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Who Needs A Formal Contract When An Offer, Acceptance And The Exchange Of Consideration Can Be Gleaned From The Totality Of The Parties’ Actions And Communications?

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  • Posted on: Dec 28 2016

We live in a technologically advanced world. Our phones are smart, our tablets are mini-computers, and our laptops/notebooks are more powerful than ever.  We can interact with each other through email, text messaging and other forms of electronic communications.  Gone, for the most part, are the more formal, traditional ways of communicating with each other, e.g., letters and faxes.

As the modern ways of communicating have become the norm, many business executives and owners are often surprised to learn that the exchange of emails and text messages can constitute a binding contract.  But why is this so?

In Stonehill Capital Management, LLC v. Bank of the West, 2016 NY Slip Op. 08481 (N.Y. Dec. 20, 2016), the New York Court of Appeals (New York’s highest court) answered this question by explaining that such communications will result in an enforceable agreement when the “totality” of “the parties’ conduct and the ‘objective manifestations’ of their intent” demonstrate the presence of a contract – that is, there is (1) an offer, (2) that is accepted, (3) for which there is the  exchange of consideration (i.e, the payment or other benefit to one party or a detriment to another party), and (4) an agreement on material terms. This holistic approach means that where these elements are satisfied through informal means, there will be an enforceable contract, even if there is language indicating that the agreement is subject to the execution of definitive documentation.

Stonehill Capital Management, LLLC, et al. v. Bank of the West:

The Facts:

Stonehill involved an auction to sell a collection of loans. The auction was conducted by Mission Capital Advisors LLC (“Mission”) on behalf of Bank of the West (the “Bank” or “BOTW”).

In connection with the auction, potential bidders, such as Stonehill Capital Management LLC and its affiliated funds (“Stonehill”), were provided an offering memorandum that set out the specific terms of the auction, including a provision stating that final bids would be “non-contingent offers (the acceptance of which by seller will require immediate execution of pre-negotiated Asset Sale Agreement(s) by Prospective Bidder accompanied by a 10% non-refundable wire funds deposit)” and that “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.”

On April 20, 2012, Mission informed Stonehill by telephone that BOTW accepted Stonehill’s bid at auction.  Mission followed up with an email on April 27, 2012, confirming that, “subject to the mutual execution of an acceptable Loan Sale Agreement,” BOTW accepted Stonehill’s offer to purchase the loans.  The email contained the material terms of the agreement, including a description of the asset for sale, the purchase price, the date of closing, and the manner of payment.

Thereafter, BOTW’s counsel initiated a series of email exchanges with Stonehill to move the deal to conclusion. Stonehill, for its part, sought and obtained approval of the credit agreement transfer forms to complete and record the transfer of the loans to it.

Before executing the final sale agreement, BOTW learned that Stonehill was providing financing to the underlying borrower, the proceeds of which would be used to pay off the loans at par, plus accrued interest. BOTW stood to realize a greater recovery if it kept the loans on its books than it would if it sold the loans to Stonehill. Consequently, BOTW refused to sign the documentation.

When Stonehill cried foul, BOTW argued that there was no binding agreement because the acceptance of Stonehill’s bid was expressly “[s]ubject to the mutual execution of an acceptable Loan Sale Agreement” and the parties failed to execute such definitive documentation.

The Proceedings in the Supreme Court and Appellate Division:

Stonehill filed suit against BOTW and Mission, alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and seeking indemnification. In its amended complaint, Stonehill added a cause of action for unjust enrichment and demanded $1.5 million in damages.

Thereafter, Stonehill moved for summary judgment, and BOTW moved to dismiss and cross moved for summary judgment.

The Supreme Court denied BOTW’s motion to dismiss and cross motion for summary judgment, and granted Stonehill’s motion for summary judgment on the breach of contract cause of action. The court held that because the purchase and sale agreement was pre-negotiated, BOTW’s acceptance of Stonehill’s bid created a binding contract. The court explained that when the transaction’s material terms are otherwise reasonably certain, making that agreement “subject to” definitive documentation does not preclude the finding of an enforceable contract.

On appeal, the First Department reversed, holding that Stonehill had failed to establish a valid acceptance on the contract issue. Stonehill Capital Mgmt., LLC v. Bank of the W., 2015 NY Slip Op. 02900 (1st Dep’t Apr. 7, 2015). The court found that Stonehill failed to establish that “the parties intended to be mutually bound by an agreement,” because the conditions comprising a valid acceptance were not fulfilled, e.g., the bank remained silent when presented with changes proposed by Stonehill, although it agreed to most of the material terms, it did not fulfill the condition requiring a written agreement and tender of a deposit equal to 10% of the purchase price. Slip op. at 1. Thus, concluded the court, even if all the material terms were agreed upon, Stonehill failed to establish that “acceptance was clear, unambiguous and unequivocal so as to render such terms enforceable.” Id. at 2 (internal quotation and citation omitted).

Not surprisingly, Stonehill appealed.

The Court of Appeals Decision:

The Court framed the issue to be decided as: whether there was “a binding agreement between the parties, which damaged Stonehill.” Slip op. at 3. The Court found that there was such an agreement. Id. at 5.

The Court concluded that “based on the totality of the parties’ actions and communications, … they agreed to an enforceable contract, with express material terms and post-formation requirements.” Id. at 4.

The totality of the parties’ conduct and the “objective manifestations” of their intent is evidenced by BOTW’s inclusion of pre-negotiated auction terms in the Offering Memorandum, BOTW’s acceptance of Stonehill’s bid in correspondence that communicated the terms of the purchase and the date and instructions for the closing, the email exchanges between BOTW’s counsel and Stonehill which indicated the sale was moving ahead and included references to documents necessary for closing the transaction, and BOTW’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 BOTW would sell the Goett Loan to Stonehill at the accepted final price.


Having found that there was a binding offer and acceptance, the Court rejected BOTW’s argument that an agreement was not formed because the transaction was “subject to” the “mutual execution of an acceptable” agreement and “a 10% deposit” – terms that, according to BOTW, “were never fulfilled.” Id. In doing so, the Court held:

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 . . . .

We disagree with BOTW that the ‘subject to’ language in the April 27th email clearly expresses an intent not to be bound to the sale of the Goett Loan. This email stated that closure of the transaction required execution of a signed document and Stonehill’s tender of the 10% deposit. That, however, is not the same as a clear expression that the parties were not bound to consummate the sale and that BOTW could withdraw at any time, for any reason. Nor did BOTW make known its desire for an unrestricted exit from the deal before accepting Stonehill’s bid . . .

This was never made explicit before the bid was accepted either. There is a difference between conditions precedent to performance and those prefatory to the formation of a binding agreement . . . . ‘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.’ Here, the signed writing and deposit were post-agreement requirements necessary for the consummation of the transfer, as established by the continued exchange of documents necessary to the asset transfer.

Id. at 4-5 (citations omitted).

“To adopt BOTW’s argument,” therefore, “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.” Id. at 5. Indeed, “[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.” Id.

Consequently, the Court reversed the First Department’s order, and reinstated Stonehill’s breach of contract claim against BOTW.


While Stonehill is not the first decision in New York to recognize the formation of a contract through less traditional means, it does reinforce the concept that the trial courts should look at the “totality of the parties’ actions and communications” in determining whether there is an enforceable agreement. This is especially important when the parties include “subject to” language in their communications. As the Court noted, when the terms of an agreement are set, “subject to” language is merely a “post-agreement requirement[] the parties [are] obliged to perform pursuant to an existing agreement.” Slip op. at 5. It is only where the parties’ communications require specific terms to be agreed upon at a later date does the “subject to” language negate the finding of an enforceable agreement.

Stonehill also makes clear that not all disclaimers will negate the formation of a contract.  In a footnote, the Court rejected BOTW’s claimed “right to withdraw” assets, stating that, “read in context, the disclaimer concerns BOTW’s ability to withdraw assets from the ‘sale,’ and not whether it may withdraw an acceptance of an offer.” Id. at n.4.

Thus, parties should take care to avoid relying on “subject to” language and disclaimers to escape the formation of a contract when their actions and communications demonstrate otherwise. As Stonehill teaches, language in emails and other electronic media such as:

  • “for discussion purposes only and cannot be used to create a binding contract”;
  • “this email is not an acceptable offer and doesn’t evidence any intention by the sender to enter into a contract”; and
  • “this email is nonbinding unless and until a more formal and definitive written contract between the parties is signed”

may not save the day if the parties’ actions and communications manifest a different story.

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