Subject To What Exactly?

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Today’s blog posting deals with the always “fresh” question about whether making something “subject to winding up with a signed, written agreement” allows the parties to walk away without having to look back. The answer we give today, however, may not be very satisfying to many readers. And, to those who find the answer of interest, rarely will they be able to apply today’s answer to any problems that reach their way.

Have you ever wondered what is really meant when we write that a letter of intent or other form of agreement is “subject to” one or more conditions? Basically, what is the meaning or scope of those two words: “subject to”? If there is any lesson to come out today, it might be that we should be much clearer than “subject to” before the parties are bound to an agreement or to perform an obligation under an agreement.

Here is today’s story and it comes from a December, 2016 decision from the New York Court of Appeals (that’s the state’s highest court). It can be seen by clicking: HERE.

Nominally, the case dealt with “real property,” though that’s not going to be relevant. What we have is an auction sale of a non-performing mortgage loan. Pre-qualified bidders could “examine” the loans and, if interested, could place an irrevocable bid. Under the auction’s terms, the successful bidder would be required to sign a pre-negotiated sales agreement and post a 10% deposit. There was also the following disclaimer:

The 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.

The same day a bidder submitted what turned out to be the successful bid for one particular defaulted loan, it sent a letter to the seller explaining that the loan was a “syndicated” loan and that the “required” sales agreement lacked a number of technical details needed for such a loan. It offered to submit the needed modifications or to sign an industry-standard form for such loans. The seller agreed that the contemplated agreement was deficient and asked the bidder to mark-up the seller’s proposed agreement.

In the meantime, the auctioneer, by telephone, advised the bidder it had “won.” It then, as the seller’s agent, confirmed that news in a writing that said, “Subject to mutual execution of an executable [Loan Sale Agreement] … the [Seller] has agree to [your bid]. As discussed, counsel representing [the seller] will be sending you an executable [Loan Sales Agreement] by Tuesday, May 1st. An executed signature page and 10% non-refundable deposit is expected no later than 2:00 pm EDT on Wednesday, May 2nd.”

Though there was some back and forth between seller’s attorney and buyer’s attorney, until the thing that happened that gave rise to the lawsuit, some things were clear:

When  [the seller] accepted [then buyer’s] offer it confirmed the bid in a correspondence setting forth the sale price, the specific loan to be sold, the timing of the closing, and the manner of payment and wire transfer instructions — terms material to the agreement.

[The seller] in no way indicated that the [Loan Syndications and Trading Association] form or any modifications were unacceptable.

At no time during the period between when [the seller] accepted the buyer’s] bid and when it withdrew from the transaction, did [the seller] communicate its objection to the [Loan Syndications and Trading Association] form that [the buyer] had sent to [the seller’s] counsel or indicate that the proposed modifications were “deal breakers.”

In fact, [seller’s] counsel emailed [buyer] that once he became aware that the asset was a syndicated loan, he too preferred to use the [Loan Syndications and Trading Association] documentation.

So, if everything was going so well, why are we reading an opinion written by New York’s highest court? Well, greed might be the reason. It seems that while the parties were working together on getting a workable sales agreement and also getting the necessary third-party approvals for transferring the defaulted loan, the seller discovered how the buyer was going to make $1.8 million from what was acknowledgedly a “bad” loan. The loan was for almost $8,800,000 and the bid price was $2,363,000. After learning it was the successful bidder, the buyer arranged a $4,200,000 loan for the original borrower and the loan proceeds would be paid over as satisfaction of the $8,800,000 loan. So, the buyer would be getting $4,200,000 for the note it would be buying for $2,363,000.

The seller realized that if it did not sell the loan, it would stand to get the $4,200,000. So, its attorney wrote to her or his counterpart at the buyer, saying:

[Seller] will not proceed with this trade because it has no obligation to do so. There are no agreements (oral or written) between [seller] and [buyer]. The Offering Memorandum specifically permits [seller] to withdraw any loan from the auction at any time. Specifically, it states “The Seller reserve[s] the right, at their sole and absolute discretion, to withdraw any or all of the assets from the loan sale, at any time.” In addition, [our auctioneer’s] bid response e-mail to [buyer] conditioned [the seller’s] response upon the execution of a definitive loan sale agreement.

The refinancing took place; the seller got the proceeds; and the buyer sued for the (undisputed) $1.8 million lost profit. The lower court ruled in favor of the buyer. The intermediate appellate court reversed by ruling in favor of the seller. The Court of Appeals restored the first court’s ruling and the buyer “won.” Here’s why.

First some basic contract law (focusing on auction contracts) using the court’s words:

To establish a prima facie breach of contract, [the complaining party] must show that [the other party] breached a binding agreement between the parties, which damaged [the complaining party].

To form a binding contract there must be a “meeting of the minds: such that there is “a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.”

In determining whether the parties intended to enter a contract, and the nature of the contract’s material terms, we look to the “objective manifestations of the intent of the parties as gathered by their expressed words and deeds.”

Disproportionate emphasis is not to be put on any single act, phrase or other expression, but, instead on the totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain.

With respect to auctions, the general rule is that a seller’s acceptance of an auction bid forms a binding contract, unless the bid is contingent on future conduct.

While an auction can be conditional, meaning property can be withdrawn after the close of bidding, it will not be deemed conditional absent explicit terms.

Basically, the seller’s position was that it had “conditioned the sale on the parties’ execution of a written agreement and … submission of a 10% deposit, neither of which was satisfied prior to [it’s] withdrawal from the transaction.” The court disagreed, concluding, “based on the totality of the parties’ actions and communications, that they agreed to an enforceable contract, with express material terms and post-formation requirements.”

How could the court overlook (override?) the pre-conditions relied upon by the seller as its reason for allowing it to avoid the sale? There was no argument that no loan sales agreement was ever executed. There was no argument that no deposit was ever tendered. After all, didn’t the auctioneer’s confirmation expressly say that the acceptance was “subject to mutual execution of an acceptable Loan Sale Agreement” and posting the 10% deposit”?

The answer turns on the effect of using the words, “subject to.”

Again, we’ll “borrow” the court’s own words, a technique taught to us by Uncle Miltie. [Uncle Miltie also raised this question: “If evolution really works, how come mothers only have two hands?”]. Back to the court’s words:

If the parties to an agreement do not intend it to be binding upon them until it is reduced to writing and signed by both of them, they are not bound and may not be held liable until it has been written out and signed.

Certainly, when a party gives forthright, reasonable signals that it means to be bound only by a written agreement, courts should not frustrate that intent.

Such 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.

“Subject to” in t[a] bid form [does] not unmistakably condition assent on the execution of a definitive agreement at some later juncture.

Use of the language “subject to” in [a letter of intent], and reference to the execution of a construction agreement as a “qualification,” do not amount to an express reservation of the right not to be bound.

A [deal memorandum entered into by the parties, which expressly stated, “This memo shall memorialize the terms of the deal that have been accepted, subject to the signing of a mutually acceptable Contract of Sale,” is a classic example of an “agreement to agree.”

Here, the Court of Appeals ruled that the “subject to” language in auctioneer’s bid confirmation DID NOT clearly express an intent on the seller’s part not to be bound to the sale. Though the confirmation stated that “closure of the transaction required execution of a signed document and … tender of the 10% deposit,” that was “not the same as a clear expression that the parties were not bound to consummate the sale and that [the seller] could withdraw at any time, for any reason.”

There is a difference between conditions precedent to performance and those prefatory to the formation of a binding agreement. The court explained the legal distinction:

A condition precedent is an act or event, other than a lapse of time, which unless the condition is excused, must occur before a duty to perform a promise in the agreement arises . . . Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself.

According to the court, the way in which “subject to” was used here was not as an “affirmative declaration [] foreclosing a sale ‘unless and until a written contract . . . is signed and delivered.’ Instead, the language [used, to wit ‘subject to,’ only] require[d] that the sale be completed upon the execution of a signed writing and the tender of the 10% deposit — post-agreement requirements the parties were obliged to perform pursuant to an existing agreement. The 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.”

Furthermore, according to the court, “there [was] no indication that these events were an actual obstacle to the sale. [The seller] proffered no evidence to suggest that [the buyer] refused to enter a signed agreement or to submit the deposit. Quite the opposite. [The buyer] was responsive to all of [the seller’s] requests for documentation, expressed its eagerness to close the deal, took necessary steps to achieve that end (including securing approval of the Credit Agreement from [the loan’s transfer agent]), and never implied its inability or unwillingness to turn over the deposit.”

So, what would have worked for the seller? What would have made it clear that the “subject to” referred to the making of a binding agreement and not just listing items that had to precede closing of the sale? Ruminations thinks “words” would have done the trick. What kind of words? – those that said what the seller meant: “we have no obligation to consummate this sale unless and until there is a fully executed Loan Sale Agreement and we have received the 10% deposit. Until then, we can withdraw our acceptance of the bid for any reason or no reason at all regardless of anything taking place after this time and even if you have taken actions in reliance on our having accepted your bid.”

Of course, no words will assuredly override the implied covenant of good faith and fair dealing, but we would expect and would counsel seller to argue that the covenant, though not waivable, applies only to contracts, not to non-binding arrangements.

So, subject to what may happen over the next week, we promise to publish another set of our Ruminations next week.



  1. Very helpful for the next time we encounter the “subject to” .

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