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Successful tenderers must read letter of appointment carefully

11th December 2012


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A number of contracts in South Africa are concluded after a tender process is followed. A party that tenders should not celebrate prematurely and assume that the mere fact that it receives a letter notifying it that it is the successful tenderer, means that a binding agreement has been concluded. This much is clear from a judgment recently delivered by the Supreme Court of Appeal in the case of Command Protection Services (Gauteng) (Pty) Ltd t/a Maxi Security v South African Post Office Limited.

The crucial question that the court had to decide was whether a binding agreement came into existence by virtue of the tender that was submitted by Maxi Security (an offer) and the subsequent letter of appointment that was delivered by the Post Office to Maxi Security (constituting acceptance of the offer).

The court concluded that the letter of appointment contemplated a formal agreement being finalised and signed before a binding agreement between the parties came into existence. The court found that the letter of appointment was not an unconditional acceptance of Maxi Security’s offer and no contract came to being. 

The Post Office invited companies to tender to provide guarding services. Maxi Security submitted tender documents and subsequently received a letter on 28 July 2003, which was headed “Letter of Appointment”.  By way of this letter, the Post Office advised Maxi Security that the Tender Board had awarded the tender to it and that it was appointed as the supplier of the services as per the tender proposal.  The letter, however, went on to provide that the appointment was subject to “BEE improvement” and to the successful finalisation and signing of a formal contract.  The letter also recorded that a draft contract would be forwarded within seven days for Maxi Security’s comment.  The letter concluded by asking for contact information of the person responsible for the finalisation of the contract process. 

Subsequently on 30 July 2003, the parties met and Maxi Security was advised that even though it tendered for all six regions that were advertised, it had been awarded the tender in respect of only three regions. At this meeting, it was also disclosed that the contract with the Post Office’s previous service provider terminated on 31 August 2003 and Maxi Security had to provide guarding services in the three regions from 1 September 2003. 

Maxi Security started providing the guarding services from 1 September 2003.  Pursuant to the meeting on 30 July 2003, the parties had exchanged various drafts of agreements, but the formal agreement was not ultimately finalised and signed by the parties. Eventually on 30 January 2004, the Post Office wrote a letter contending that it appointed Maxi Security on a conditional month to month basis, subject to and until finalisation of the negotiations and conclusion of the agreement.  Since the negotiations did not result in a formal agreement being finalised and signed, the Post Office advised that it was not prepared to continue with the negotiations and that the month to month contractual arrangement would come to an end on 29 February 2004.

Maxi Security alleged that the 30 January 2004 letter constituted a repudiation of the agreement that had been concluded on 28 July 2003, after the letter of appointment constituted acceptance of the offer that was made by Maxi Security in the tender documents.  Maxi Security accepted the repudiation and contended that it was entitled to damages in the sum of R14 million from the Post Office.

The reference in the letter of appointment to the appointment being subject to “BEE improvement” and the successful finalisation and signature of a formal contract was a clear indication that the Post Office called for further negotiation and a formal contract had to be finalised and signed.

Despite the fact that Maxi Security had already started rendering services from 1 September 2003, the court concluded that the letter of appointment left little room for doubt that there could not be a binding agreement until the negotiations were concluded and a formal contract was signed.  The court therefore concluded that the rendering of the guarding services from 1 September 2003 was pursuant to a collateral agreement and not an agreement which arose prior to an offer made in the tender documents and an unconditional acceptance of that offer by way of the letter of appointment.  Maxi Security was therefore unsuccessful.

This case illustrates the importance of carefully reading a letter notifying a tenderer that its tender has been successful.  It would be premature for a successful tenderer to finalise the appointment of personnel and the acquisition of equipment needed to render services contemplated in a tender, before conditions set out in a letter of appointment have been fulfilled.

Companies that often award contracts by way of tenders can avoid legal liability by making it clear in the request for proposals that no binding agreement will come into operation until and unless a formal agreement has been finalised and signed on behalf of the parties and future disputes may also be avoided by once again making this clear in writing to the successful tenderer.

Written by Aslam Moosajee is a director at Norton Rose in South Africa.



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