purchase real or personal property or to renew a lease is an irrevocable offer which, to be turned into a binding contract, must be accepted "in exact compliance with its terms".[22] Lord Diplock observed:
"Exact compliance with the terms of an offer in an "if contract" had been required in courts of equity as well as in courts of common law ... A rationale of the distinction which was drawn between the two kinds of contracts in courts of equity is that equity was concerned with the performance of contracts into which parties had already entered. It did not force any person to enter into a contract with another ... A more practical business explanation why stipulation as to the time by which an option to acquire an interest in property should be exercised by the grantee must be punctually observed, is that the grantor, so long as the option remains open, thereby submits to being disabled from disposing of his proprietary interest to anyone other than the grantee, and this without any guarantee that it will be disposed of to the grantee. In accepting such a fetter upon his powers of disposition of his property, the grantor needs to know with certainty the moment when it has come to an end."[23]
[55] I have quoted rather than merely paraphrased the above passage because examination of it discloses two significant points. Firstly, as Winn LJ did in Hare v Nicoll, the above passage highlights as justification for strict compliance, the point of practical business application that so long as the option remains open, the grantor submits to being disabled from disposing of the proprietary interest to anyone other than the grantee. This again prompts the point that in the present case the grantor submitted to that position with the business-like assurance of cl 2's clearly stipulated essential need for the grantee's earlier compliance with the substantial obligation to have entered and completed the Star Pharmacy contract and to give notice thereof.
[56] Secondly, the above passage again shows why V Quattro's reliance on this line of authority is not apt to the present case. It is quite clear this line of authority requires exact compliance with the contract's conditions for the actual exercise of the option being granted. Thus, it makes plain that in the present case, if the issue was whether the call option had been exercised as required, exact compliance would be required with the stipulation it be exercised by service of a notice of its exercise by 5pm on the call option expiry date of 28 August 2023. But this case is not concerned with whether time is of the essence in respect of the actual exercise of the option.
[57] In developing the earlier mentioned argument that cl 3.2 is akin to a limitation which if frustrated automatically ends the contract, V Quattro's counsel referred to Stillwell & Co Pty Ltd v Budget Rent-A-Car,[24] which followed Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd.[25] In each case a lease offered an option to renew exercisable only if rent had been paid punctually, which it was not. As that was a condition precedent to the tenants being able to accept the offer of renewal it was held the option was not validly exercised. The reasoning in Gilbert J McCaul, followed in Stillwell, was that the want of punctual payment could not in such a context be waived, for the offer to renew could not be accepted if its conditions for acceptance had not been performed. It thus followed a contract was not created, there existed no contractual right to waive and the purported acceptance of the option to renew was really only a new offer. So it is that in lease cases equity will not provide relief against forfeiture arising from failing to exercise an option to renew, there being no loss of a proprietary right to relieve against.[26]
[58] It may be accepted the requirement of the condition which was not met in Gilbert J McCaul and in Stillwell was not a requirement going directly to the act of exercise of the option in the way it was in the line of English cases discussed above. But like those cases it was clearly stipulated as a condition to be met in order to actually exercise the option. So, for example in Stillwell the relevant parts of the clause in issue were:
"6. Upon the written request of the lessee delivered to Mobil not less than three months before the expiration of the term of this sub-lease and provided that at the date of exercise of the option and at the date of the expiration of the said term there is no subsisting breach or non-observance by the lessee of any of the covenants obligations and provisions herein contained and provided further that during the said term the lessee has regularly paid the rental reserved hereunder in accordance with CL1 hereof and has paid all other payments due hereunder punctually on demand, then Mobil will grant to the lessee a further sub-lease of the demised premises for the terms set out in item 8 of the schedule ..."[27] (emphasis added)
[59] Thus, it can be seen the requirement in Stillwell was expressly included as one of a list of requirements, including the manner and timing of the act of exercise of the option, clearly stipulated as essential entitling requirements through use of such words as "provided that" and "provided further that". There is no such clearly stipulated essentiality in respect of the deadline for the payment of the $10 in the present contract. The use of proviso stipulations as in Stillwell is a third answer to the rhetorical question of counsel for V Quattro about how the drafter could have made clear that compliance with the time for payment of the $10 was essential.
[60] V Quattro also relied upon Barton v Morris.[28] In that case Mr Barton and a company called Foxpace entered into a contract pursuant to which Foxpace was liable to pay Barton £1.2 million in the event that a piece of real estate was sold to a purchaser introduced by Barton for £6.5 million. Lady Rose, with whom Lord Briggs and Lord Stephens agreed, considered the contract was a straightforward unilateral contract under which Barton was not obliged to make an introduction of a potential buyer to Foxpace, so that if he chose not to do so he would not have been in breach of any contractual obligation. [29] Her Honour later observed Barton did not come under a contractual obligation to provide the introduction to Foxpace and rather this was a unilateral contract by which the making of the introduction, were that to occur, was what brought the contract into existence. It is a considerable stretch to compare that case to the present, as if the present contract was unilateral until and unless the payment of the premium within two days brought it into existence. The facts of Barton v Morris clearly required the occurrence of specified subsequent events to trigger the existence of an enforceable contract in a way that is not apparent of the timing of the receipt of consideration here.
[61] Townsville Pharmacy advanced the additional argument that the words of cl 3.1 and 3.2 can be construed as constituting a promise at the time of the agreement to pay the premium so that the consideration was a "promise to pay" the premium as distinct from the payment of the premium. The argument is founded on the High Court's decision in Barba v Gas & Fuel Corporation (Vict)[30] and a line of associated cases now discussed.
[62] In Barba v Gas & Fuel Corporation (Vict)[31] the outcome of the case in part depended upon whether an option, granted by one Craigie to the Gas and Fuel Corporation to acquire an easement over property he later sold to Mr. and Mrs Barba, was binding. The operative part of the executed agreement relevantly commenced:
"IN CONSIDERATION of the sum of $10.00 now paid to the Grantor (the receipt of which is hereby acknowledged) by GAS AND FUEL CORPORATION OF VICTORIA ...Hereby Grant unto the Corporation an option to acquire an easement for the Corporation to construct, maintain and operate one or more pipelines ..."[32]
In fact, the $10 was not paid despite its receipt being acknowledged by the written agreement.
[63] It was argued in Barba that there had been a promise to pay the $10 and that was sufficient consideration for the grant. Gibbs J, with whom Stephen and Jacobs JJ agreed, alluded to Lydia Court Pty Ltd v Panousis[33] as possibly supporting the view that since the option was expressed to be in acknowledgement of a payment which had not been made there was no consideration. But it was unnecessary to decide the point because in Barba there was additionally evidence of an oral agreement that the $10 was to be paid when the respondent received the option. That was regarded as a promise to pay, which was sufficient consideration for the grant of the option.[34]
[64] In Lydia Court Pty Ltd v Panousis,[35] the decision referred to by Gibbs J, the contract operatively commenced:
"IN CONSIDERATION of the sum of One dollar ($1.00) paid to me/us by you ...".
Street J there held if the one dollar had not in fact been paid (despite the written contract recording it had), no contractual obligations had been imposed. In Barba at first instance Crockett J considered Lydia Court had been wrongly decided, briefly reasoning that despite the erroneous recording of the consideration having been paid, the "consideration remains in the form of a debt due".[36] However, in the High Court in Barba, Gibbs J found it unnecessary to decide the correctness of Lydia Court because of the additional evidence of the oral agreement the $10 would be paid when the respondent received the option.[37]
[65] Here, unlike in Barba, there was no accompanying oral agreement to suggest that the consideration was not the payment of $10 and rather was only a promise to pay $10. But the written agreement itself here contemplated the payment could be made at a time after the execution of the contract. The circumstance common to each case is that the nature of the consideration was identified on the making of the contract and it was agreed the payment constituting that consideration could be made in the future. Whether the consideration is characterised as a promise to pay or not, it was the fact the consideration was identified, not the timing of the payment, which gave contractual force to the agreement.
[66] Barba was considered in Himbleton Pty Ltd v Kumagi (NSW) Pty Ltd,[38] where Giles J considered a written put option agreement which operatively commenced:
"In consideration of the sum of one dollar ($1.00) paid to the Grantor by the Grantee (the receipt and adequacy of which is acknowledged), the Grantor hereby agrees that the Grantee has the irrevocable right to require the Grantor to purchase the Property subject to and on the same terms and conditions herein contained ...".
Those terms recorded the one dollar consideration had been received but in fact it was not paid. Giles J quoted the reasons of Street J in Lydia Court and Crockett J in Barba at first instance. He observed the High Court's decision in Barba did not determine which of their competing conclusions was correct.
[67] Giles J went on to prefer the reasoning of Crockett J, explaining:
"It is true, as Kumagai pointed out, that cl 1 of the put option describes the dollar as "paid" rather than "payable", but it is quite clear that it was intended that the payment of a dollar be consideration for the grant of the put option. Had there been a substantial rather than nominal consideration, Kumagai would have been entitled to go beyond the word "paid" and the acknowledgement of receipt in order to enforce a promise by Himbleton to pay the consideration. If there be a promise to pay for that purpose, then equally Himbleton can go behind the word "paid" and the acknowledgement of receipt in order to assert the same promise as consideration for the put option."
[68] The conclusion inherent in that reasoning is 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. The premise of such reasoning seems to be the parties' mutual intention, inherent in the contract's acknowledgement of payment, that they were executing a contract for which the grantee's consideration had already been given. Put another way, they did not intend that the commencement of an enforceable contract between them was dependent upon the future payment of consideration for the grant of the option, for they regarded consideration for the grant as already having been given. It is that feature which seems to justify the reasoning that if the amount acknowledged as paid turns out to be unpaid, then it is not a missing requisite element for the commencement of an enforceable contract. Rather it merely becomes a debt owing for an amount mutually but wrongly regarded as having been paid and thus impliedly promised to be paid.
[69] Such reasoning suggests a liberal interpretative approach in favour of the existence of a contract is apt, absent contrary textual indications, where there has been neglect in connection with the paying of consideration of a nominal scale. If such an approach is apt where the nominal payment is supposed to have been made on or before the act of entry into the contract, then it is apt, absent contrary textual indications, when the payment is expressly permitted to be made subsequent to entering into the contract, as in the present case. I will return to the significance of the nominal scale of the consideration after dealing with another case relied upon by counsel for Townsille Pharmacy, Dacco Pty Ltd v Crows Nest Fund Pty Ltd.[39]
[70] In Dacco, Ward CJ in Equity, as her Honour then was, considered a deed of put and call option. The put option fee of $10 to be paid by the grantor "on the date of" the deed was not paid. On the other hand, the call option fee of $105,000, to be paid over 18 months in three equal instalments, was paid. The deed's clause requiring payment of the put option on the date of the deed was headed "Consideration". Ward J rejected the argument that the payment of the put option as provided was a condition of the validity of the deed, finding there were clear textual indications to the contrary and that the breach of the obligation was clearly waived by the subsequent acceptance of the sum tendered.[40] Dacco is of no material assistance to the present interpretative exercise save for illustrating the elementary expectation that the essentiality of a clause in an individual case should be ascertained from the text of the agreement in that case.
[71] Ward CJ's view there had been a waiver was not taken up by Townville Pharmacy's counsel as applicable here, although V Quattro's inaction in response to the failure to pay the premium in time, even after receiving the requisite notice of V Quattro's timely purchase of Star Pharmacy, founded an alternative argument in the event I concluded 3.2 had been an essential time stipulation. That argument, based on the reasoning of Mahoney J in Falconer v Wilson,[41] was that even if cl 3.2 had been an essential time stipulation, Townsville Pharmacy's inaction in allowing the stipulated time to pass reduced the clause to one which would not warrant recission unless there followed a notice requiring performance within a specified reasonable time which was not then complied with. Townsville Pharmacy's counsel explained that argument was not that there had been a waiver but that the clause, if it had been essential, lost its essentiality of time because no action was taken in response to it not being fulfilled in time. It is unnecessary to rule on that argument because these reasons conclude cl 3.2's time stipulation was not essential.
[72] Dacco's combination of the $10 fee and the subsequent conduct in paying the requisite $105,000, mirrors a feature of this case, namely the modest scale of the obligation to pay the $10 compared to the significant obligation to undertake the Star Pharmacy purchase. Here, as already explained, meeting the time for payment of the former was not expressly identified as a condition precedent in the way the timing of the latter, more onerous obligation was. If the contract had clearly indicated time was of the essence in respect of the requirement for when the $10 was to be paid by, it would be no answer to protest that it was only $10. However, in the absence of any such clear indication, the modest scale of the $10 premium is of itself a feature which trends against inferring the time for its payment was of the essence.
[73] The nominal scale of the consideration is consistent with the requirement to pay it being thrown in as notional consideration, so that the parties' business arrangement could take the legal form of an enforceable contract, providing business certainty. That is not to say its nominal scale as consideration meant it was a fiction. The parties clearly regarded consideration to be essential, for they clearly wanted their agreement to have the status of a contract. But the amount of consideration was not of such a scale as to suggest the timing of its payment was essential. In support of this point Townsville Pharmacy highlighted the following apt observation of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd:[42]
"The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be and that this ought to have been apparent to the promisor." (emphasis added)
[74] The modest amount of consideration here certainly does not suggest the timing of its payment would have been of determinative importance. To the contrary, it is improbable that having gone to the obvious trouble of creating their contract the parties intended it would within two days be rendered unenforceable if a mere $10 had not yet been paid.
[1] In conclusion, recital C does not say that the grantor's agreement to be bound is only operative if the premium is received within the time stipulated in the agreement. At best for V Quattro, recital C is ambiguous as to whether it means that. It may simply mean that the grantor's agreement to be bound derives from the fact there is to be consideration, in the form of the provision of the premium to the grantor, not from when the benefit of the consideration is to be received.
[2] However, the operative text of the agreement clearly confirms the latter meaning. That is apparent from a powerful accumulation of features, namely:
(a) cl 3.1 does not say payment of the premium in consideration of which it makes the grant of the option must first occur for an enforceable contract to come into existence or for the grant to become operative;
(b) cl 3.2 contemplates payment of the premium occurring after the date on which cl 3.1 of the agreement makes the grant;
(c) cl 3.3, the clause actually stipulating the mandatory requirements for the exercise of the option, did not include a requirement that the premium was paid in the time stipulated by cl 3.2;
(d) cl 3.2 was not accompanied by a condition like in cl 3.3, stating "the call option will expire worthless" if the payment of the premium does not occur in the time stipulated;
(e) cl 3.2 was not accompanied by a statement that the payment occurring in the time stipulated was an event which "this agreement is subject to or conditional on", which, in telling contrast, was a condition to cl 2.1's imposition of the event of a far more significant contractual commitment upon the grantee than merely paying $10;
(f) that $10 is so obviously a nominal amount of itself supports the interpretation that it was the existence of the contractual element of consideration within the agreement - giving it the business certainty of a contract - rather than the consideration's quantum or its prompt payment, which was essential.
[3] Those features demonstrate both that the payment of the premium within two business days was not a condition precedent to the coming into existence of an enforceable contract and that the time stipulated for its payment was not of the essence.
[4] It follows the declaration sought should be made. There is no apparent reason in a case of this kind why costs ought not follow the event and I will order accordingly.
[1] Townsville Pharmacy's application also sought an order for specific performance of the agreement but it was not pursued at the hearing, it apparently being considered a declaration would be sufficient for present purposes.
[2] Affidavit of Nicholas Peter Loukas Ct doc 5 ex NL2.
[5] Eg Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1935) 53 CLR 618, 636.
[6] Eg Metropolitan Gas Co v Federated Gas Employees Industrial Union [1925] HCA 5; (1925) 35 CLR 449, 455.
[7] Eg Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656-657; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104, 116-117.
[8] [1886] UKLawRpKQB 52; (1886) 17 QBD 275 at p 286. Also see Onesteel Manufacturing Pty Ltd v Bluescope Steel (AIS) Pty Ltd [2013] NSWCA 27; [2013] 85 NSWLR 1, 21.
[9] Citing the reasoning of Brennan J in connection with leases in Progessive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 42. Also see Denny Mott & Dickson Ltd v James H Fraser & Co Ltd [1944] UKHL 3; [1944] AC 265, 274.
[10] Paraphrasing language relied upon by V Quattro's counsel by Fraser JA in Wagners Cement Pty Ltd & Anor v Boral Resources (Qld) Pty Limited & Anor [2020] QCA 289 [41].
[12] [1982] HCA 28; (1982) 149 CLR 509, 512, 526.
[14] [1968] 1 WLR 74, 80.
[15] [1968] 1 WLR 74, 81.
[16] [1968] 1 WLR 74, 81-82.
[18] [1966] 2 QB 130, 148.
[20] [1978] AC 904, 928.
[21] [1968] 1 WLR 74, 81.
[22] [1968] 1 WLR 74, 81.
[23] [1978] AC 904, 929.
[26] Piazza Trevi v Cromwell BT Pty Ltd as custodian for the Cromwell Symantec House Trust [2017] NSWSC 794. Also see Replay Australia Pty Ltd v NightOwl Properties Pty Ltd [2023] QCA 76.
[27] [1990] VicRp 52; [1990] VR 589, 591.
[29] [2023] UKSC 3 [17].
[32] [1976] HCA 60; (1976) 136 CLR 120, 125.
[34] [1976] HCA 60; (1976) 136 CLR 120, 131-132.
[36] Gas & Fuel Corporation of Victoria v Barba [1976] VicRp 81; [1976] VR 755, 763.
[37] [1976] HCA 60; (1976) 136 CLR 120, 132.
[40] [2020] NSWSC 1550, [75]-[77].
[41] [1973] 2 NSWLR 131, 139.
Townsville Pharmacy No 4 Pty Ltd
V Quattro Pty Ltd [2023] QSC 105
(1976) 136 CLR 120
(1991) 29 NSWLR 44
(1935) 53 CLR 618
(1925) 35 CLR 449
(2014) 251 CLR 640
(2015) 256 CLR 104
(1985) 157 CLR 17
(1982) 149 CLR 509