Condition Precedent: Everything You Need to Know
A condition precedent is an explicit or implicit clause within a contract that says the other party must accomplish its duty before the contract can move forward. 5 min read
2. What's the Purpose of a Condition Subsequent?
3. What's an Out?
4. How Does a Condition Subsequent Work?
5. What Is a Conditions Precedent?
6. What Does a Party Need to Know When Drawing up a Condition Subsequent Contract?
7. Other Key Terms
What Is a Condition Subsequent?
A condition subsequent (CS) is an exit clause from an existing contract. The agreement between parties includes language that frees one of them from the deal. This happens when a conditional outcome occurs. A CS relieves a party of all obligations.
What's the Purpose of a Condition Subsequent?
Think of a condition subsequent as an escape clause. It ends a party's contractual obligation. In contracts, all involved parties have certain responsibilities. The CS gives one party the ability to walk away from the promise to perform a duty.
A CS is a kind of insurance for one or more parties. It makes sure that one of the groups in the contract can leave when certain conditions are met.
Think of a contract as a series of promises. Everyone who signs the agreement must keep their promises. Sometimes, a situation changes and leaves a party in a bad situation. The CS covers that group, protecting them from the bad situation.
An example is a property purchase agreement. One party agrees to buy the property from the other. What happens if the buyer goes bankrupt? The buyer doesn't have the money to honor the promise. A divorce or relocation could also cause problems. So, the party asks for a CS that relieves them of an obligation.
This happens when the condition occurs. It frees one party from the contract. It's an escape clause for bad events. The party mentioned in the CS no longer has any requirements in the contract.
Note that the defendant has the burden of proof in CS matters. A court of law will expect the party to show that he met the terms stated in the contract. The same is true of CP rulings.
Finally, a key aspect of the CS is who chooses the outcome. For example, if a CS involves a person's taste or judgment, that person is the only one who can decide if a condition is met. The subject of the contract has all the power. Because of this, leaving a condition up to personal taste or judgment is a bad idea.
What's an Out?
An out is a simpler term for a condition subsequent. The CS clause in a contract offers one or more reasons for a party to exit the agreement. Each of them is an out.
Having an out gives a party great contract protection. That's why outs are subject to intense contract negotiation. A smart contract maker always gets as many outs as possible. It's an excellent form of contract insurance.
How Does a Condition Subsequent Work?
When writing the contract language for a CS, the steps are:
- Describing what the condition is
- Defining which party has to meet the condition
- Deciding who pays for the process
- Determining time limit for a party to meet the condition
- Identifying which party gets to say whether the condition is met
A good CS is specific. It leaves no room for interpretation. All parties know exactly what's expected of them. They also know all the conditions that could trigger the CS.
What Is a Conditions Precedent?
This is the opposite of the condition subsequent. When multiple parties enter into a contract, they have outstanding conditions that they must meet. Until the parties meet the terms of these conditions, they don't have a deal. A conditions precedent (CP) is a term in the deal that the parties must satisfy, fulfill, or waive.
You'll find condition precedent agreements most often in deeds and contracts. With deeds, the CP is something that must happen in order for property title vests. Without it, the receiving party never gets the deed.
With contracts, the CP is something that must happen. When it does, the party in contract has to honor his part of the agreement. Until the CP occurs, the party has no obligations. A CP is a triggering mechanism.
Real estate condition precedents usually refer to the conditions of the property acquired or the financing of the purchase. A party won't want to finish the contract if the property has issues. Similarly, the party won't complete the buy if the financing falls through. The CP makes these items contractual obligations.
What Does a Party Need to Know When Drawing up a Condition Subsequent Contract?
Every word matters in a contract. Using the wrong one can cause unforeseen legal issues. As an example, a recent case involving Oculus Rift creator Palmer Luckey came down to usage of the word "unless" in a nondisclosure agreement (NDA).
The court's ruling on Total Recall Techs. v. Luckey dismissed a claim with prejudice. The California court agreed with the defendant's claim that the CS used unclear wording.
Several legal analysts took issue with this decision. They felt that the judge incorrectly gave the defendant the benefit of the doubt. All of this was avoidable with a better contract. Rather than spell out a CS, the parties inferred one. The defendant used this lack of clarity to win a court ruling.
When writing a CS, you should:
- Use terms like "except that" and "if" clauses
- Avoid terms like "unless"
- Use precise terms to avoid fights
The goal is to write a contract with clear language. Nothing you write should leave any room for doubt. Otherwise, you could lose a ruling worth millions of dollars over a word like "unless."
Other Key Terms
- Express conditions: These are conditions that a contract explicitly states. A party should always use express conditions when possible.
- Implied conditions: These are conditions in a contract that a reader would reasonably infer. Since they're not spelled out in detail, implied conditions are ambiguous. They can lead to unsatisfactory contract interpretations.
- Condition concurrent: This term is the easiest to understand. It means that one condition must happen at the same time as another. Parties use this when both/all of them have the same obligations in the agreement. Everyone simply has to handle their share of the condition to trigger the contract.
- Satisfactory performance: Courts use a good-faith test to decide whether a party has met a condition. The test is what would qualify as satisfactory performance to a reasonable person.
- Substantial performance: Courts understand that a party might not satisfy the full conditions of a contract. They still offer leeway when the party is very close to meeting all conditions. Substantial performance is usually good enough to fulfill contractual obligations.
- Divisible contracts: In many contracts, the parties are responsible for two or more parts. It's a division of conditions. Each group has to meet its obligations. A divisible contract exists so that the parties have clear terms about who does what.
- Breach of Conditions: A party doesn't always have to honor the terms of the agreement. The groups involved with the contract must follow the rules of the agreement. For example, if a person agreed to sell a black 2016 Cadillac Escalade to someone, he would breach the conditions by showing up with a white 2003 Cadillac Escalade. The buyer wouldn't have to honor the terms of the agreement since the seller didn't.
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