Withdrawing an irrevocable offer before acceptance?

By Steven Stuart-Steer on 10 February 2020
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The Pretoria High Court recently handed down judgement in an auction case on 4 December 2019 in W & A Le Roux Slaghuis (Pty) Ltd and Another v Van Niekerk (A554/17) [2019] ZAGPPHC 577 (4 December 2019)  in which it needed to decide whether a bidder was allowed to withdraw his irrevocable offer to conclude an agreement for the purchase of an auctioned item for sale while such offer still remained open for acceptance by the seller.  

Facts of the case

A public auction was held during May 2015 in which a butchery and attaching property of W & A Le Roux Slaghuis (Pty) Ltd was placed on auction and for which the successful bid went to one Mr C J L van Niekerk at R3.3 million.[1]  

When entering the auction, each bidder signed a written agreement (hereafter "Auction Agreement") which provided that the property of the seller was to be "sold without reserve to the highest bidder, but subject to confirmation by the Seller, which confirmation… is open for Acceptance by the Seller at any time [within 14 calendar days]".  The Auction Agreement further provided that the offer to purchase the property of the seller was "unconditional and irrevocable".  

In accordance with the requirements of the Auction Agreement, Mr van Niekerk paid the auctioneers the required sum of R 612,150 as a deposit and to cover the agent's commission fee before leaving the auction.  The purchaser learned shortly thereafter that certain loose assets (which formed part of the auctioned property he had bid on) were then sold separately at the auction and that the freezer and two cool rooms (forming a valuable part of the auctioned butchery) had been near fully demolished.  Additionally, certain fixtures and specialised equipment were in the process of being dissembled and removed by a third-party purchaser.  

In light of the fact that what then remained of the butchery following the auction was no longer the same property on which he had placed his bid, the purchaser's attorney advised the auctioneers and auctioning seller that the bidder was no longer prepared to continue with the transaction under the Auction Agreement and that the his prepaid amount thereunder must be immediately returned.  Following receipt of this, the seller then replied to accept the offer bid of R3.3 million in terms of the Auction Agreement a day before the offer was due to lapse (but being after the bidders withdrawal from the agreement), and accordingly argued that the purchaser was bound to the Auction Agreement and must honour the sale given that his offer was irrevocable according to the Auction Agreement.

Arguments by the litigants 

The purchaser contended that the demolition and removal of substantial parts of the auction property constituted a repudiation by the seller and auctioneer in breach of the Auction Agreement and therefore he was entitled to the election to cancel such agreement.  After a protracted exchange of letters, the auctioneers and seller accepted the repudiation and cancellation of the Auction Agreement but refused to return the deposit and commission fee.

The court accordingly needed to consider whether a party who makes an irrevocable offer may withdraw the offer whilst it is still open for acceptance. 

Court's decision

It was held that a sale by public auction entails the conclusion of three contracts, namely: (i) between the seller and the auctioneer (as principal and agent, respectively); (ii) between the purchaser and the seller; and (iii) between the purchaser and the auctioneer.  The single Auction Agreement was broken down into this constituent parts.

The court found that the agreement between the purchaser and the seller constituted an option to purchase the auctioned property.  Such option imposes a tacit duty on the seller to preserve the auctioned property being sold.  The option could accordingly only remain open for acceptance by the seller for as long as it acts in accordance with its agreement.  

By breaching its duty of care in allowing damages to, and material changes of the character of, the auctioned property, it was held that the seller had repudiated the option in breach of the Auction Agreement, which entitled the purchaser to withdraw his offer whether or not the offer was said to be irrevocable.

Cancellation before the contract comes into existence?

In arriving at its conclusion, the court also needed to consider whether it was possible for a party to repudiate an agreement before it has fulfilled the required suspensive conditions so as to become effective. 

The Auction Agreement needed to be read as an option for while it was open for acceptance, constituting two parts: (i) the offer to sell the property; and (ii) an option to keep that offer open for a certain period.  It was held that such option must be viewed as a contract in and of itself capable of repudiation.  

Although the Auction Agreement had not become unconditional (and therefore was yet to come into full existence so as to be effective) at the time of breach by the seller, the court held that the option to conclude such agreement was in force and capable of breach.  Accordingly, the conduct of the seller constituted a repudiation of the option which entitled the purchaser to elect to accept the repudiation and to cancel the option, which in turn was fatal to the Auction Agreement coming into existence.

Conclusion

The fact that an agreement expressly provides for an offer to be irrevocable does not make it irrevocable under all circumstances.  Where a contracting party commits a material breach of its obligations which would substantially cause damage or change the character of an asset being sold, this can be fatal to the agreement and entitle the other party to withdraw its offer on any of the recognised grounds on which an agreement may be repudiated, despite the offer being said to be irrevocable.

Extrapolating from this case, it would appear that further types of agreement which remain subject to the fulfilment of certain suspensive conditions could be capable of repudiation by a contracting party, entitling such person to cancel the agreement and claim damages despite the agreement having not yet become fully effective and despite any terms providing for the agreement to be irrevocable.
  
Based on this pivotal case, closing conditions should be carefully drafted, including to potentially clearly deal with  the timing for the passing of risk and possible interim obligations of care and safekeeping of assets pending the agreement becoming unconditional.  with the interplay with boiler plates may need careful attention and adjustment in each case so as to cover extenuating circumstances beyond their control (i.e. vis major, casus fortuitus or force majeure events).  Temporary custody or escrow arrangements may also be included an agreement to mitigate or manage transfer risks.

[1] Case available at http://www.saflii.org/za/cases/ZAGPPHC/2019/577.html.

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