The organisation, the other party and the Board all have
particular responsibilities when a contract is subject to Board
Organisations often try to protect themselves by inserting a
clause into the contract that its performance is subject to Board
approval. What does this involve, and does each party –
and the Board – need to do?
There is little guidance from the courts on the concept of
"Board approval", particularly where contracts are made
"subject to Board approval", but some general principles
What is the effect of a "subject to clause"?
Contracts that contain "subject to" clauses are
conditional contracts. A "subject to"
clause has the effect of postponing the performance of the binding
contract. This means that neither party can withdraw from the
contract until the time for fulfilment of that clause has
Contracts that are "subject to finance" are a good
example. A "subject to finance" clause is inserted into a
contract to benefit the purchaser, who is not bound to complete the
contract if the purchaser cannot obtain finance. It follows that
until finance has been approved, the purchaser is not bound to pay
the contract price but, will be required to act honestly and
reasonably in their efforts to obtain finance.
What if you don't try to get Board approval?
A general rule in contract law is that each party impliedly
agrees to do all things that are necessary to enable the other
party to have the benefit of the contract.
Failure to take reasonable steps to seek Board approval may
constitute a breach of contract (subject to the particular
circumstances of the case).
Does the Board have an unfettered right to approve or reject
The Board does have an unfettered right to approve or reject a
contract that contains a clause that it is "subject to Board
That said, the Board must exercise that right by:
considering the approval or otherwise of the contract by
reference to its general obligations to the company (for example to
act in the best interests of the company); and
ensuring that it acts in good faith as required, either
expressly under the terms of the contract or by acting consistently
with the general rule that each party to a contract has an
obligation to ensure the other party may have the benefit of the
What if the Board rejects the contract?
If the Board rejects a contract, the other party would need to
consider the facts, matters and circumstances of each individual
case (including the contract's terms) to determine whether the
rejection is actionable.
For example, the other party might have an expectation that
Board approval will be given. This will depend largely on the
representations and negotiations that have occurred at or around
the time the contract was executed. It might be, for example, that
representations were made before the contract was executed that the
Board approval process is simply a rubber stamp. The other party
might be able to sue on that basis.
What should the Board consider?
A Board that is considering rejecting a contract that is
'subject to Board approval' should ensure that they
understand the manner in which the contract was negotiated and any
representations that may have been made.
It ought to also seriously consider keeping a detailed record of
the reasons for the refusal of the contract.
What should each party consider when making a contract subject
to Board approval?
Representatives of the company should be careful about what
representations are made about Board approval (and indeed, about
anything material to the contract!), to avoid giving rise to an
expectation that it will be given as a matter of course.
They should also be sure to take reasonable steps to obtain that
Likewise, the other party should think about the consequences of
this condition for its own business. Is Board approval likely,
given what the company's representatives have said during the
negotiations? How long can you afford to wait for it? If Board
approval is needed by a certain date, it's worth specifying the
date, and that time is of the essence. This will start the clock
ticking and help concentrate the mind of the company.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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