24 June 2020 by , and Corporate & Commercial Alert

When is an irrevocable offer in fact revocable?

This was the question the Gauteng High Court (High Court) recently had to address in W & E le Roux Slaghuis (Pty) Ltd and Another v Van Niekerk 2020 (2) SA 624 (GP), which was an appeal from the judgment of a single judge (First Judgment).

The Facts

Van’s Auctioneers, acting on behalf of W & E le Roux (Pty) Ltd (W & E), conducted a public auction at which Mr Van Niekerk made a bid and signed a sale agreement to purchase Lot 1, a property including a building, a bakery and a “butchery with cold room and freezer rooms” (the relevant part for this case) for the total sum of R3.3 million. The sale terms included a provision that the agreement was an offer to purchase and that Van Niekerk as purchaser was “irrevocably bound” for a period of 14 days, during which time the offer was open for acceptance by the seller, W & E. 

Four days after making the offer, it came to Van Niekerk’s attention that two cold rooms and a freezer room, forming a substantial part of the butchery premises, were being demolished and parts of the cool rooms and freezer rooms were being removed. As a result, Van Nierkerk withdrew his offer on the basis that what remained of the premises was no longer the premises which he offered to purchase, and by removing/demolishing parts of the cool rooms and the freezer rooms, W & E had repudiated the sale agreement.

In response, W & E and Van’s Auctioneers argued that Van Niekerk’s withdrawal of his offer was ineffective on the basis that the offer made was irrevocable and had not yet been accepted and Van Nierkerk was accordingly not entitled to withdraw his offer to purchase. In fact, the auctioneer paid to remedy certain demolition and removal work due to his error in listing the items being removed as a separate lot at the auction.

However, complexities of the relationships created between the auctioneer and each of the seller and the purchaser are not relevant to this note, which deals with the agreement/s between seller and purchaser. This analysis is not affected by whether or not the seller or purchaser act directly or through an agent.

The High Court’s decision

The High Court dismissed the appeal and confirmed the First Judgement in favour of the purchaser, Van Niekerk. Van Niekerk was entitled to withdraw his offer notwithstanding that the offer was stated to be irrevocable.

The High Court held that the irrevocable offer constituted an option to sell granted to the seller, which option agreement was in existence and conferred contractual obligations and rights on both the seller and purchaser. This agreement must be distinguished from the sale agreement, which would come into effect when the seller accepted the purchaser’s offer and exercised the option. While the sale agreement was not yet in existence and therefore could not be breached, the option agreement was in existence and could be breached by the seller and (depending upon the nature of that breach) might entitle the purchaser to revoke the offer, notwithstanding that it was expressed to be “irrevocable”.

In short, the High Court found that the option agreement placed an implied duty on the seller to preserve the merx (the asset which is the subject matter of the option and of the sale) and should the merx be sold to another, undergo material damage or change its fundamental character, the seller will have repudiated the option agreement on the basis that the asset is no longer the same asset which the offeror intended to purchase. The purchaser may accept the repudiation and revoke the irrevocable offer, as was done by the purchaser in this case.

Conclusions

Generally, an offer may be revoked at any time before the offer is accepted by the offeree. Even an offer stated to be irrevocable may be revocable in certain circumstances. In particular, where it is an offer to purchase and an act or omission of the seller (or its agent) changes the character of the merx or breaches the seller’s implied duty to preserve the merx.

Accordingly, the terms of agreements which contain irrevocable offers should be carefully considered regarding matters such as: time periods for acceptance and methods of acceptance; when risk and benefit passes; whether what constitutes material damage can or should be defined, and whether force majeure may excuse either party.

It seems clear on the facts of this case that the butchery cold room and freezer room were a material part of the merx (Lot 1) which suffered material damage clearly caused by the seller or its agent. More difficult questions may arise where the merx is something like a share in a company.

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