In this second blog on conditions (for the introductory blog, click here), I would like to discuss the drakonic effect: the right to terminate on failure to satisfy all conditions.
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 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.)