Conditions in contracts - Weagree

Conditions in contracts

A very important subject is the use of conditions in contracts. Below, legal and practical aspects of conditions will be explained in detail, several common condition-related provisions will be addressed, a set of best practices will be formulated, followed by some examples (or checklists) for conditions.

General observations about conditions in contracts #

Conditions precedent (cp’s) and conditions subsquent are of great importance because their effect can be drakonic. If a condition is not satisfied, the related rights or obligations either fall away or, depending on the formulation, become effective. This may even apply to the enforceability of the entire agreement.

Examples of conditions are a financing clause for the sale of a house, financial credibility (solvency) conditions for (revolving) credit facilities, a required shareholder approval for major (M&A) transactions or clearance by competition law authorities.

The law. Many national laws address the effects of a condition being satisfied, as does the DCFR:

III. – 1:106: Conditional rights and obligations

  1. The terms regulating a right, obligation or contractual relationship may provide that it is conditional upon the occurrence of an uncertain future event, so that it takes effect only if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition).
  2. Upon fulfilment of a suspensive condition, the relevant right, obligation or relationship takes effect.
  3. Upon fulfilment of a resolutive condition, the relevant right, obligation or relationship comes to an end.
  4. When a party, contrary to the duty of good faith and fair dealing or the obligation to co-operate, interferes with events so as to bring about the fulfilment or non-fulfilment of a condition to that party’s advantage, the other party may treat the condition as not having been fulfilled or as having been fulfilled as the case may be.
  5. When a contractual obligation or relationship comes to an end on the fulfilment of a resolutive condition any restitutionary effects are regulated by the rules in Chapter 3, Section 5, Sub-section 4 (Restitution) with appropriate adaptations.

VIII. – 2:203: Transfer subject to condition

  1. Where the parties agreed on a transfer subject to a resolutive condition, ownership is re-transferred immediately upon the fulfilment of that condition, subject to the limits of the re-transferor’s right or authority to dispose at that time. A retroactive proprietary effect of the re-transfer cannot be achieved by party agreement.
  2. Where the contract or other juridical act entitling to the transfer of ownership is subject to a suspensive condition, ownership passes when the condition is fulfilled.

One may bear in mind, that a lawyer may have two roles relating to conditions prece­dent: negotiating them and making sure that they are satisfied.

Conditions as an exit. In many cases, the contracting parties may believe that the execution of an agreement con­cludes the deal, whereas in many cases there is still a lot of work to be done before the transaction is completed.

The negotiations of conditions precedent sometimes bring key interests of the parties to light. One party may have a great interest in the quick closure of the deal, whilst the other will probably need to receive more information on the object of the transaction. This is why conditions in contracts often serve as a leverage to renegotiate key deal terms (i.e., in such case, despite the drakonic effect, a condition precedent is not intended as an exit but rather as a protection of one party against ‘hidden defects’).

For example, if an ‘unsatisfied’ condition requires that the acquired company has a certain mini­mum amount of cash flow during, the purchaser may insist that the purchase price be reduced. At the same time, arguments to object to a proposed condition may be that satisfying such condition is onerous, expen­sive or not customary. In all cases, a condition should not permit a party a discretionary freedom to walk away from the deal after signing the agreement. (Explained in legal concepts: the ‘free will’ of a party or the ‘mutual consent’ of both parties should not in fact mean that one party may effectively still freely make up its mind.)

Terminology and cp’s versus conditions precedent. In somewhat unusual terms, the DCFR distinguishes between ‘suspensive conditions’ and ‘resolutive conditions’. More common is a distinction between conditions precedent (also called cp‘s) and conditions subsequent: conditions precedent, on the one hand, address conditions that should be satisfied before a right, obligation or contractual relationship comes into existence. On the other hand, conditions subsequent describe facts or events pursuant to which a right, obligation or contractual relationship may be terminated. Nevertheless, the term condition subsequent is not common parlance (if known at all); therefore, it strongly recommended that simple conditional wording is used such that “if ABC occurs, Party 1 may terminate this agreement”.

Conditions relate to future or uncertain facts or events. The DCFR on conditions in contracts requires that a condition refers to a future or uncertain fact or event. This distinguishes conditions from the legal concept of mistake (Irrtum, erreur, dwaling). The concept of mistake implies that an agreement, entered into on the basis of an incorrect assumption, is voidable (or otherwise subject to termination) if the agreement had not been entered into but for that assumption being incorrect (subject to tests of reasonableness and proportionality of termination).

To include a condition that refers to an unknown but existent fact or event (or to a fact or event that is uncertain for the parties but certain for others) is therefore not so much a question of conditionality of the agreement but rather an agreement between the parties that the referenced fact or event is important enough to trigger a termination. Nevertheless, if a straightforward condition is satisfied but for some apparently insignificant facts or events, the rights or obligations that are the subject of the condition will not come into force.

Potestative conditions. Effectively, such ‘subjective condition’ implies that the party has never been truly bound to the ‘agreed’ transaction (since that party has always been free to terminate ‘at will’); in fact it is questionable whether there was mutual consent or a meeting of offer and acceptance as regards the object of the agreement).

On the European continent, potestative conditions are invalid or ineffective. Depending on the contents of the condion, the principle of good faith would impose legal consequences that may for instance range from complete ineffectiveness of the condition, to a more objective (and reasonable) test whether the condition is satisfied, or even to an obligation on a party to make best efforts in order to ascertain that the condition be satisfied.

The potestative nature of a condition is not always apparent. For example, the following conditions contain a prevailing subjective element:

…Borrower has delivered its financial statements, in form and substance satis­factory to Lender.

…Purchasers having completed a due diligence review of the business, assets, contracts, tax and financial condition of Acquired Com­panies, being satisfied in all respects with the outcome of the review.

…The Parties having entered into a joint development agreement, allocating each Party’s entitlement to intellectual property rights in a mutually satisfactory manner.

The questionability of overly subjective conditions can be remedied in several ways. The inclusion of a standard of reasonableness in each of those conditions would mean that the beneficiary of the condition cannot avoid a closing by a simple statement that the condition is not satisfied (timely). The standard of reasonableness implies an objective test or at least a duty to explain (on reasonably understandable grounds) why the condition is not satisfied. Similarly, the conditions could be phrased more objectively.

For example, the condition could refer to market standards or customs of the market or even to the internal policies generally used by the beneficiary in similar circumstances. Alternatively, it is a good option to leave the determination whether the condition is satisfied open. Finally, the condition related to the joint development agreement could be elaborated by attaching an agreed framework or the main terms of such agreement. Obviously, time restraints or other circumstances may make this ap­proach impractical.

Topics adjacent to conditions #

Conditions reasonable efforts and good faith. Most conditions in contracts require that one party undertakes to achieve a certain fact or event. This would imply that that party also has the power to prevent the satisfaction of a condition. That’s is not true: European legal systems impose the principle of good faith (or a similar concept – e.g., not to abuse a right) on such party requiring it to make reasonable endeavours in achieving the stipulated results. The specific effects of this general principle and the particular actions required in the context largely depend on the circumstances of the case. It is clear, however, that a party cannot sit and await the lapse of time: a condition that was dependent upon the efforts made by the party that is entitled to invoke it, is valid and enforceable only if that party is able to show that it has done what could reasonably be expected from it to have that condition satisfied.

Because by its nature the principle of good faith depends on the particularities of the case, it is not always possible to foresee what level of efforts actually is required. This does not take away that the parties may well be able to prescribe what minimum level of efforts is expected or which specific actions must be undertaken by a party in order to allow it to invoke the condition. Therefore, a generic contract clause providing that the parties will make best efforts to have the conditions satisfied (within an agreed period of time) is as such redundant: it does not add anything to what the law imposes. This is different if the parties also provide what such ‘best efforts’ means or if they prescribe the contents and any monetary implications of any required actions.

Note that reasonable efforts to have a condition satisfied is something else than a condition that reasonable efforts are made to attempt to achieve something. Compare the following two examples:

This Agreement is conditional upon Employee having made reasonable endeavours to obtain a waiver from his current employer regarding the non-compete obligation in their employment agreement.

This Agreement is conditional upon Employee having obtained a waiver from his current employer regarding the non-compete obligation in their employment agreement. Employee shall make reasonable endeavours to obtain such consent as soon as practicable.

In the first example, the condition would be satisfied if the employee has made several serious requests even if they were rejected, whereas in the second example, the condition is not satisfied until the waiver is actually obtained.

Satisfaction of the conditions (and closing agenda). After signing the agreement, the closing conditions must be satisfied. The question whether a condition is satisfied is after all a matter of interpretation, the scope and extent of matters or efforts required depend on what the parties (or the lawyers on their behalf) agreed.

Usually, the parties’ lawyers take the lead in identifying all work that needs to be done before completion can take place. This requires foresight, organization and attention to details. The first step is usually the creation of a “closing list” or “closing agenda”, a document or spreadsheet listing all of the (closing) conditions in each of the transaction documents, as well as all actions on the closing agenda. In the table, for each item ownership (i.e., responsibility) is allocated, the current status and the action required from time to time. This closing agenda is a roadmap to closing and neither a negotiation document nor a document that requires drafting skills. It is typically shared openly amongst all the lawyers involved in the transactions. Despite the typical lack of professional project management skills of a lawyer, the lawyers involved in the transaction take a lead and take care of satisfaction of the conditions and the fulfilment of all other actions required for closing. At the closing the closing schedule or action list serves as the guide to tick off each closing document.

Whilst a condition provides for an exit right for one party in case of non-fulfilment, the opposite is often true as well. For example, if the closing of a transaction is conditional upon certain conditions being satisfied and both parties fulfil all the closing actions, the closing itself implies a waiver of any pending conditions. This would be the effect of the Lex Mercatoria principle that “no-one may set himself in contradiction to his own previous conduct (non concedit venire contra factum proprium)”[1]. Clearly, if a party pursued the closing on the pretext of the other party’s statement that all conditions were satisfied and it appears that a material adverse change has occurred (triggering a MAC-condition not to be satisfied), the legal concept of fraud or even mistake would imply a right to reverse the closing and to claim damages. This is generally addressed in the lead-in to the conditions, where it stipulates that:

each of the following conditions be satisfied or waived.

Although generally there is no need to express this ‘waiver effect’, it may well trigger a contract party to require a positive statement (in the US context often called a “certificate”) confirming that a fact or an event (as foreseen in the condition) is absent or has not taken place, respectively.

This generally recognised principle is included under No. I.7 in the CENTRAL list of Lex Mercatoria principles, rules and standards (click here for the full list of the principles). The list is included in Willem Wiggers, International commercial law – source materials, Kluwer 2006.

Best practices on drafting conditions in contracts – intro and overview #

Best practice rules. Below are best practice principles and rules of good practice related to drafting conditions in contracts, conditional clauses and triggering events. Where a reference is made to a “condition”, the same applies to triggering events and, albeit to a slightly lesser extent, to conditional clauses. The best practice rules refer to conditions being ‘satisfied’ or not; no difference in meaning is intended where the word ‘fulfilled’ is used and the same principles apply to conditions that should not be fulfilled in order for the object of that condition to have its effect.

1) The object of the condition, conditional phrase or triggering event should be clearly defined.

The object of a condition is what is made conditional: the right or obligation that comes to life or ceases to exist when the condition is satisfied (or fails to be satisfied). Make sure that it is clear what exactly is conditional.

For example, in a share purchase agreement, conditions precedent can be formulated in several ways. Consider the following examples:

Purchaser’s obligations are subject to each of the following conditions being satisfied:
The Closing is subject to each of the following conditions being satisfied:

The obligations in this Agreement are subject to each of the following conditions being satisfied:

This Agreement is subject to:

Obviously, the first condition is very one-sided and Purchaser-friendly; the second condition is probably the most reasonable and adequate; and although the third condition is more specific than the last, the effect of both  is that various provisions will cease to be effective (e.g. notably on confidentiality, applicable law and dispute resolution).

The object of a condition can be anything which the parties agree, but would typically range from:

  • the agreement (as a whole): this is dangerous since (strictly speaking but probably not intended) the non-fulfilment of a condition also drags along the binding nature of a choice of law and the provisions on dispute resolution and confidentiality.
  • a closing or completion of the transaction: this is a common provision in financial and M&A transactions.
  • a right or obligation of a party: the conditionality of a right or obligation is often indicated by the words provided that or a mere unless or if. All rights and obligations can be subject to certain conditions being fulfilled. For example, a right to an indemnity will typically be subject to the condition that the party seeking the indemnity makes full disclosure of relevant facts and gives the indemnifying party full control and authority to conduct the defence.
  • the completion (or waiver) of the last closing step: if several steps must be taken either consecutively or concurrently, for example during the closing of a transaction, the parties often agree that all steps are conditional upon the last step being completed. Obviously, the effect of this will be that all steps take effect (and become unconditional) in the split second of fulfilment of the last step.
  • certain events taking place: for example, a revolv­ing credit agreement permits multiple borrowings, requiring a complete set of closing conditions in respect of the ini­tial draw-down or closing and an additional, separate (usually shorter) set of conditions that must be satisfied by the borrower at the time of each draw-down (i.e. with the lapse of time).

2) Bring conditions that relate to the same object together in one article or section of the agreement.

This best practice rule is consistent with the general drafting technique of grouping exceptions to a rule together (see paragraph 1.3(b) on ambiguity). The legibility of conditions improve if they are separated out of the object to which they relate. A similar technique is used when a definition is lifted out of a contractual provision or the text of another definition (i.e. by creating a new defined term and substituting this term in the overly complex provision or definition, respectively).

Alternatively the contractual provision may have the following pattern: there is a general obligation, which contains a few objects; each of those objects is phrased generally but requires to be refined by exceptions, qualifications, limitations or conditionality. Now, to prevent accurate drafting efforts resulting in an unclear provision, it is helpful to untangle all those objects and to connect the right conditions with the right objects.

An illustration of this is a licence provision: the licence clause itself lists the elements of exclusivity, geographical scope, sub-licensability, assignability, and its royalty-bearing character, whilst the exceptions, qualifications, limitations and conditions to each of those elements are usually elaborated in the subsequent sections.

Where to locate conditions? If conditions affect various articles of an agreement, list the conditions in a separate article; if conditions or triggering events affect various elements of a section, separate them out in the same section or in a separate section of the same article.

3) Divide conditions in contracts clearly, subject-by-subject and consider enumerating them.

Because the effect of a condition can be very important to the parties (since potentially the entire agreement is at stake), it is strongly recommended to formulate and present each condition in a clear and unequivocal manner. For example, a drafter should prevent two conditions becoming confused and interpreted as one consisting of two sub-conditions (each of which must be met).

Example (triggering events). An example is the following clause taken from an escrow agreement in which the escrow agent should be able to apply clear and strict criteria:

The Escrow Agent shall release the Technology and Know How to Customer immediately:

(a)     upon receipt of a joint written instruction to that effect from Supplier and Customer, stating the deposit code and date;
(b)     upon receipt of a notice that Supplier shall be dissolved or liquidated, is declared bankrupt or otherwise insolvent pursuant to the laws and regulations of a jurisdiction to which Supplier is subject;
(c)     in the event that Supplier is in material breach of its obligations arising from the Principal Agreement, upon receipt of a copy of Customer’s notice of default to Supplier, provided that if the Escrow Agent deems that such breach was capable of being remedied, a reasonable term for remedy permitted in such notice has also expired.

The Escrow Agent may deem:

(i)     a breach by Supplier to be “material” if Supplier failed to deliver the Product ordered by Customer (X) within the period specified in the purchase order or Statement of Work, or (Y) strictly in accordance with the agreed specifications, as stated in the notice of default.
(ii)     a period for remedy of any breach to be “reasonable” if it is no less than 30 days;

(d) in  the event that a court judgment has become final and conclusive or has become provisionally enforceable, resulting in the Escrow Agent being obliged to deliver the Material to Customer.

Ordering the conditions in contracts. As is the case for enumerations generally, the legibility of conditions improves if they are listed subject-by-subject. Apply a logic to the order of the conditions. An exception to this can be that the legibility of a listing of items, one of which is verbose and the other just a few words, may require that the short conditions are listed first and the lengthier ones thereafter.

Sentence structure. Often, conditional clauses are placed together at the beginning of a sentence. However, it is recommended to follow the general drafting principles of the left-right principle: make the reader comfortable by first driving your point home (and start with the main principle, followed by the conditions).

Enumerated conditions. If you do enumerate the conditions or triggering events, apply enumeration principles.

4) Each condition and each conditional clause should be formulated such that it is capable of being either ‘satisfied’ (or ‘fulfilled’) or not.

This is the same best practice rule as applies to drafting warranties where each warranty should be capable of being either correct or incorrect. Conditions in contracts  and triggering events in clauses are important components of a contract. Especially where a condition contains a subjective element, the trigger as to whether it is satisfied or not becomes fluid.

Text interpretation required. The more questionable the satisfaction of a condition is, the more likely it is that only one party determines whether or not it is satisfied. In that case, the condition may qualify as a potestative condition and be invalid or inoperative. Also, if the parameters for satisfying a condition are vague, the ‘reasonableness factor’ of invoking the condition becomes more important. After all, from a legal point of view, whether or not a condition is satisfied (or fulfilled) or not remains a matter of interpretation.

Conditions vs. obligations. Mixing up conditions and obligations is a source of ambiguity. This is particularly sensitive if you explore the dividing line between a condition, on the one hand, and an obligation depending on the performance of another obligation on the other hand. For example, compare:

If Purchaser becomes aware of a matter which is likely to give rise to a Warranty Claim, Seller shall not be liable in respect of such Warranty Claim unless Purchaser has given notice of the relevant facts to Seller promptly after becoming aware of the matter or such facts.
If Purchaser becomes aware of a matter which is likely to give rise to a Warranty Claim, Purchaser shall give notice of the relevant facts to Seller promptly after becoming aware of the matter or such facts.

In the first example, a right to an indemnification exists (with the condition that the claim which gives rise to the indemnification is notified promptly); whereas in the second example, which is not a condition, such right to an indemnification is not affected if no prompt notice has been given. The second example is in fact a lex imperfecta in that the breach of the obligation to notify (promptly) remains a priori without consequences.

The failure to satisfy a condition results in the non-existence of a right or obligation to which the condition pertains; the failure to perform an obligation upon which another obligation or a right depends results in a claim for restitution, a right to suspend performance or a claim for damages.

Grammatical recommendations. As a consequence of the rule that conditions should be capable of being correct or not, it is recommended that you use the present tense in all conditions. The present perfect is also acceptable if the condition represents a preliminary question that needs to be settled (as opposed to a matter that needs to be negotiated and agreed on). Therefore, it is recommended to avoid the use of shall (or will).

5) Never include a warranty, an obligation or other operative clause in a condition.

A condition is a hard and fast statement. By including an obligation, warranty or other operative provision in a condition, the condition (and its strong effect) may easily become ambiguous or even lose its character of conditionality. For example:

The Licence is subject to the condition that Licensee is at all times in full compliance with Licensor’s Trademark Guidelines and, if it is not, it shall remedy such non-compliance within ten business days after Licensor notifies Licensee of such non-compliance.

Do you agree that in this example the conditionality of the licence (and therefore the strength of the trademark) has disappeared or at least become negotiable? What do you think will happen if the licencee is able to remedy non-compliance at once but takes the full ten business day period? Or if during the ten business days an event of force majeure occurs (permitting the remedy only after a few more business days?). How alert will the licencee be in preventing any non-compliance?

At the very least, a drafter should distinguish the obligation from the condition by clear conditional wording (e.g. provided thatunlessif) or by inserting the condition in a separate sentence. If there are more than two conditions or if a condition is rather wordy, it is recommended to bring all obligations (and warranties or other operative clauses) that relate to the satisfaction of a condition into a separate section of the contract.

6) Distinguish exceptions from conditions.

‘Exceptions’ pertain to a ‘rule’ (or, equally, a right or an obligation) and might be governed by their proper rules (or not be governed by any particular principle). ‘Conditions’ trigger the application or the applicability of a rule, a right or an obligation. Two examples to illustrate the difference:

If Purchaser becomes aware of a third party claim which gives rise to a Warranty Claim, it shall give prompt notice of the relevant facts to Seller, except that any failure shall not affect the rights of Purchaser unless Seller can demonstrate that such failure prejudiced Seller’s ability to successfully defend the matter giving rise to the Warranty Claim.

Seller shall indemnify Purchaser against each third party claim which gives rise to a Warranty Claim, provided that Purchaser shall give prompt notice of the relevant facts to Seller…

In common law jurisdictions, the distinction between exceptions and conditions may be relevant in view of the remedies that may be invoked. Those remedies may restrict a party in the legal actions it is able to invoke. For example, in case of an exception to a licence grant (e.g. a licence under a patent or copyrighted work) the granted right does exist but using the right as exempted would result in a breach of contract; whereas in case of a condition to a granted right remaining unsatisfied, the granted right itself has not come into existence, which entitles the owner of the right to start an action for infringement. As a starting point the remedy for breach of contract is a claim for damages; in case of infringement of a right, the owner of the right may also claim that the infringing acts stop (which might be extremely disruptive) and claim the benefits or profits derived from the act of infringement (which might well exceed the plaintiff’s damages). This distinction does not necessarily work out the same way in all common law jurisdictions, but from a legal-traditional point of view the unavailability of a remedy might alert the drafter to choose for either an exception or a condition.

A provision is clearer and more comprehensible if it distinguishes between the rule and the exceptions to that rule, than if the rule is formulated such that the exceptions become conditions for the inapplicability of that rule. Conditions may give rise to further distinctions or to their own contractual regime, which may become a source of wordy clauses.

7) Do not phrase the key obligation of an agreement as a condition.

For example, it is nonsense to stipulate that the transfer and delivery of the Shares would be a condition to closing. This is because despite all exclusions or limitations of liability, if one party is unable to perform its key obligation, no law would protect such party against the other party deferring the performance of its obligation. Similarly, making the transaction subject to a condition that the key obligation is performed is like repeating the law of contracts.

The obligations of Seller in connection with the Closing are subject to the following conditions being satisfied:

(e)     all Share certificates and the shareholder registers of the Acquired Companies required to complete the Transaction shall be delivered to Seller.

Exception. The best practice rule must be distinguished from a conditionality that does make sense. This might be the case if the key obligation must be performed by more than one party (e.g. several sellers who should each hand over their own shares) or if the object of the transaction consists of various objects (e.g. the shares of several companies are to be transferred). In those cases, it is appropriate that a purchaser requires that no shares are deemed to be transferred (and no part of the purchase price is available to any seller) unless all shares are actually transferred. For example:

Purchaser shall not be required to purchase or acquire any of the Shares unless all of the Shares are sold and transferred.

8) Conditions referring to the absence of a fact or the non-occurrence of an event require a statement in writing that such fact is absent or that such event has not occurred.

Obviously, in most transactions, the purchaser of a business (or a bank providing a loan or credit facilities) will not be in a position to establish whether a condition that something did not happen before the closing of a transaction has been satisfied. At the same time, pursuing the closing could legally operate as an implicit waiver of the condition. The effect of a waiver is obviously to the detriment of the other party (e.g. the purchaser or bank) because the deal-breaking impact of a condition would disappear completely. For example:

The obligation of Purchaser to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:
(a)     no legal proceeding shall be pending at any court or quasi-judicial or administrative agency of any jurisdiction which may possibly result in an unfavorable order or judgment that would (i) prevent consummation of any of the material transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (iii) affect adversely the right of Purchaser to own any of the Shares or to control the Acquired Company, or (iv) affect adversely the right of Company to own its assets and to operate its business (and no such order or judgment shall be in effect); and
(b)     Seller shall have delivered written confirmation to Purchaser that any and all consulting agreements it may have with the Acquired Company are terminated and no fees pursuant to those agreements are due or payable.

Despite the implicit waiver of the condition as a consequence of closing, it would be appropriate to convert the condition into something with a strong legal effect: if the seller (or borrower) must hand over a written statement that ‘the something’ has not happened, the written statement would imply a warranty by the seller (or borrower) that such ‘something’ is absent. If that would be incorrect, the burden of proof that the seller (or borrower) was not aware of the incorrectness of its statement would shift to the seller. Also, being required to provide such a statement would prompt the seller (or borrower) to inquire actively whether its statement is indeed correct, in order to avoid the purchaser (or bank) alleging that it ought to have been aware of the ‘something’.

9) Do not include a best efforts provision in connection with a condition, unless it specifies a required (i.e. a particular or preferred) course of action in a meaningful manner.

In European continental legal systems, the general principle of good faith requires that the parties make best efforts in order to have each condition satisfied in due course. This means that, in connection with the conditions, upon entering into an agreement there is an implicit presumption that all internal approvals required for the consummation of the transaction are obtained as soon as possible after signing of the agreement; that merger filings are made (and all answers to any competition authority’s questions are given) in due course; and that any adverse events are dealt with in such manner that damages are minimised for the purchaser (i.e. between signing and closing, the seller would act in a trustee-like role vis-à-vis the purchaser).

In a European context, it would be redundant or even exaggerated to provide:

Subject to the terms and conditions in this Agreement, Purchaser and Principal Seller shall, and Principal Seller shall procure that the Company shall, use commercially reasonable efforts to take promptly, or cause to be taken promptly, all actions, and to do promptly, or cause to be done promptly, all things reasonably necessary, proper or advisable under applicable laws and regulations to satisfy the conditions to the other Parties’ obligations to consummate the Acquisition and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement. Each Seller will use its commercially reasonable efforts to cause the other Seller to fulfil such other Seller’s obligations under this Agreement.

If the parties are able to provide how a certain course of action must be undertaken by a party, it makes sense to specify those actions. In such case, the best-efforts obligation is partly turned into a results-oriented or milestone-driven obligation. For example, a purchaser (who would normally coordinate the preparation of merger filings) could be obliged to propose antitrust remedies before the appropriateness of such remedies would even be addressed by the competition authorities.

10) Conditions are for the benefit of both parties, unless otherwise specified.

For example, in respect of a choice of court, one party may need to prevent its being effectively unable to take recourse on the other party as a consequence of complications in the enforcement of a (favourable) court decision:

Section 11.2 is for the benefit of the Pledgee only. For the avoidance of doubt, subject to the applicable law, the Pledgee may initiate concurrent proceedings in any number of jurisdictions.

Obviously, the benefit of a condition is often determined by the context in which the condition applies. A technique to identify the beneficiary of a condition is to use the active tense, to personalise (or to ‘de-nominalise’) the related obligation or right.

In large transactions with several conditions, a separate section can be included to identify which conditions are for the benefit of which party (or both parties). The identification would also specify that the relevant party is solely entitled to waive the condition. For example:

Benefit. The Conditions under 2.1(a), (e), (f) and (g) are for the benefit of Purchaser and may be waived by Purchaser. The Condition under 2.1(b) is for the benefit of Sellers and may be waived by each Seller. The Conditions under 2.1(c) and (d) are for the benefit of all Parties and may be waived by Purchaser and a Seller acting jointly.

Note how any practical complications of having more than one seller (each of whom would need to waive its right) are avoided by establishing the authority of each seller to bind all.

11) Include a deadline before which all conditions must be satisfied.

A deadline is a relatively strong incentive for a party to have the conditions satisfied as soon as reasonably practicable. Obviously, a deadline provides a certainty about the rights and obligations of both parties. Such deadline is usually called a ‘long stop date’ or ‘drop dead date’.

It is recommended to provide for a deadline, that is realistic in view of what must happen or can happen during the period when not all conditions in the contract are satisfied. For example, it does not make sense to agree on a long stop date which precedes the day on which a competition authority would be required to make a decision on the proposed merger transaction (where a positive decision or the lapse of a statutory period to make the decision implies the satisfaction of a condition). But obviously, if the long stop date does cover such period, the non-satisfaction of the condition would be caused by a failure to submit the merger filing in a timely fashion.

12) Specify the effects of non-fulfilment of a condition.

If one or more of the conditions will not be satisfied, the disappointed party may want to claim the pre-contractual liability of the other party. Also, several actions might have been taken in anticipation of the completion of the agreement or the satisfaction of the condition and such actions may have an irreversible aspect or may require efforts or costs to achieve reversal.

Typically, the non-fulfilment of a condition results in the right of either or both parties to terminate the agreement without any liability towards other parties involved in the transaction. For example:

If the Conditions are not satisfied or waived on or before the Long Stop Date, each Party may terminate this Agreement and the other Party shall not have any claim against the Party so terminating this Agreement as a result of such termination. Following termination, this Agreement shall cease to have effect, except for this Section and Articles [confidentiality, notices, costs, applicable law and dispute resolution], and except furthermore that such termination shall not affect any rights or liabilities of either Party in respect of any preceding breach of this Agreement.

Do not repeat the law. It is unnecessary to provide that the right to terminate cannot be invoked by a party who caused the non-fulfilment of a condition (whether this is the consequence of a party’s failure to make sufficient efforts to have a condition satisfied or to start making such efforts in a timely fashion). This is because the law will not permit such termination right to be exercised.

Examples of conditions in contracts #

Depending on the nature of the contract, different types of conditions are called for. M&A transactions require different conditions than loan facility agreements. In the ordinary course of business contracts, conditions are rarely found, except that individual contract clauses may well be ‘conditional’. A party with strong bargaining power may require the satisfaction of many condi­tions before becoming obliged to perform itself.

M&A transactions.
Some typical conditions for large M&A-transactions are:

  • Internal approvals. Large companies have typically established internal contract approval policies: before a transaction may be consummated, an internal body must have approved it.
  • Competition clearance. Transactions of a certain size often trigger a regulatory requirement to obtain clearance by national or European competition authorities.
  • Other regulatory approvals. If the transaction contemplated by the agreement requires a governmental approval, neither par­ty will want to be obligated to close unless the approval is ob­tained.
  • Third party consents. Similarly, both parties will want all ma­terial consents from third parties to be in hand before closing.
  • No breach or MAC. Performance is not required if the business has been affected by a truly major event (a MAC, material adverse change or, in other words, a material adverse event). Such material adverse change would be negotiated to be something coming from outside the business with a very large impact (measured against the value of the business) on the acquired business. A stronger purchaser might be able to negotiate that performance is not required if the other party has breached its covenants or representations.
  • Bringdown of warranties. Warranties first made at signing may be required to be repeated (‘brought down’) at closing. This is often an implicit effect of the warranty provision, but sometimes a seller is required to submit a written statement expressly confirming that the warranties are still ‘valid’.
  • Legal opinions. These are letters from counsel to one party ad­dressed to the other party, stating legal conclusions relevant to the transaction.
    Certified organisational documents. Entities will often be re­quired to deliver copies of their certificates of incorporation, by-laws or other organisational documents, certified as accurate by an official in the jurisdiction of the organisation or by an officer of the entity.

U.S. particularities.
In the U.S., certain closing conditions in contracts are very standard, which are highly unlikely to appear in EU-sourced agreements. For example, agree­ments to which a company or other legal entity is a party may require the following closing documents (in the U.S., such documents are often referred to as “certificates”):

  • The certificates of incorporation, certified by the secretary of state of the jurisdiction where the company or legal entity is incorporated.
  • The company’s by-laws, certified as accurate by the corporate secretary.
  • A statement of good standing issued by the secretary of state of the (U.S.) state of incorporation and certificates from other (U.S.) states indicating that the company or legal entity is entitled to do business in those states.
  • A board resolution of the acquired company or legal entity’s board of directors authorising the transaction, certified by the corporate secretary.
  • A statement of the corporate secretary certifying the signatures and incumbency of the officers who are signing the transac­tion documents.

Whereas a European lawyer (of the purchaser) will ascertain that the local equivalents of the above items are in order; a purchaser’s interest in such documents is normally limited, given the scope of the First E.C. Company Directive on the representation of companies. Nevertheless, any complications that might arise are best identified early. In particular, conditions that re­quire a lengthy process to be completed or the consent of a third party are two potential closing condition pitfalls. For instance, if a condition requires the delivery to the other party of a satisfactory environmental report, a transaction lawyer should initiate the preparation of the report as soon as possible following signing of the transaction.

Closing certificates.
It would appear, especially in U.S. originating M&A agreements, that closing conditions in contracts often require the delivery of a certifi­cate executed by the seller of shares or a complete business, stating that all the warranties made by the party are correct. Such a certificate adds nothing to what is already reflected in the agreement.

The rationale behind this practice is that requiring an individual to sign a formal-looking doc­ument induces a normal person to double-check the correctness of the warranties (or other certified matters). This is different in revolving credit facilities, which invariably require that the borrower, at the end of a term of loans drawn under the facility, delivers a certificate confirming that certain warranties are (still) correct and that the borrower is in full compliance with certain financial covenants.

The title ‘certificate’ is more commonly used in U.S. legal practice than it is in a European context. A ‘certificate’ is in fact nothing more a simple document signed by an individual, in which statements of fact are made.

Legal opinions.
The requirement for legal opinions at a transaction’s closing deserves special mention. A legal opinion is a written statement of legal consequences of the agreement, delivered by one party’s lawyer to the other party. Especially in financing transactions, legal opinions are common practice.

Most law firms have a review process be­fore legal opinions bearing the firm’s name may be delivered. If the parties agree that certain legal opinions be provided, the lawyers involved will focus on the scope of the opinion and the necessary legal conclusion that must be reached. Accordingly, a condition requiring the delivery of an opinion “in form and substance satisfactory” to the other party may be inca­pable of being fulfilled. Therefore, it is recommended to agree on the scope and conclusions of the opinion in advance and at­tach them as an exhibit.

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