Client Alerts

New York’s Highest Court Affirms Enforceability of Agreements That Are “Subject To” Further Documentation

Client Alerts | January 12, 2017

On December 20, 2016, New York’s highest court rendered a decision confirming what participants in financial markets have long believed to be true: that absent an express manifestation of the parties’ intent not to be bound, an agreement to buy or sell a financial instrument that includes all material terms but is “subject to” additional documentation, is nevertheless a binding agreement. The Court of Appeals’ decision in Stonehill Capital Management, LLC v. Bank of the West should give comfort to participants in markets where trading via telephone, Bloomberg message or other informal means is common, with formal documentation executed after the fact.

Facts of the Case

The case concerned the sale of a syndicated loan by Bank of the West to Stonehill Capital Management pursuant to an auction sale conducted by Mission Capital Advisors, LLC. The bid process involved circulation of an Offering Memorandum that announced the solicitation of indicative bids for the purchase of certain syndicated loans. As part of the “Loan Sale Process” announced in the Offering Memorandum, Mission Capital and Bank of the West would select final bidders based on the indicative bids, and the final bidders would then submit final bids, upon acceptance of which the winning bidder would be required to execute a pre-negotiated “Asset Sale Agreement” and deposit 10% of the proceeds of the sale. Stonehill was selected as a final bidder and its final bid was ultimately accepted in a written confirmation received from Mission, which stated that “[s]ubject to mutual execution of an acceptable [Loan Sale Agreement], [Bank of the West] has agreed to the Stonehill [] bid.” The confirmation further stated that Bank of the West’s counsel would forward an executable agreement and that the 10% deposit would be expected by no later than a certain date and time. Wire instructions were provided with the written confirmation.

Following some discussion between counsel for Stonehill and Bank of the West as to the proper form of sale agreement, in which the parties agreed that an LSTA form agreement was appropriate (rather than the “Loan Sale Agreement” initially proposed by Bank of the West), Bank of the West determined that it would be economically advantageous not to close and unilaterally refused to close the sale. Bank of the West based its withdrawal from the transaction on a disclaimer in the Offering Memorandum stating that “[t]he seller reserves the right, at their sole and absolute discretion, to withdraw any or all of the assets from the loan sale, at any time…. Only those representations and warranties that are made by the seller to a prospective bidder in a definitive, executed loan sale agreement shall have any legal effect.” Bank of the West thus claimed that because the Loan Sale Agreement contemplated in the Offering Memorandum had not been executed, and the required deposit had not been made, it had no obligation to close.

Stonehill sued in New York state court, and the trial court found in Stonehill’s favor, granting summary judgment on its breach of contract claim against Bank of the West and finding that because the purchase and sale agreement was pre-negotiated, Bank of the West’s acceptance of Stonehill’s bid created a binding contract. On appeal, however, the Appellate Division reversed, finding that Stonehill had failed to establish a valid acceptance. The Court of Appeals granted leave to appeal, and reversed the Appellate Division, reinstating the grant of summary judgment to Stonehill.

The Court of Appeals’ Holding

Citing well-established New York case law, the Court of Appeals stated that it would look to the “objective manifestations of the intent of the parties as gathered by their expressed words and deeds” and that it would not place disproportionate emphasis on any single act, phrase or other expression, but instead would look to the “totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain[.]” This analysis was conducted in light of the general rules that “[w]ith respect to auctions […] a seller’s acceptance of an auction bid forms a binding contract, unless the bid is contingent on future conduct[,]” and that “[w]hile an auction can be conditional […] it will not be deemed conditional absent explicit terms.”

Citing to case law from the federal court of appeals for the Second Circuit, the Court noted that “when a party gives forthright, reasonable signals that it means to be bound only by a written agreement, courts should not frustrate that intent[.]” Applying this principle to the facts of the case, the Court found that “[s]uch a forthright, reasonable signal is not obvious from the mere inclusion in an auction bid form of such formulaic language that the parties are ‘subject to’ some future act or event. Less ambiguous and more certain language is necessary to remove any doubt of the parties’ intent not to be bound absent a writing.” The Court rejected Bank of the West’s contention that the “subject to” language in its written acceptance clearly expressed an intent not to be bound, finding that the execution of a written agreement and 10% deposit were “post agreement requirements necessary for the consummation of the transfer” – but not conditions precedent to the formation of a binding contract. The Court concluded that “[t]o adopt [Bank of the West’s] argument would mean that the auction was neither final nor binding–in direct contravention of the auction sale terms and the usual manner in which reserve auctions proceed.”

The Court of Appeals has made clear that there is a distinction between “conditions precedent to performance and those prefatory to the formation of a binding agreement.” More generally, the Court opined that “[t]he fact that the parties anticipate and identify future events necessary to close the sale is not the legal equivalent of an intent to delay formation of a binding contract absent the passage of those events.”


The Court of Appeals’ decision should come as a comfort to traders of bank loans, corporate bonds and other financial instruments, including derivatives. In markets where it is typical for trades to be conducted over the telephone or by other informal means, subject to the execution of documentation at a later date, an agreement will be binding absent some “forthright, reasonable signal” that the parties do not intend to be bound. It remains to be seen whether this principle will be applied by the New York courts in contexts outside of the securities field, such as mergers and acquisitions or other transactions.