In a series of weblogs, I would like to discuss best practice rules on drafting conditions. Before doing so, I believe it is helpful to make some general legal observations related to conditions. Before that, I think a quick look at the Draft Common Frame of Reference (DCFR) for a European Civil Code (in one form or another) might be a nice introduction. That’s where this blog starts.
A very important subject in contracting drafting is the use of conditions. In this series of blogs, some legal aspects of conditions will be touched upon, several common condition-related provisions will be addressed, a set of best practice drafting principles will be formulated, followed by some examples (or checklists) for conditions.
Conditions 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
- 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).
- Upon fulfilment of a suspensive condition, the relevant right, obligation or relationship takes effect.
- Upon fulfilment of a resolutive condition, the relevant right, obligation or relationship comes to an end.
- 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.
- 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
- 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.
- 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.
