Why conditions precedent are a useful and important tool in contracts

Conditions precedent are contractual provisions that require specific events to occur or certain conditions to be satisfied before a contract, or particular obligations within that contract, become fully effective or enforceable.

Conditions precedent are important because they create practical flexibility (and in many cases are a matter of legal or financial necessity) by allowing a party to lawfully terminate or avoid performance if specific conditions aren't met, while counterparties often resist them precisely because they prefer certainty of full contractual performance without easy exit routes.

Contract situations where conditions precedent may apply

Conditions precedent are quite commonly included in transactions and contracts (and then possibly negotiated on by the other party) such as :-

• Mergers and acquisitions - whether regulatory approvals, shareholder approvals, third-party consents or financing arrangements.

• Finance and Banking - in loan agreements and other financing documents, common conditions precedent include corporate authorisations, anti-money laundering checks, satisfactory audited financial statements and compliance certificates or insurance insurance policies being in place.

• Property Transactions - conditions precedent often include obtaining relevant planning consents for development or change of use, environmental or structural surveys, vacant possession,  finalisation of planning obligations under Section 106 of the Town and Country Planning Act 1990.

• Construction Contracts - often similar to other property transactions as above but can also include performance bonds/guarantees, evidence of contractor's all-risk insurance and other required policies and approval of health and safety documentation.

• Commercial Contracts - conditions precedent might include industry-specific regulatory approval, securing necessary IP rights, satisfactory results from a trial or quality control processes or issues linked to related  contracts with key suppliers or customers.

Negotiating points

The following are key parameters that are commonly negotiated:

1. Scope and Specificity

• Level of detail - conditions should be drafted with sufficient clarity to avoid disputes about whether they have been satisfied.

• Objective vs. subjective conditions - whether satisfaction is determined objectively or based on a party's subjective judgment (e.g., "reasonable satisfaction" versus "satisfaction in its sole discretion").

• Materiality thresholds - qualifiers such as "material" or "substantial" and what these mean in practice.

2. Co-operation and costs

• Which party bears responsibility - clear allocation of who must take action to satisfy each condition.

• Cooperation obligations - the extent to which counterparties must co-operate to help satisfy conditions.

• Cost allocation - who bears the costs associated with satisfying conditions.

3. Timeframes and Deadlines

• Long-stop dates - the final date by which conditions must be satisfied before termination rights arise; and/or

• Interim milestones - phased approach to condition satisfaction with interim deadlines; and/or.

• Extension mechanisms - circumstances, if any, under which deadlines can be extended.

4. Waiver Provisions

• Unilateral vs. mutual waiver rights - whether one or both parties can waive a condition.

• Partial waiver - whether conditions can be partially waived.

• Waiver procedures  - the process and form requirements for effectuating waivers.

5. Monitoring and Reporting

• Status updates - requirements for periodic reporting on progress toward satisfying conditions.

• Evidence requirements - the form and standard of evidence required to demonstrate satisfaction.

• Certification processes - whether formal certification of satisfaction is required and from whom.

6. Failure Consequences

• Termination rights - whether failure automatically terminates the agreement or merely creates a termination right.

• Break fees - whether compensation is payable if certain conditions are not met.

• Alternative arrangements - fall-back positions if conditions cannot be satisfied as originally contemplated.

Contact Us

For further advice on structuring, negotiating, or managing conditions precedent in your transactions, please contact our specialist lawyers.