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.
Unless the parties otherwise agree:
(a) the relevant contract or contractual obligation takes effect upon fulfilment of a suspensive condition;
(b) the relevant contract or contractual obligation comes to an end upon fulfilment of a resolutive condition.
1. A general default rule
Under the Principles, unless the parties otherwise agree, the fulfilment of a condition has prospective effect only. It does not operate retroactively.
Parties are encouraged to express whether a condition operates retroactively or prospectively.
2. No retroactive effect
In the case of a suspensive condition, the contract or contractual obligation automatically becomes effective from the moment the future uncertain event occurs.
1. The facts are the same as in Illustration 5 to Article 5.3.1. The contract takes effect if and when the necessary antitrust clearance is obtained.
In the case of a resolutive condition, the contract or contractual obligation comes to an end from the moment the future uncertain event occurs.
2. The facts are the same as in Illustration 6 to Article 5.3.1. The contract comes to an end if and when B loses its licence.
(1) If fulfilment of a condition is prevented by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the non-fulfilment of the condition.
(2) If fulfilment of a condition is brought about by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the fulfilment of the condition.
This Article on interference with conditions is a specific application of the general rules on good faith and fair dealing (see Article 1.7), inconsistent behaviour (see Article 1.8) and co-operation between the parties (see Article 5.1.3).
Under this Article, the party is not under an obligation to use all reasonable efforts to bring about the fulfilment of the condition. This Article merely states that the party who, contrary to the duties of good faith and fair dealing or co-operation, prevents the condition from being fulfilled may not rely on the non-fulfilment of the condition. If, on the contrary, the party brings about the fulfilment of a condition contrary to the duties of good faith and fair dealing or co-operation, that party may not rely on the fulfilment of the condition.
Whether or not a party is under an obligation to use all reasonable efforts to bring about the fulfilment of a condition is a matter of interpretation. In commercial practice, the parties themselves may expressly provide for the observance of the principle of good faith as regards all the events upon which completion of the transaction is conditional or go beyond this minimum standard and impose a duty to use “their best efforts to bring about the fulfilment of the conditions as soon as practicable”. These clauses may also be imposed on one party only (see Article 5.1.4).
The available remedies (right to performance or damages) are to be determined in accordance with the contractual provisions and the general rules on these remedies, as well as with the particular circumstances of the case.
Four factual situations can be distinguished to illustrate the operation of this Article.
(a) Where the fulfilment of a suspensive condition is prevented by a party contrary to the duty of good faith and fair dealing or the duty of cooperation, that party may not rely on the non-fulfilment of the condition.
1. The licensing of software by B to A is agreed by the parties to be dependent upon the professional approval of the software by an independent computer engineer, C, who is nominated by B. B regrets the bargain and bribes C not to approve the software. Because of the bribe, C states that it does not approve the software. B is not allowed to rely on the non-fulfilment of the condition, i.e. B cannot refuse to perform the obligation under the contract when asked by A to do so.
(b) Where the fulfilment of a resolutive condition is prevented by a party contrary to the duty of good faith and fair dealing or the duty of cooperation, that party may not rely on the non-fulfilment of the condition.
2. A hires earth-moving equipment from B for the time necessary for A to purchase its own equipment. As a commercial favour to A, the rate of hire is below the market rate. B’s obligation to make the earth-moving equipment available is subject to the resolutive condition that it comes to an end if A acquires its own earth-moving equipment. A turns down very attractive offers in order to continue benefiting from the favourable rate of hire. A may not rely on the non-fulfilment of the condition.
(c) Where the fulfilment of a suspensive condition is brought about by a party contrary to the duty of good faith and fair dealing or the duty of cooperation, that party may not rely on the fulfilment of the condition.
3. The facts are the same as in Illustration 1, except that B bribes C to give its approval of the software despite C’s professional misgivings about the software. B is not allowed to rely on the fulfilment of the condition, i.e. B cannot ask A to perform the contract.
(d) Where the fulfilment of a resolutive condition is brought about by a party contrary to the duty of good faith and fair dealing or the duty of cooperation, that party may not rely on the fulfilment of the condition.
4. A appoints B as its agent for the promotion and sale of A’s products. The agreement is to come to an end if the gross amount of sales made by B fails to reach EUR 1,000,000 by 31 December the second year. A, who has found another party willing to act as agent on terms more favourable to A than B, withholds supplies to B with the result that by the above date B’s gross sales fall well short of EUR 1,000,000. A may not rely on this to treat the agreement with B as having come to an end.
Pending fulfilment of a condition, a party may not, contrary to the duty to act in accordance with good faith and fair dealing, act so as to prejudice the other party’s rights in case of fulfilment of the condition.
This Article only relates to the acts performed during the period that precedes the time when the condition is fulfilled. It does not concern acts which amount to an interference with conditions. These acts are dealt with by Article 5.3.3.
The situation in which fulfilment of the condition is pending is specific and deserves special treatment in application of the general principle of good faith and fair dealing (see Article 1.7). Indeed, a person who would benefit from the fulfilment of a condition has a conditional right which deserves protection (particularly in the case of a suspensive condition). During the period pending fulfilment of the condition one party’s actions may detrimentally affect the other party’s position. This Article assumes that it is generally better to prevent such actions than to cure their effects.
This Article is also important as a reminder to the parties to consider this issue and even state expressly what measures the person who would benefit from the fulfilment of the condition might take in order to preserve its rights. In commercial practice parties may draft a specific provision (sometimes known as “covenant of ordinary course of business”) that produces effects between the date of signature and the “closing date” and restricts the parties’ right to dispose of assets only to those transactions that fall within the ordinary course of business.
A share purchase agreement entered into between the seller A and the purchaser B provides that the transaction will be completed only if at the closing date all the conditions have been met, including B’s having obtained the necessary credit from its banks. A is bound to restrict its activity to ordinary business management and B is under a duty of confidentiality as to any information concerning the company that it has received in the course of negotiations.
(1) On fulfilment of a resolutive condition, the rules on restitution set out in Articles 7.3.6 and 7.3.7 apply with appropriate adaptations.
(2) If the parties have agreed that the resolutive condition is to operate retroactively, the rules on restitution set out in Article 3.2.15 apply with appropriate adaptations.
When a contract subject to a resolutive condition comes to an end as a result of the fulfilment of the resolutive condition, the parties will often have performed, fully or in part, their obligations under the contract. The question then arises whether and, if so, under which rules, the parties have to make restitution of what they have received.
Under the Principles, the fulfilment of a resolutive condition normally has prospective effects only. For this reason restitution will have to follow the regime set out in Articles 7.3.6 and 7.3.7 on restitution following the termination of a contract, which also operates only prospectively. The specificity of this restitution regime vis-à-vis the restitution regime set out in Article 3.2.15 is that for contracts to be performed over a period of time, restitution cannot be claimed for the period prior to the moment when the contract came to an end.
However, under the Principles parties are free to determine that a resolutive condition is to operate retroactively. Under these circumstances it appears to be appropriate to apply the restitution regime set out in Article 3.2.15 (restitution following avoidance) since avoidance also operates retroactively. There is no special rule for restitution in the case of contracts performed over a period of time.