In this latest post in our series on understanding contract terms, we’re tackling conditions precedent. Below is the definition and explanation of how conditions precedent affect your contracts.
A condition precedent is an event which must take place before a party to a contract must perform or do their part. For example, you agree to paint a house if the owner of the house supplies the paint. Until the paint is supplied, you’re not required to (or able to) paint.
If a condition precedent does not occur, no duty of performance arises and no payment is required. Furthermore, the party protected by the condition is not in breach when that party does not perform his or her part of the contract.
Use in Contracts
Conditions precedent are common in real estate contracts. Salience A typical mortgage contract will include a condition precedent that an inspection to assess the value of the property must occur and be agreed to by the buyer and seller before the mortgage contract will take effect. Similarly, in a real estate sales contract, if the buyer must first acquire a loan before he is obligated to pay the seller, then the buyer is not breach of the contract when he fails to obtain a bank loan and doesn’t pay the seller.
Conditions precedent are also common in wills and trusts, e.g. transferring of money or property only occurs after certain events occur, such as reaching a certain age.
Conditions precedent play an important role in protecting parties in contractual transactions. In the above real estate sales contract example, absent the condition precedent of obtaining a bank loan, the buyer would be required to pay the seller regardless of whether the buyer is able to obtain the necessary financing. When the buyer doesn’t get the loan (and therefore doesn’t have the money to pay) and fails to pay the seller, he is in breach of the contract and the seller may recover the damages.
Tips for Drafting Conditions Precedent
The condition precedent should not be entirely in control of one party without qualifiers. Typically, courts do not favor terms in a contract where there is no mutuality of obligation. To avoid this problem, you can insert language that requires a “good faith effort” or “reasonable effort” to complete the condition precedent. For example, if the buyer in the example above fails to make any good faith effort to obtain the bank loan, he will be in breach of the contract regardless of the condition precedent.
The problem is that there is no bright-line rule for determining what a “good faith” or “reasonable” effort is. Typically, courts will look to the circumstances of the transaction and at similar transactions to determine whether the party made a reasonable effort. The general rule is what would a prudent person do under similar circumstances.
If you’d like to learn more about conditions precedent or drafting contracts in general, please feel free to contact us today.
