Millions Invested and Nothing to Show for It - That's Just the Nature of Option Agreements
The Ontario Court of Appeal in 798839 Ontario Limited v. Platt, 2016 ONCA 488, recently affirmed a trial judge’s decision that saw an optionholder that invested millions into the development of mining claims be left with zero interest in those claims. The optionholder failed to meet all of the necessary preconditions to be able to exercise its option, and was left without any interest to show for it. What seems like an unjust outcome is just the nature of options, according to the Court of Appeal.
Jacobus Hanemaayer (“Hanemaayer”) and his corporation, 798839 Ontario Ltd (“798”) (collectively, the “Investors”), entered into an Option Agreement with Robert Platt (“Platt”), the owner of a number of undeveloped mining claims containing kaolin deposits in Northern Ontario.
Pursuant to the Option Agreement, title of the claims was transferred to the Investors (so that the Investors could benefit from tax programs), though the beneficial title remained with Platt. However, the Investors could earn a 100% interest in the mining claims by fulfilling its obligations, over a period not exceeding five years, to finance and carry out the required exploration, development and testing work, i.e., fully fund the development of the claims. In exchange, if the interest reverted to the Investors, Platt would receive a 5% royalty.
Over several years, the Investors sunk $10.8M (in 1988 dollars) for a drilling exploration program, but failed to finance pilot plant, bulk sampling, or other material testing necessary to establish a final feasibility study for a full production mining facility.
Soon, the relationship between the Investors and Platt soured, and the Investors took the position at trial that the Option Agreement transferred title and ownership to them, amongst other claims that Platt misused the money provided to him to explore the claims. The trial judge, Justice Penny, found that the Investors had no interest in those claims, which rested solely with Platt, as they had failed to fully-finance the development of the claims. In essence, the pre-conditions for exercising the option had not been met, and title reverted back to Platt.
The Court of Appeal’s Analysis
The Investors appealed the decision, asking the Court of Appeal to find the trial judge erred in interpreting the Option Agreement to include the automatic reversion of the claims to Platt in the event that the development of the project was not fully funded. The Investors simple position was that they paid for the development of the claims, so they held the interest in the claims, not Platt.
The Court of Appeal applied the principles set out by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, and interpreted the Option Agreement in the surrounding circumstances of which it was entered into, referred to as the “factual matrix”. In this case, the Investors appealed the judge’s decision by arguing that because Platt had no capital to develop the claims, they were worthless without their investment. The Investors argued that they would not have entered into an agreement whereby they would direct funds into a development without obtaining any interest. They took the position on appeal that such an arrangement was not commercially reasonable, and the Option Agreement cannot be read on that basis.
The Court of Appeal found that the trial judge had no evidence before him of unbalanced bargaining, and that it was equally absurd to think that Platt would give up a 100% interest in his claim in exchange for partial financing and only a potential 5% royalty from a corporation with no assets.
The Court of Appeal went further to explain that option agreements are, by their very nature, instruments that provide for unbalanced outcomes. The optioner (the party granting the option) benefits from the price if the option is exercised, but runs the risk of being stuck with that potentially much lower price than what turns out to be the value of the property when the option is exercised. On the other hand, the optionee (the one holding the option) purchases the right to obtain the property at the agreed price if it performs its obligations, but has the complete discretion to perform those obligations. If it chooses not to, it loses out on the price paid for that option.
Options Can be Cruel
What is noteworthy in this case is the Court’s recognition of the principles of contractual interpretation using the factual matrix analysis outlined in Sattva, but its strict reading of the Option Agreement resulting in its unwillingness to favour the Investor who poured millions into the development of the claims, but not quite enough to reach the “full funding” requirement to obtain the interest in the claims
Though harsh, the plain reading of the terms of the Option Agreement, and the nature of option agreements themselves, could not be overcome by the consideration of the factual matrix.
litigation Mining Claims Option Agreements