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Powered by Bactalicontrahendo - Option and Preference Contracts Option and Preference Contracts Bactalicontrahendo contracts are aimed at concluding another contract, generally prohibited but with exceptions for option and preference contracts Option contract restricts offeror's right to revoke an o...

Powered by Bactalicontrahendo - Option and Preference Contracts Option and Preference Contracts Bactalicontrahendo contracts are aimed at concluding another contract, generally prohibited but with exceptions for option and preference contracts Option contract restricts offeror's right to revoke an offer, keeping the offer open for a specified period of time Holder of an option can bring a contract into existence by exercising the option and accepting the offer Preference contract binds one person to give preference to another when concluding a specific type of agreement, such as the right of first refusal Example of preference contract: a undertakes to offer something to b before offering to others, if a decides to sell Option may be granted graciously or for consideration, such as with monetary value involved An option can be kept open for a specified period of time or indefinitely if not expressly stated Exploring Options in Contracts An option can be an exclusive right or a transferable right to third parties. An option has two parts: the main offer, which is an offer to enter into a main agreement, such as a sale or lease agreement, and an ancillary offer, which is an agreement to keep the main offer open for a certain period of time. An option includes a stipulated period of time during which the offerer is not free to revoke the offer and is also not allowed to make the same offer to another party within that time period. An ordinary revocable offer can be terminated by the offerer before it has been accepted, but the revocation must be communicated with the offeree. As a general rule, an option may be transferred through session; however, there are exceptions if transfer is prohibited in terms of the option or if the option is personal to the offeree. In circumstances where the identity of the offeree is important to the offerer, the option may not be transferred because it will then be personal to the offeree. The case of Hitch versus Nel provides guidance on the transferability of options and distinguishes between a credit sale versus a cash sale. Legal Effect and Requirements of Options in Contracts The court held that in some circumstances, an option will be personal to the offeree, or the identity of the offeree will be important to the offeror, especially in credit sales. The legal effect of an option is to render an offer irrevocable, and any attempt to revoke the offer will constitute a breach of contract. An option should specify the time within which it must be exercised, and failure to do so will result in automatic termination. If an option does not stipulate a time period, the offer must be kept open for a reasonable period of time, depending on the specific circumstances of each case. The death of either party does not terminate an option unless stipulated in the contract explicitly or implicitly. Certain types of contracts, such as the sale of land, are required by law to comply with specific formality requirements, like being in writing, in order to be valid. Formality Requirements for Options and Main Offers The main offer must be in writing to be valid, but does the same requirement apply to the option itself? Previous cases have held that if a main offer must be in writing, the option must also be in writing. However, the constitutional case of Mookoni versus Tasos Properties established that the formality requirements for the main offer do not apply to the ancillary offer, such as the option. This ruling applies to options as well, meaning that the formality requirements for the main offer do not necessarily apply to the option. In the event of a material breach of the option, the innocent party has the choice to cancel the contract and seek restitution, or uphold the contract and claim damages. Regardless of whether the innocent party chooses to cancel or uphold the contract, they are entitled to claim damages meant to put them in the financial position they would have been in if the other party had complied with the option. Definition of Preference Contract A preference contract is an agreement where one person binds themselves to give preference to another if they decide to conclude a specified type of agreement. Also known as a right of first refusal or a right of preemption. A undertakes to make the first offer to B in the event they decide to, for example, sell their car. The granter of the preemptive right is under no obligation to sell the property, but the grantee acquires the preferential right to buy if and when the granter decides to sell. Does not create an obligation on A to sell to B, but creates an obligation for A to make an offer to B before making an offer to any other person. Principles relating to options and preference contracts help draw the differences between an option and a right of preemption. Grantor of a preference contract has obligations such as the grantee having a correlative right not to sell and the trigger event in a preemption agreement. Grantor's first obligation is that the grantee has a correlative legal right against the grantor not to sell, supported in case law. In the case of Sotterio versus Redco, Pinetons, Pty Ltd, the grantor cannot be compelled to sell the property but is obliged to give the grantee the preference of purchasing and is prevented from selling to a third person without giving first refusal. Preference Contracts and Right of Preemption A preference contract gives the grantee the first opportunity to purchase the property before it is offered to a third party. If the grantee rejects the offer, the grantor can then make an offer to a third party, but is not compelled to sell. The right of preemption involves a negative contract not to sell the property to a third party without first giving the grantee the first refusal. The grantee has a legal right against the grantor not to sell the property to a third party. A preference contract creates both negative and positive obligations for the grantor. The grantor cannot make an offer to a third party before offering it to the grantee, and must make a good faith offer to the grantee before making an offer to a third person. If the grantor decides to sell, they must make an offer in good faith to the grantee, and cannot avoid the preemption agreement by making an unreasonable offer. The terms and conditions stipulated in the preference contract must be incorporated in the offer to the grantee. It may be difficult to determine whether the grantor is acting in bad faith, but objective criteria can be used to assess the offer. The Grantor and Grantee Relationship When the grantor makes an offer to the grantee, the offer must be kept open for a reasonable period of time. The reasonable period for the offer to be kept open depends on the facts and circumstances of the individual case and must be done in good faith. In the case of Wisserlkerke and Andel versus Wisserlkerke, the grantor may withdraw the offer if they genuinely change their mind about selling the property, unless an option has been entered into with the grantee. If the grantor is in breach of a preference contract, the grantee may be entitled to the same civil remedies as discussed under options, as well as the ORIX mechanism. The grantee may seek an interdict to stop the conclusion of a contract or sale of the property if the grantor is in violation of the preference contract. In the event that a seller concludes a contract of sale with a third party in breach of a right of preemption, the holder of the right of preemption may step into the position of the 3rd party through the OREX mechanism, as developed in the case of Associated SA Bakeries, Pty Ltd versus OREX. Right of preemption remedy in contracts The right of preemption is a remedy concluded between the seller and the holder of the right of preemption. The holder of the right of preemption will step into the position of the 3rd party in a transaction. This remedy has practical problematic areas and criticism, as discussed in the textbook. It is important to understand the specific case in which this remedy was developed and its implications. Take note of the criticism as discussed in the textbook.