Define Conditional Contract: Everything You Need to Know
To define conditional contract is to set the terms which a business gets possession of goods before completing the sale through the full payment for the goods.3 min read
To define conditional contract is to set the terms under which a business gets possession of goods before completing the sale through the full payment for the goods. A conditional contract allows the seller to retain ownership of the goods until the purchaser makes the payment in full, while the purchaser can set up shop, so to speak, with office furniture, equipment, tools, and office supplies and make payments over time.
A conditional contract, also called a hypothetical contract, is a binding legal document that includes a clause stipulating the prior performance of another agreement before it can be enforceable. What this means is that, in the case of a purchase of office equipment, a party may contract to buy the equipment, but the terms of that contract are not considered met until another condition, i.e. payment of the sales price in full, as well as finance fees and other charges, is complete. If the purchaser fails to make payments, the seller may take back the equipment, which it still legally owns, and keep any security deposit that may have been provided per the terms of the contract. The purchaser cannot assert ownership because it has not fulfilled the conditions of the agreement.
When a Conditional Contract Make Sense
Payment is not always the only condition set forth in a conditional contract, and both the buyer and the seller can both set conditions that the other party must meet. These could include things like a timetable for delivery dates to comply with construction schedules, the condition of the goods, or any other factor either party deems important.
For the most part, conditional contracts are not the best way to proceed for either party. They both assume a level of risk.
- For the seller, it means that their goods could be subject to damage or that they are, in a sense, extending credit to the buyer rather than getting the full payment at the time of the sale.
- On the purchaser’s part, it could mean that they are laying out an extra in finance charges, which might be money better spent on inventory, advertising, or other daily business expenses.
However, there are times when conditional contracts are beneficial:
- When the buyer needs the equipment or goods to begin operations but is still in the process of finalizing mortgage agreements, waiting on business loans or other considerations where cash flow could be a problem.
- Where a contract is dependent upon outside entities, such as a planning commission, making a final determination on the suitability of the property.
- When negotiations with a landlord are proceeding in good faith, but not yet finalized.
- Where legal matters are slowly working their way through the judicial process, yet the outcome is for the most part already decided, i.e. an inheritance.
How to Protect Yourself
Regardless of whether entering into a conditional contract makes sense or not, neither party should ever agree to a conditional contract that is dependent upon conditions of a related conditional contract being met.
If for any reason, the dependent conditional contract fails to become enforceable, then it could create a domino effect that sends ripples through all related transactions, especially those that would have to proceed due to contractual obligations. This could lead to a breach of those contracts, resulting in possible financial liability and responsibility for rectifying other damages.
It’s also advisable to explore other options before proceeding with a conditional contract. For instance, if a determining factor is a decision by a planning commission, it might be best to delay things until a decision comes through. No matter how certain things may appear, there is always the chance a new development could arise that would cause further delays or scuttle the review process completely.
It might also be a good idea to insert a timetable that outlines when conditions pass the point of impossibility. Although it might be a huge disappointment to have months or years of planning end up going nowhere, the alternative of being straddled with obligations that cannot be met could be much worse.
When it comes to conditional contracts, the most important thing to always remember is that haste is the enemy, and laying out the precise events that trigger each condition on which the contract is based is always the best approach.
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