In this article we explain ‘conditions precedent’, why they are used, how you can deal with them, and share some key points to note.
Before entering into a contract, it’s important to ensure you understand the risks and that it accurately reflects your intentions. The interpretation and enforcement of conditions precedent may vary depending on the specific contract, the intentions of the parties, and the applicable legal principles. Our team of commercial solicitors will help you make an informed decision, providing advice tailored to your specific situation.
What is a condition precedent?
A ‘Condition precedent’ (‘CP’) is a requirement(s) or event that must happen before the contract - or certain parts of it - can come into effect.
Put simply, ‘…I agree to do this, subject to you doing that…’.
Where might I come across conditions precedent?
CPs are common and can be found in any number of commercial situations.
Examples might include:
- Loan agreements requiring certain conditions be met before the funds can be drawn down.
- Third party consent being needed - eg. consent of shareholders or a landlord or a local authority before a transaction can take place.
- Funding arrangements whichmust be in place before a contract can take effect.
- Notice requirementsin liability or claim clauses- eg. notice of the intention to bring a claim must be given in a certain way by a certain time.
- Payment or liability clauses in insurance contracts - such as‘… X shall be a condition precedent to any liability of the Insurer to make payment under this policy...’.
- A mortgage which cannot be obtained without a valuation survey of the house in question.
Why are conditions precedent used?
CPs are used when parties want to finalise a contract but:
- there are matters outside their control and
- they don’t want to be committed under a contract and therefore
- be liable for damages for breach of contract
- if those matters don’t work out the way it had been hoped.
Importantly, CPs allow for difficulties or obstacles to the main contract to be identified in advance eg. one party’s ability (or otherwise) to obtain financing, which would change the situation entirely, can be identified early.
How would I deal with them?
CPs are a matter for negotiation.
As ever, the parties’ intentions must be clearly expressed in the contract. This is even more important with conditions precedent because there is no contract until they are met.
Negotiations must cover:
- whether there is a CP - ie. it’s clear to both parties that a condition is intended.
- what it is - exactly what it involves is clearly and unambiguously stated.
- what has to be done to meet it.
- what is the deadline?
- who decides if it has been met - a third party?
- does it have to be completely fulfilled or just use ‘reasonable endeavours’?
- the consequences of not fulfilling it - eg. extension of time, waiver, costs.
If these elements are not clear, the clause may not operate as a CP, the contract will be deemed to exist. Any claim against a party will have to be brought as a breach of contract (which is potentially far more onerous and expensive than a contract not existing at all).
See our article for more tips on negotiating a commercial contract.
Points to note.
- The contract will not come into existence unless the CPs are fulfilled.
- It’s essential that both parties keep open lines of communication in case the CPs are not met and the anticipated contract does not come into being. Conversations need to continue to take place about progress towards meeting the CPs and ongoing analysis of how likely it is that they will be met.
- If they aren’t met and that contract doesn’t come into being, the parties need to consider the implications for their customers and their supply chain.
- A‘condition subsequent’ is one that affects the validity of an existing valid contract ie. the contract exists but will terminate if the condition subsequent isn’t met.
When negotiating a commercial contract, it’s important to carefully consider the use of conditions precedent to allocate risks and ensure certain prerequisites are satisfied before obligations become binding. This can be key to ensuring you and the other parties enjoy a fruitful commercial relationship.