Court of Appeal Finds Put-Right Option as Forming Part of Consideration
This dispute involved an Asset Purchase Agreement (“APA”), wherein the defendants purchased from the plaintiffs a judgment they had obtained against a third party. A corporation owned by the defendants bought the judgment for two promissory notes and $200,000. The APA contained a “Put-Right option,” which allowed the plaintiffs to compel the defendants to purchase the shares for $3.00 a share, if notice was given within one-year following January 22, 2013. Subject to proper notice, the defendants would then have 10 business days to finalize the purchase of these shares. If the defendants failed to purchase the shares in accordance with the agreement, the plaintiffs were entitled to exercise any remedies available to them including filing a lawsuit.
On February 25, 2013, the plaintiffs gave notice to the defendants that they wished to exercise the Put-Right option. The defendants incorrectly responded that this notice was premature. On December 9, 2013, the plaintiffs sent another letter in which they demanded payment for the shares by no later than January 2, 2014. The defendants failed to pay and the plaintiffs sued and brought a motion for summary judgment.
The motion judge ruled in favour of the plaintiffs on summary judgment and the defendants appealed. The appeal was dismissed. The standard of review in this case was reasonableness, meaning that absent a palpable and overriding error by the motion judge, the Court of Appeal did not have jurisdiction to overrule the motion judge’s ruling. During the motion the defendants argued the Put-Right option contained in the APA was a unilateral contract, which required strict compliance on behalf of the plaintiffs if they were to enforce the Put-Right option. The defendants argued that the plaintiffs cannot now seek to enforce the Put-Right option because they failed to provide section 116 Certificates for the shares they were seeking to sell. The motion judge found the plaintiffs substantially complied with the terms of the Put-Right option by offering proper notice within the prescribed time frame, and any failure on their behalf of to provide section 116 Certificates did not vitiate the option clause altogether.
The Court of Appeal found the Put-Right option to be a bilateral contract, as it formed an integral part of the overall agreement for the purchase of the judgment. The Put-Right option operated as security for the plaintiffs for $400,000, which was part of the purchase price due to the plaintiffs. As such, substantial compliance was all that was necessary on the part of the plaintiffs in order to rely on the Put-Right option.
The issues and facts involved in this case are highly idiosyncratic, which renders this decision of little guidance for future cases. However, the Court of Appeal’s finding the Put-Right option as a bilateral contract was pivotal in the plaintiffs’ success in this proceeding. Commercial contracts can be very complicated at times, sometimes entail a “mini-contract” that forms part of the overall agreement, or agreements within an agreement. How these “mini-contracts” are interpreted by the courts in relation to the overall agreement will impact the parties’ respective exposure to liability. Depending on a party’s particular interests in an agreement, it may be prudent to draft certain option clauses in a way that characterises them as forming part of the consideration for the purchase or sale of assets or interests.
See: Flintoff v Crown William Mining Corporation 2016 ONCA 86
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