Most contracts assume a particular state of affairs exists before the contract commences.
The parties sign the contract, and commence performance.
Other times, that state of affairs doesn’t exist.
The parties want to wait until the event materialises and then sign and perform the contract.
When they don’t want to wait to finalise the contract, conditions precedent are used to prevent the contract coming into force, or delay the duty to start performing the contract until that presupposed state of affairs exists.
That’s when conditions precedent come into play.
What are Conditions Precedent?
Conditions precedent are express contract terms which that must be satisfied before the entire comes into force, or a contractual obligation becomes legally enforceable.
The parties want to:
- formalise the contract in advance of a contingent event taking place.
If the event takes place, the contract is formed, and performance starts, or
- make performance within a legally binding contract conditional on an event external to the contract.
That’s two situations:
- In the first, there is no contract until the event takes place; and
- In the second, the contract is formed but the duty to perform the contract does not arise until the event is place.
The duty to perform the obligation, or the contract itself is dependent upon the fulfilment of the specified condition.
Condition Precedent not satisfied
When the condition is not satisfied, there is either:
- no agreement, and no contract, or
- no requirement to perform the obligation within the existing contract
Operation of Conditions Precedent
So, conditions precedent are contractual provisions which set conditions that must be true for the:
- contract to come into force and require one or more parties to start performing,
- contractual obligation of one party to commence, or
- suspend performance of a contractual obligation.
Some of the possibilities for the event could be:
- issuing of a notice by one party to the other to start work
- an investment received by one of the parties, say in advance of a share issue
- a patent or some other intellectual property right is obtained or granted, for a manufacturing agreement to commence
- funds are raised to finance contractual works by one of the parties, for a software development project to commence
- entry by one of the parties into a contract with another person
- a particular, named person is hired by one of the parties.
In Persimmon Homes v Hall Aggregates  EWHC 2379, Coulson J said:
[…] if one party's obligation to do something under a contract is contingent upon the happening of a particular event, the circumstances of that event must be identified unambiguously in the contract. It must be clear beyond doubt how and in what circumstances the relevant obligation has been triggered.
Conditions Precedent to activate legal rights
There are other, more subtle ways to use conditions precedent.
New players often miss them.
Conditions precedent can be used to activate legal rights.
That means that unless the other party does something, they will not receive the benefit of an existing contract.
Unless some positive action is taken, a legal right or duty to act will not arise.
The classic example are indemnities, such as intellectual property indemnities.
Example: Indemnities as Condition Precedents
For example, the right to call upon an indemnity in a contract requires:
- the indemnified party must give the other party control of the claim against it and take other specified steps.
- When those steps are not taken, then the party will not be entitled to receive the benefit of the indemnity.
Use of conditions precedent might also extend to matters such as:
- giving control of settlement negotiations
- setting preconditions to obtain an extension of time for performance of the contract
- receiving any benefit under a force majeure clause.
When conditions precedent are used in this way, it doesn’t extinguish the right.
The right never arises in the first place.
The condition precedent was never satisfied to obtain the benefit of the contract.
Condition Precedent Label
The words “condition precedent” does not need to be used for clause or condition to operate as a condition precedent. It’s the effect of the clause that counts.
It’s a good idea to use the phrase so that contractual intention is clear, if that is what is intended.
Clarity of Contingencies
When using clauses that require a condition to be satisfied, it usually makes sense to include a “long-stop” date.
These long-stop dates require the event to take place within a specified time. If it’s not, it’s too late for the contract to come into force at all, or to initiate the performance obligation by the other party.
When the Condition is not Satisfied
Also, it makes sense to state what happens if the condition is not satisfied.
Doing so creates a contrast between the intended state of affairs when the condition is satisfied and when it is not.
The parties – and more importantly a court – won’t be left wondering what the parties had in mind in either case.
Example Condition Precedent
It shall be a condition precedent of this agreement that [the customer] shall [obtain a patent licence to work the invention].
Should the said licence is not obtained by [date | [time period] from the date of the agreement], this Agreement shall not come into force.
It shall be a condition precedent for performance of clause [number] that the Supplier will tender a certificate of insurance for the contracted works.
In the absence of production of the said certificate, this Agreement shall not come into force.
When conditions precedent is incorporated into a contract, it is likely to be an implied term that neither party will do anything to prevent the term from being satisfied.
Many of the principals apply equally to Conditions Subsequent.