A contract or a contractual obligation may be made conditional upon the occurrence of a future uncertain event, so that the contract or the contractual obligation only takes effect if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition).
1. Scope of this Section
Parties to a contract may make their contract or one or several obligations arising under it dependent on the occurrence or non-occurrence of a future uncertain event. A provision to this effect is called a condition.
Conditions governed by the Principles include both those that determine whether a contract exists and those that determine obligations within a contract. Accordingly, application of the Principles may in some circumstances impose duties even in the absence of a contract (see, e.g., Articles 5.3.3 and 5.3.4).
A condition may refer to a range of events, including natural events or acts of a third person.
This Section only deals with conditions that originate in an agreement between the parties.
Conditions imposed by law are not covered by this Section unless they are incorporated into the contract by the parties. Thus, a public permission requirement imposed by law is outside the scope of this Section but may be governed by Article 6.1.14. However, if the parties introduce a provision making the contract, or their contractual obligations arising under it, dependent upon a public permission being granted, then that provision is a condition.
2. Notion of condition
The word “condition” may have a number of meanings. For instance, in some jurisdictions condition means a major term of the contract. That is not the sense in which the term “condition” is used in this Section.
Some contracts may provide that the performance by one party is dependent upon the performance of the other party. These provisions are not conditions, they merely specify the obligations of both parties under their contract.
1. In a share purchase and sale agreement concluded between seller A incorporated in country X, and purchaser B incorporated in country Y, B’s obligation to pay the agreed price is subject to A’s having “performed all of its obligations hereunder to be performed on or before a certain date”. This performance is not a condition, but a contractual obligation and as such is not an uncertain event.
The parties may also fix a specific date at which the contract, or one or several of the obligations arising under it, is to take effect or is to come to an end. In many jurisdictions these provisions are referred to as “terms”. They are not conditions under this Section. The same holds true when the parties include a provision in their contract that makes the contract or one or several of the obligations arising under the contract dependent upon the occurrence of a future event that is bound to happen.
2. A contract of sale is concluded on 2 October, with the delivery of the goods to be made on 10 October. The obligation to deliver is not conditional because it is not subject to a future uncertain event.
3. Architect A, who intends to renovate her offices, borrows money from a bank and the loan agreement provides that title to a particular property A owns will pass to the bank on A’s death. This is not a condition since A’s death is certain to occur.
The parties may in their contract provide for a time by which the condition has to occur.
4. A share purchase agreement is concluded between A and B. It will take effect if all necessary authorisations are received by 30 January. The agreement is conditional and it includes a date by which the condition has to occur if the parties’ obligations are to come into effect.
If the contract does not state a specific time by which the condition must occur, in appropriate circumstances the time may be implied on the basis of an interpretation of the intentions of the parties under Chapter 4.
3. Suspensive and resolutive conditions
A contract or contractual obligation can be made to depend upon the occurrence of a future uncertain event, so that it takes effect only if the event occurs. Under the Principles this is a suspensive condition. In some jurisdictions it is known as “condition precedent”.
5. A merger contract is concluded between A and B subject to A’s having received the necessary antitrust clearance for the transaction from the relevant authorities before a specific date.
A contract or a contractual obligation can be made to come to an end upon the occurrence of a future uncertain event. Under the Principles this is a resolutive condition. In some jurisdictions it is known as “condition subsequent”.
6. A contract appointing B as a fund manager to manage the investments of a company provides that the agreement is to come to an end if B loses its licence to conduct the fund management business.
Instead of agreeing on a resolutive condition, the parties to a contract may agree that one or both of them may, under certain circumstances, have the right to terminate the contract.
4. Condition entirely dependent on the will of the obligor
Sometimes the contract or contractual obligation is made dependent upon an event which is entirely in the discretion of the obligor. In this case the question is of whether the obligor really wants to be bound. This is a question of interpretation. If it appears that there is no intention to be bound, there is no contract, nor is there any contractual obligation.
7. A document drawn up between A and B contains a list of provisions. One of them states that a contract of sale will come into being if A decides to sell certain goods. A is under no obligation, not even a conditional one, in view of the fact that it is within A’s unfettered discretion to decide whether or not A wants to sell the goods. The fact that A may be under a pre-contractual obligation not to act in bad faith is irrelevant in this case.
In some cases there is a conditional obligation in spite of the fact that one party has a choice whether or not to conclude the contract. This holds true when the freedom of choice is in actual fact dependent upon external factors.
8. An international merger agreement provides for the merger within a certain period of time of two subsidiaries of a parent company, subject to approval by the Board of Directors of one of the companies. Under the applicable law the approval cannot be unreasonably withheld. There is a conditional obligation since the condition is not entirely dependent on the will of one of the parties.
Parties to complex and high-value business transactions that involve prolonged negotiations frequently provide for a so-called “closing” procedure, i.e. the formal acknowledgement (“closing”) at a certain point in time (“closing date”) that on or before that date all the stipulated conditions (“conditions precedent”) have been satisfied. Normally, but not necessarily, on the “closing date” the parties will sign a document which confirms that no “condition precedent” survives or, if some conditions have not been satisfied, that they have been waived.
Despite the terminology used by the parties, not all the events referred to as “conditions precedent” are “conditions" as defined by this Article. In actual practice there are mixed provisions. Thus, for instance, events such as the receipt of all necessary antitrust clearances, the admittance to trading on a stock exchange, the granting of an export licence, and the obtaining of a bank loan, may be true suspensive conditions because they are events that are not certain to occur. Other terms such as the accuracy of one party’s representations or warranties, the commitment to perform or abstain from some specific acts, and the submission of a tax certificate that evidences that no taxes are due by the party concerned, are in fact obligations that the parties have agreed to fulfil before the formal conclusion (“completion”) of the transaction. These are not events that are uncertain to occur and therefore these provisions are not conditions under the Principles.
Also, with respect to the effects of a “closing”, there is no clear-cut rule as to whether or not a term is a condition. In practice it is difficult to derive a logical answer from the clauses themselves. In particular, clauses named “conditions precedent” often mix up real conditions and specific matters that still need to be agreed upon or real obligations that the parties must fulfil in the course of the negotiations (see Article 2.1.13).
9. A Share Capital Increase Agreement negotiated between issuer A and lead manager B under the heading “Conditions precedent” provides as follows:
“The obligation of the Lead Manager at the closing date to subscribe for the shares is subject to the realisation of the following conditions precedent on or prior to the closing date:
a. Accuracy of representations and warranties;
b. Performance of undertakings: the Issuer has performed all of those of its obligations hereunder to be performed on or before the closing date;
c. Admittance to trading on stock exchange;
d. Delivery of any and all closing documents: the Lead Manager shall have received the following documents on or before the closing date [...].
If any one of the above conditions has not been satisfied at the time it should have been satisfied pursuant to this Section, the obligations of the Lead Manager may be terminated by the Lead Manager.”
In this Illustration the contract consists of a mixture of legal obligations and suspensive conditions: item (c) is a suspensive condition, as it is outside the control of the parties; items (a) and (b) embody contractual obligations; and item (d) embodies a contractual obligation as regards the documents a party is under an obligation to procure but a suspensive condition as regards other documents.