Can You Back Out Of A Deal If The Agreement Is Still Unsigned?

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Anyone who hasn’t asked this question or been asked this question just hasn’t been around long enough – “Now that the final agreement has been prepared, are we obligated to sign it and go forward?” There’s no need to scroll down to the bottom for an answer. We’ll put it right here, up front – “It depends.” “It depends” doesn’t mean: “No.”

There’s a companion question that gets asked – “What if we, up front, say that we can back out at any time before signing, for any reason or no reason at all”? There’s no need to scroll down to the bottom for an answer. We’ll put it right here, up front – “It depends.” “It depends” doesn’t mean: “No.”

Today’s blog posting is mostly the following story, one that illuminates the questions we’ve begun with.

As part of an on-line, sealed bid auction sale of non-performing loans, prospective bidders were presented with a required form of asset purchase agreement.  The successful bidder would be required to sign that agreement. Interested buyers were invited to present “indicative” bids. Based on those indicative bids, the seller would select acceptable candidate-buyers and those parties could perform pre-bid due diligence for the offered loans.

If still interested, each candidate could submit a final non-contingent offer by a stated date. The successful bidder would then sign the required purchase agreement and would have to submit a 10% non-refundable, wire funds, deposit.

So, bidders would be bound by their offers. Would, however, the seller be bound? Apparently, that’s not what the seller had in mind. The offering package included the following disclaimer:

The seller reserves the right, at their [sic] 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.

“At any time”? Today’s blog posting looks at that question, though readers can guess the answer because we’d probably not be raising the question if the answer were, “Yes.”

Well, this is what happened. The successful bidder, on the same day it submitted its bid, wrote to the seller that the form of asset purchase agreement was “not the proper document to effectuate a syndicated loan transfer, and offered to ‘either make the minor modifications required to that document to account for the agent’s approval process, etc[.], or use an LSTA [Loan Syndications & Trading Association] syndicated loan document, whichever the seller prefers.’”

A few days after being notified that it was the successful bidder, the now-buyer sent the seller a “modified redlined version of the proposed [Loan Sales Agreement], purportedly at the [seller’s] request, containing what [the buyer] considered to be the necessary technical changes that would allow the [Loan Sales Agreement] to effectuate the sale and assignment of the bid-upon syndicated loan. The seller responded that the document appeared to be a substantially larger mark-up than expected. The next day, the seller said that “the LSTA form agreement is actually pretty good.”

A couple of days later, the seller emailed a written confirmation of the bid acceptance to the buyer. The confirmation stated that an executable Loan Sales Agreement would be arriving in four days and it had to be executed, and returned with the 10% deposit, the next day. A follow-up email from the seller later that day pushed for a closing in the early part of the month, effectively within the next three weeks.

The agreement was not sent as planned. A week after the written conformation was sent by email, the seller’s attorney was still preparing the document. Email messages were exchanged over the next couple of days. They dealt with the mechanics of the planned closing. In the exchange of email messages, it was agreed that the buyer, not the seller, would adapt the [industry-standard syndicated] Loan Sales Agreement, using the terms of this particular transaction. Two days later, it did. At the same time as the buyer sent the proposed agreement to the seller, the buyer initiated the loan transfer process with the agent for the syndicated loan. Two days after that, that agent gave its approval.

Twenty days had now expired since the successful bid was submitted. That’s 18 days after it was accepted by telephone and 11 days after the written confirmation. The parties were planning on a closing within the next two weeks – the sooner, the better.

[Now, this story wouldn’t we very relevant, and probably not very interesting, if not for the twist all readers should be anticipating. So, we continue.]

Though, the Loan Sale Agreement had not yet been executed and the deposit not yet been posted, the buyer sent an allonge to the seller for use with the promissory note. [Though Wikipedia informs us that, in fencing, an allonge is a thrust or pass at the enemy, that’s not the kind of allonge we’re talking about. “An allonge (from French allonger, ‘to draw out’) is a slip of paper affixed to a negotiable instrument, as a bill of exchange [or a note], for the purpose of receiving additional endorsements for which there may not be sufficient space on the bill itself. An endorsement written on the allonge is deemed to be written on the bill itself.”] The allonge was the document needed to effectuate the note’s transfer to the buyer.

Just about this time, the seller learned that the buyer was arranging to refinance the defaulted loan. A bright light went off in the seller’s head: the buyer would stand to make a quick profit of $1.8 million on its purchase price of $2.4 million. The seller realized that it could do the same and recover a lot more on the defaulted loan if it arranged for a refinancing without selling the note then selling the note for the bid price.

So, after a little bit of stonewalling, it notified the buyer that the deal was off. In doing so, it made three assertions, both before and during the lawsuit that followed. First, the seller argued that the sale was conditioned on there being a fully signed sales agreement and delivery of the 10% deposit, neither of which had happened. Second, it argued that the express terms of the sale were that the only representations and warranties being given were those in the bid documents and the terms of the industry-standard LSTA agreement contained additional and different ones. Third, it pointed to its reservation of the right “to withdraw any or all of the assets from the loan sale, at any time.”

After hearing the parties tell their respective stories, the highest court in New York (its “Court of Appeals”), told the seller: “You lose; pay $1.8 million to the buyer.” It concluded that, “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 did the court get there? Basically, it analyzed the parties’ post-bid actions. That’s how it happens. Careful attorneys draw documents designed to make for certainty of result, and then the parties act in a way to override the “protections” written in the documents. In this case, the protections were those intended to fix the terms of the auction sale but also to give the seller the right to cancel the deal. Was that perfectly done in this case? Were careful attorneys involved? We don’t know. Clearly, the seller did not realize that the note to be sold was a “syndicated” note. Had it known that, it might have used an appropriate sales agreement as part of the bid package. Not knowing what it was selling gave rise to all of the back and forth and ate up weeks of time.

Still, how did a well-regarded court dismiss the seller’s arguments? We start by dismissing something we’ve heard all too often: “An oral agreement isn’t worth the paper it’s printed on.” That’s just plain not true. We start with some words from the New York court:

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.

Is there anything in those quoted statements that says: “a writing”?

How did the court apply those principles to the facts at hand? Here’s what it wrote:

The totality of the parties’ conduct and the “objective manifestations” of their intent is evidenced by [the seller’s] inclusion of pre-negotiated auction terms in the Offering Memorandum, [the seller’s] acceptance of [the buyer’s] bid in correspondence that communicated the terms of the purchase and the date and instructions for the closing, the email exchanges between [the seller’s] counsel and [the buyer] which indicated the sale was moving ahead and included references to documents necessary for closing the transaction, and [the seller’s] utter failure to identify or explain any objections to the LSTA form prior to the May 18th correspondence announcing its withdrawal from the sale. This established the parties’ intent to enter a binding agreement in which [the seller] would sell the [defaulted loan] to [the buyer] at the accepted final price.

Ruminations will now go out on a limb and translate what the court was saying into our own words. We grant that our understanding of the court’s thinking can’t be found anywhere in its words, but we’ve never been deterred by such small matters. Here we go:

The court was not enforcing the written documents within the bid package. It was not enforcing an unexecuted loan sales agreement. It was enforcing a separate oral agreement formed by the post-bid acceptance letters and discussions. Basically, the parties reached an oral agreement that incorporated the terms of the sales agreement document that was included in the bid package, but for some minor non-substantive changes. It supplanted the carefully designed bid package. The parties orally (and by their behavior) agreed on the transaction. The seller’s “reservation” of a right to “walk” out of the bid package offering was irrelevant because it became bound by a later oral agreement. And, by “oral” we mean actual words from the parties’ lips, their email correspondence as well as their confirming actions.

We’ve written about this before in the context of a letter of intent. If you haven’t read our earlier blog posting or don’t remember it, we urge you to click HERE and read it (again?).

Yes, words matter, and not just those visible on paper. Yes, actions can speak louder than words. So, the only fair answer we can give to our title question is: “It depends.” It depends on what happened from the time your negotiation started until the day you ask the question.

If you’d like to see the actual court decision, just click: HERE.



  1. Jason Kirkham says

    Hypothetically, how do you think the court would have ruled if, after the events described, the buyer determined that the loan was not worth the $2.4M purchase price? Since the 10% deposit had never been paid, would the court have ordered the buyer to pay that as liquidated damages? Or, would the seller have been required to prove actual damages?

    • I can’t speak for the law governing the agreement because, among other things, I’m not quite sure which one that is. But, in New Jersey and many, if not most, jurisdictions, just because there is a deposit involved doesn’t mean that liquidated damages in that amount or any amount becomes the measure of damages. That misbelief has been rejected in New Jersey. For liquidated damages to apply, the parties must has agreed to such a measure of damages. So, the questions would be: did the parties, in their oral agreement, agree to the deposit as liquidated damages; was it in the loan sales agreement; did they “adopt” such a provision by reference thereto; and what is law or prevailing custom in the jurisdiction and did the parties impliedly adopt that custom or wee they bound by that law?

      Does anyone else have thoughts about this?

  2. Ira, I agree with you about the deposit — liquidated damages needs to be provided in the agreement as the damages remedy (whether exclusive or alternate depending on the jurisdiction). But I am curious about one aspect of the decision and your rumination on it. You emphasize the “oral” nature of the agreement enforced by the court and the absence of a “writing.” Had there been no email exchanges, how would the court’s holding square with the statute of frauds, assuming that doctrine is alive and well in New York?

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