02/02/2010

Offer and acceptance are the basis of our contract law.  For a contract to exist you must have both of these (among other things).  In business, offers are made all the time, generally with the intent of creating contracts if they are accepted. So what happens if circumstances change dramatically before the offer is accepted?

If you are in business and you make an offer with a view to creating a contract, what will happen if circumstances change dramatically and then the offer is accepted?  Will you still be required to perform the contract despite the changed circumstances?

This was the conundrum the New Zealand Supreme Court faced in a recent case of Dysart Timbers Ltd v. Neilsen.  In that case the defendant sought to get out of a deal on the basis that the circumstances changed and the offer automatically lapsed because of those changed circumstances.

In summary, the Supreme Court said it is important to focus on the intention of the party making the offer.  What is required is an objective assessment of the terms of the offer and the circumstances in which it was made. If an offer was made based on a particular factual basis or assumption, whose continued existence was fundamental, a court could find an implied condition that the offer would lapse if that basis or assumption ceased to apply.

But an offer would only lapse if it is objectively apparent that the willingness of the offeror to be bound by the offer has been fundamentally undermined by the change of circumstances.  A fundamental change would be rare. The test for implied lapse of offer is set at a high level.

The upshot of all this for business people is to not take the risk if you can avoid it. Ensure that any substantial contractual offer is put in writing and carefully drafted to give due consideration to possible outcomes.  It is essential to state what is intended.  If you can set out any conditions that would lead to automatic lapsing of the offer, then it would be good to do so. 

For further information regarding Sale of a Business and Contracts, please contact Peter Townsend of TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.