Are Option Agreements Unbalanced? They Should Be.

At first glance, a commercial agreement that provides for an option to purchase property or a right may seem unfair. The party who has the option, i.e. the optionee, could invest significant money and time in a venture; however, if the optionee does not satisfy every precondition of the option, it may have nothing to show for it in the end. So why do Canadian Courts enforce the preconditions of an option agreement so strictly? A recent decision of the Ontario Court of Appeal, 798839 Ontario Ltd. v. Platt, 2016 ONCA 488, per Blair J.A. ("Platt"), answers this question.

In Platt, the Court made it clear that the reason for requiring the optionee to fulfill every precondition of the option is to protect the interests of the party who gave the option, i.e. the optionor. By giving the option, the optionor risks that it will be bound by the price it offered if the optionee fulfills the preconditions of the option. Thus, the Courts require that the optionee strictly adhere to the terms of the option because of the risk assumed by the optionor.

While this reasoning could very well result in the optionee investing time, money and effort in an option that is never realized, this is the chance the optionee takes. In the eyes of the Court, the unfairness to the optionee is irrelevant.

The Facts

Platt involved an agreement to develop mining claims in northern Ontario. The respondent owned the rights to various mining claims with respect to mineral deposits. After exhausting all of his funding, the respondent sought investors to develop his mining rights. The appellant was an investor interested in pursuing the project with the respondent.

The appellant and the respondent entered into various agreements, including...