Require a statement if absence is a condition

If the absence of a fact or the non-occurence of an event is a condition to a party’s performance, it makes sense to provide that the other party confirms that such fact is absent (or such event has not occurred). In other cases, such statements – or certificates – are less ‘necessary’. This post discusses the eighth best practice rule related to drafting conditions.

8)      Conditions referring to the absence of a fact or the non-occurrence of an event would 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 happened before closing of a transaction is 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) that 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transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (iii) affect adversely the right of Purchaser to own any of the Shares or to control the Acquired Company, or (iv) affect adversely the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, be requiring the statement, the seller (or borrower) would be tempted to inquire actively whether its statement is indeed correct, in order to avoid that the purchaser (or bank) will allege that it ought to have been aware of the ‘something’.

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