Court of Appeals Holds that Contract Language Making Formation “Subject to” a Future Act is Insufficient to Create a Condition Precedent

In Stonehill Capital Mgmt., LLC v Bank of the West (No. 191) previewed here, the Court of Appeals held that Bank of the West could not withdraw its acceptance of Stonehill Capital Management’s winning bid at an auction of an $8.8 million syndicated loan. The Court rejected the Bank’s argument that it was not bound to close the transfer of the loan because it had made its acceptance “subject to” negotiation and execution of a mutually acceptable sale agreement and payment of a deposit, and Stonewall had not completed either by the time that the Bank reneged on the deal.

As the Court held, the contract language “subject to” was simply not strong enough to indicate a clear intention not to be bound to complete the transaction such that the written agreement and deposit were conditions precedent to formation of the contract between the parties. Instead, the Court determined, the Bank’s language merely indicated that the written agreement and deposit were post-formation requirements that had to be completed before closing, not conditions precedent to an enforceable contract.

Importantly for contract drafting going forward, the Court indicated that a clear manifestation of intent to create a condition precedent to contract formation would likely be found using the language “unless and until,” instead of the “subject to” language that was used by the Bank. The Court also rejected the Bank’s argument that its bid specifications had expressly reserved the right for the Bank to remove “any and all assets” from the auction at any time. The Court, thus, declined the Bank’s invitation to construe that provision to allow it to withdraw its acceptance of Stonehill’s winning bid after the close of the auction.

Because the parties had entered an enforceable agreement, the Court reversed the Appellate Division, First Department’s dismissal of Stonehill’s complaint, and reinstated the trial court’s award of summary judgment to Stonewall for the Bank’s breach of the contract.

The Court of Appeals’ decision can be found here.

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