Harvela v Royal Trust

Legal Case Summary

Harvela Investments v Royal Trust Co of Canada [1986] AC 207

FORMATION OF CONTACT

Facts

The first defendant held shares in company. By means of a telex communication they invited the claimant and the second defendant to make an offer to purchase shares by sealed tender. They stated in this invitation that they bound themselves to accept the highest offer. The claimant made a bid for a fixed sum; the second defendant made a bid for a fixed sum or alternatively for ‘$101,000 in excess of any other offer’, whichever was to be higher. The first defendant accepted the bid made by the second defendant, despite the fact that the fixed sum which they offered was lower than that offered by the claimant.

Issue

The issue was whether the second defendant’s referential bid was invalid, and by extension whether the first defendant was bound to accept the claimant’s offer as the highest valid bid.

Decision/Outcome

The House of Lords held that the referential bid was invalid, and as such, the first defendant was bound to accept the claimant’s offer. It reasoned that to allow a referential bid would create the possibility of conflicting obligations for the first defendant (had both parties made a bid offering a certain sum in excess of any other offer), in which case the offeror would be bound by the terms of its own promise to accept both offers. This would therefore be an unreasonable construction of the invitation to tender. It would also undermine the purpose of a sealed tender, which is to prevent a bid being made based on the sum offered by the competitor.