Condition Precedent – what, why, when and how ?

/ April 7th, 2013 / Comments Off on Condition Precedent – what, why, when and how ?

Simply put a condition precedent is a contractual clause which provides that the contract or certain parts of the contract will only come in to force upon the happening of certain conditions.

Whilst most common in construction and insurance contracts, condition precedents are also present in other contracts, for example, in a loan agreement, a borrow may have to satisfy certain conditions such as obtaining property valuations or offering the lender a first charge before the lender is obliged to provide the funds and the borrower is able to drawdown.

In some cases a contract only comes into existence upon the happening of a condition precedent that is uncertain and they remain free to withdraw from the agreement until the condition is satisfied. It is however more usual for the parties to remain bound by the agreement even whilst the condition has not been satisfied and in these circumstances the parties are usually under an obligation not to do anything that could prevent the occurrence of the condition. There may even be an obligation to use reasonable efforts to ensure that the event occurs and failure to do so my result in a breach of the contract.

Condition precedent clauses are sometimes referred to as “contingent conditions”. They impose no obligation to ensure absolutely that the events in question occur and should therefore be distinguished from promissory conditions which require either a party or both parties to guarantee a certain event.

Condition Precedent Liability

Usually a condition precedent prevents a liability or further liability from arising until the condition is satisfied. It is important for both parties to understand the nature and consequences of the condition precedent. Failure to comply with the condition may prevent a party from exercising its rights and expose it to risk, for example, a clause that requires payment by a specific date.

Condition Precedent in Insurance

Condition precedents have a far greater significance in insurance contracts. If the wording of the insurance contract provides for the avoidance of liability where a condition has not been satisfied it will automatically be deemed as a condition precedent.

Consider the following two clauses in an insurance contract: (i) the insured is required to give immediate notice to the insurer of any event which is likely to give rise to indemnity under the policy; and (later in the contract): (ii) the liability of the insurer is conditional upon the insured paying the insurance premium and observing the terms of the contract. This is a clear condition precedent clause and late notification to the insurance company could result in the claim being rejected. It should however be noted that the second clause, whilst purporting to apply to the whole contract, simply cannot apply to the whole contract (for the reasons outlined below), however it can apply to the first clause as the ability to investigate the claim is a genuine commercial consideration for the insurance company.

Considerations

There are some important considerations when reviewing condition precedent clauses. The clause should be drafted with reference to the contract as a whole and must be clear and unequivocal; any ambiguity could render the clause unenforceable. Equally a contract cannot be drafted with a clause to say that the whole contract is conditional (in an attempt to limit liability) as this would clearly not be true of every clause. A contractual clause may not always spell out that it is a condition precedent and even where it does it may not be held to be a condition precedent.

Ideally a condition precedent should be stated in the contract to be a condition precedent, it should clearly explain how it is discharged and the consequences of any failure to comply.

Furthermore the parties to a contract should bear in mind that condition precedent clauses are ultimately “conditions”. A condition on its own is an important term in a contract and one that is said to go “to the root of the contract”. When a condition is broken the innocent party is entitled to terminate the contract and claim damages. Conditions are different from warranties, which when breached only allow the innocent party to make a claim for damages, and innominate terms which lie in between the two i.e. they may or may not entitle the innocent party to terminate in addition to claiming damages (depending on the seriousness of the breach).

Where a condition precedent is breached it can have severe consequences, particularly in insurance contracts as it could discharge the insurer from liability for the claim (and even allow for the termination of the policy).

Further Information

Further information on condition precedent clauses is available from: http://www.boyesturner.com/news-article.html?id=1511 whilst their application in insurance contracts is available from The Chartered Institute of Loss Adjusters: http://www.cila.co.uk/files/Technical%20Bulletins/Technical%20Bulletin%2016%20-%20Policy%20Conditions.pdf.

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