In this blog, I will discuss the first best practice rule on drafting conditions (or triggering events or other conditional clauses). For a list of all best practice rules I identified click here. In subsequent blogs I will address the others.
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 of 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 one; and although the third condition is more specific than the last one, both their effect 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 a dangerous one 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., the lapse of time).