Conditions in contracts: What are they, and what are their effects on your obligations?

Entering into agreements is something any business owner is familiar with, whether it’s for the supply of goods, taking out finance to grow a business, sale agreements, concluding an employment agreement with employees, and countless other possible arrangements. While many businessmen and women alike might feel comfortable and familiar with certain aspects of contracts, an often easily confusing topic relates to the various types of conditions that might be set in an agreement. In this article we aim to explain what contractual conditions are, the types of conditions that can exist in a contract as well as the effects and consequences of fulfilment or non-fulfilment, and why it’s important to have a trusted professional legal advisor assist with reviewing, negotiating and drafting contracts generally.

What is a contractual condition in general?

Conditions are used in contracts to make provision for future events that will affect the obligations between the contracting parties. Oftentimes, parties will want to ensure that certain contractual obligations (or rights) become enforceable when an event takes place. As such, it’s important to know that contractual conditions have several elements to them.

A crucial element of a condition is that the occurrence of the event in question must be uncertain, in other words an element of doubt exists as to whether the event will occur or not. Where a “condition” provides that, for example, in the event of the death of one party, the other party shall pay an amount of money to an organisation, such a provision will in fact be known as a time clause as it relates to a certain future event. This is because the event in question, being the death of the one party, is certain although the time of that event is uncertain. Contrasted to an example of a condition, where two parties agree that the one party will be obliged to cease selling a product supplied by the other party in the event of the other party registering a trademark over that product – in such an instance, it is not certain whether the other party will register a trademark in respect of the supplied product, and so the other party is entitled, in terms of the agreement, to continue selling the supplied product on the condition that the one party does not register such the trademark.

Suspensive and resolutive conditions

Understanding the difference between suspensive and resolutive conditions is of utmost importance. This is because the result of the fulfilment (or non-fulfilment) of the particular condition will have differing effects on parties’ contractual obligations where the condition is either suspensive or resolutive.

A suspensive condition is one which, as its name would suggest, suspends the effect of an obligation (this can be either a single particular obligation contained within a contract, or the entire contract itself) pending fulfilment of the condition. In other words, the parties’ contractual obligations are suspended (despite agreement being reached and a contract having been executed) pending the fulfilment of the particular condition. For example, a purchaser’s obligation to pay the purchase price in a sale of assets agreement is on the condition that within a certain period of time, the seller obtains documentation certifying their agreed value by a registered appraiser. In this case, the purchaser’s obligation to pay is suspended until the seller has fulfilled the condition of obtaining the required documentation.

Oftentimes, one will also come across the term conditions precedent. This term is often used to indicate certain suspensive conditions which suspend the operation of an agreement in its entirety until such time as the conditions have been fulfilled. Furthermore, non-fulfilment of such conditions precedent will, as prescribed in the agreement, render the agreement null and void and will sometimes attach a form of liability to the party failing to fulfil the conditions.

A resolutive condition works differently to a suspensive condition in that it will not suspend an obligation (or the entire agreement itself), but rather the said obligation will remain enforceable/in effect until such time as the condition is fulfilled or waived. An example of which being the parties to a supplier agreement agree that an overseas supplier shall provide the local contracting party with certain goods at a particular agreed price subject thereto that, in the event of import tariffs increasing above a certain value, the agreement itself shall automatically come to an end. Such a resolutive condition keeps the operation of the contract in place, dependant on the uncertain future event that is out of the control of the parties, and upon the occurrence of the event, the agreement automatically terminates. A resolutive condition in an agreement will most certainly always contain further provisions relating to neither of the parties having any claim against the other in the event of the resolutive condition being fulfilled or not waived, as the case may be, and it is thus important that parties to a contract fully understand the effects hereof as they may very well be unfair or prejudicial to an unsuspecting or ill-informed contracting party.

In today’s economic climate individuals and businesses alike have become ever more sensitive to their financial health. Many have had to make extremely difficult decisions this past year in cutting costs just to try and stay afloat. This most often has resulted in people entering into further/extended agreements or terminating such agreement having good intentions, this may have been done with a stressed or rushed mindset leaving them at risk of falling prey to extremely prejudicial conditions and terms.

As such, we emphasise the importance of having trusted and qualified legal advisors assist you and your business when reviewing, drafting, negotiating and entering into contracts. Such professionals will be able to spot high-risk clauses and conditions and assist you in negotiating with the other party to more agreeable and mutually beneficial terms. This is precisely one of the many services we offer at Strauss Law and we pride ourselves in our ability to draft, review and negotiate contracts according to our clients’ needs.

References:

• Van Huyssteen, LF ‘Contract: General Principles’ (2020) 6ed Juta & Company Ltd

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE)