Posted on June 20, 2017 by Matt Harker

Interpreting an option to extend a contract: lessons from the Court of Appeal

The NSW Court of Appeal has issued an important reminder to local councils about the need for clarity in tender documents.

In Port Macquarie-Hastings Council v Diveva Pty Limited [2017] NSWCA 97, the Court considered the proper construction of an option to extend a contract. The tender documents provided no information about how the option was to be exercised, leaving open the question of whether it could be exercised by the developer unilaterally or was for the benefit of the council.

The Dispute

After undertaking a tender process in 2011, the Council entered into an agreement with Diveva Pty Ltd (Developer) to supply, deliver, and lay asphalt. Significantly, the contract was for an initial term ‘with a further 12 month option available’.

Towards the end of the initial term, the Council indicated to the developer that the Council would not exercise the option. The developer, however, thought otherwise, and notified the Council that it was exercising the option itself.

The Council rejected the developer’s notification and commenced a further tender process. The contract was eventually awarded to a different provider.

Proper construction of the option

The key question for the Court of Appeal was whether the contract conferred a right on the developer to exercise the option unilaterally. If so, Council would be in breach of contract by failing to honour the developer’s exercise of the option.

In the Court’s view, the contract conferred a unilateral right on the developer, and not the Council, to exercise the option. This was for several significant reasons.

First, the language used, being ‘twelve month option available’, indicated that the extension of the term was offered by the Council to the successful tenderer. Unlike in other parts of the agreement the right to exercise the option was not qualified, suggesting that it was for the developer only to exercise.

The use of the word ‘option’ also indicated that the term was not an agreement that the parties must agree for the contract to be extended. By use of that term, the contract could only be extended unilaterally.

Furthermore, and in reasoning that could be applied to almost all tenders, the Court considered the commercial purpose and context of the tender. It emphasised that an objective observer would see it as unlikely that the Council could unilaterally bind the successful tenderer to continue to supply asphalt under the terms of the contract against its will. The fact that a tenderer has to organise its affairs to ensure it has enough resources to comply with the full contract also suggested that the option belonged to the developer and not Council.

Significance

The emphasis placed by the court on the commercial purpose and context of the tender is particularly instructive. It suggests that a council will need to use express words if it is to displace any suggestion that an option to extend a contract belongs to the successful tenderer and not to the council.

In this regard, the decision provides a timely reminder to councils to exercise great care when drafting tender documents. A council should clearly specify how any option to extend the term of the contract is to be exercised and by whom. The simple inclusion of an ‘option to extend’ is not be sufficient to protect the interests of council.