(a) Covenants vs. conditions

Unlike conditions (and warranties) – which are statements of fact as at a specific point in time – covenants are ongoing promises by one party to take or not to take certain actions. But covenants and conditions are more related than it may seem at first sight. Compare the following examples:

1. Seller shall sell and deliver the Products to Purchaser, subject to the condition that Purchaser has paid the Purchase Price.

2. Seller hereby sells and delivers the Products to Purchaser, subject to the condition that Purchaser shall pay the Purchase Price within five days after the Signing Date.

3. Seller hereby sells and shall deliver the Products to Purchaser within five days after the Signing Date, subject to the condition that Purchaser has paid the Purchase Price.

4. Seller hereby sells the Products to Purchaser and Purchaser hereby purchases the Products against payment of the Purchase Price. Seller shall deliver the Products within five days after the date of this Agreement.

Example 1 does not contain an ‘act of purchase’ by the Purchaser and does not contain an unequivocal link between the Purchase Price being a “purchase price” and the sales. Example 2 has the same defects; the strict wording would not grant the Seller an action for performance against the Purchaser (i.e. the Purchaser could argue that despite Seller’s act of sale, the Purchaser’s act of purchase remains open until the Purchaser so decides). Example 3 is the same as example 2, except that the required order of performance of payment and delivery are changed. Example 4 is a proper sales provision without any explicit conditions (i.e. one may well argue that the sale is subject to the implied condition that the Purchase Price be paid).

Based on the wording used or missing in the examples (i.e. a reference to a “Purchase Price” and a failure to reflect that the products are “hereby purchased”, respectively) examples 1 to 3 may well need improvement. Whether they are more obligatory than a precise lawyer would prefer is a matter of (reasonable) interpretation. If they were written by a non-lawyer for a simple transaction between two individuals, it is quite possible that a court would determine that the main intentions of the parties as expressed in the examples are all the same: one party sells and the other party buys, against payment of a purchase price. If an amount has been paid and the Products have been delivered, a court will probably not invalidate the sale. Nonetheless, it emphasises the importance of drafting straightforward obligatory provisions in the active tense.

The relationship between conditions and covenants can also be explained in a different way. First, although a condition is not, as such, a ‘promise to act’ in a certain way, the stipulation of a condition often implies that the parties use reasonable endeavours that the condition will be satisfied in such manner that the object of that condition takes its anticipated effect. Accordingly, a condition may a contrario imply an obligation (i.e. a covenant) imposed on the party who is able to influence the satisfaction (positively or negatively) of that condition. Similarly, a covenant is not a key obligation and therefore many courts will refuse to permit a complete suspension or postponement of performance by the beneficiary of an obligation if the obligor fails to perform according to the covenant.

Second, if contractual obligations are drafted in the passive tense (i.e. without an actor or obligor being appointed) the distinction between covenants and conditions becomes fluid. This becomes clear when reading the American Restatement of Contracts:

“If in an agreement words that state that an act is to be performed purport to be the words of the person who is to do the act, the words are interpreted, unless a contrary intention has been manifested, as a promise by that person to perform the act. If the words purport to be those of a party who is not to do the act they are interpreted, unless the contrary intention has been manifested, as limiting the promise of that party by making performance of the act a condition.”

Although the distinction might not be of great relevance from a contract-drafting or even a practical perspective, it is important to be aware how conditions and obligations interact with each other.