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Drafting contracts

(b) Subject matters adjacent to conditions

Conditions reasonable efforts and good faith. Most conditions 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.

[1] 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.

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