This article is written by Sarabjit Singh Kahlon.
Table of Contents
Imagine yourself to be a teenager pestering your father to buy you a motorcycle. Finally, one day your father announces that he has at last decided to grant your wish. You are overjoyed and want to hug him, until your mother begs you to be patient and hear the full deal first. Your father has two strings attached, first that you must gain admission into a medical college, and the second that if you are found to be driving above 80 K.M.H. then the motorcycle will be withdrawn. The first condition is called condition precedent (CP) because until and unless admission is not attained your father is not going to buy you a motorcycle. At last after burning midnight oil you gain admission into a medical college, and your father fulfills his promise. However, condition subsequent (CS) that of violating 80 K.M.H. the speed limit hangs like “The Sword of Damocles“. Once the speed limit is breached the prized possession goes back into the custody of your father, sad but a stark reality.
What is a condition?
The word condition preceding (CP) and (CS) relates to a future uncertain fact or event that may or may not occur. There is a possibility of it happening but cannot be predicted with certainty. Depending upon the context of the wording when such condition is satisfied or fulfilled it either gives rise to a right, obligation or contractual relationship or extinguishes the same.
Since, condition decides between two extremes existence or termination; therefore, it is extremely important that the right conditions connect with the right objects. There should be no scope of ambiguity. The obligation which falls due on fulfilment of condition is a legal duty or commitment which can be for example payment of a specified amount or requiring a particular action.
Difference between Condition & Obligation
To begin with let us not confuse obligations with conditions. There may be clauses in a contract illustrating that performance of one party is dependent upon the performance of the other. These are obligations and not conditions, as defined earlier uncertain future events. It will be foolhardy to mix an obligation with a conditional clause. The term “default” applies to obligations that haven’t been performed, not to conditions that haven’t been satisfied.
To make payment on receiving goods is a contractual obligation and not a condition. Fixing a date on which a contract becomes effective or expires is a date that is bound to arrive and not an uncertain event.
A share purchase agreement shall conclude only if all authorizations are received by ‘X’ date. In this example object of the condition is not the date but the fact that authorizations are to be obtained before ‘X’ date for the share purchase agreement to survive. Hence, authorization is the condition, and only if that is fulfilled then share purchaser is obligated to fulfill his part of the agreement.
(CP & CS)
The words precedent and subsequent following ‘Condition’ have the ordinary meaning of preceding in time and following in time respectively. (CP) and (CS) both form part of contracts and deeds mostly. In a contract, a (CP) precedent is an event that must take place before the parties must perform the agreement. Whereas (CS) is a condition that causes the contract to become invalid if the specified uncertain event occurs or does not occur depending on the context. In other words, a contract shall come into existence only after the (CP) are met. However, the contract shall lapse if the (CS) are breached. Simply put, 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.
Salient features of (CP) & (CS)
(CP) & (CS) control the destiny of Contracts be it their inception or termination. Likewise decide upon the right, title and interest in a property. Conditions serve as a tool of leverage and protect the interests of the parties to the contract. Preferably inscribe a deadline date by which the condition must be satisfied, also called the ‘drop dead date’. Equally important, it is to specify the effects of non-fulfillment of a condition. Each conditional clause should be so formulated that the condition is either fully satisfied/fulfilled or is not. Do not leave it hanging in mid-air. Connecting the right conditions with the right objects is very important.
The object of a condition is the conditional part. The right or obligation comes to life or ceases to exist when the condition is satisfied (or fails to be satisfied). Therefore, while framing the conditions choose the subject and object of the condition prudently. Imagine making ‘The agreement’ as a whole; subject of a condition that shall lapse upon failing of the uncertain event. By this act you have also buried the right to pursue infringements of confidentiality if any or invoke the dispute resolution process, since the agreement as a whole has lapsed. Or draft it so that the right to claim damages, penalty etc. remains alive for example state that the relevant clause shall survive the termination of agreement. Consequences of each word should be manifestly foreseen, before putting pen to paper. Once all conditions are met it implies waiver of all applicable conditions, and a signal to proceed further.
By virtue of (CP) & (CS) interest in property is created that is to take effect only if a specified uncertain event takes place or the specified uncertain event does not take place. Thus, sale, exchange, gift, lease or mortgage of property is governed as per ‘The Transfer of Property Act, 1882 and intestate and testamentary succession under the “Indian Succession Act, 1925’. The table extracted below illustrates (CP) & (CS) as applicable to property and differences between them.
A condition precedent is one the fulfillment of which completes an inchoate title.
A condition subsequent is one of the fulfillments of which extinguishes a title already completed.
A condition precedent always comes before the creation of an interest.
A condition subsequent always follows the vesting of an interest which is already complete.
In the case of Condition precedent, the vesting of the estate is postponed till the performance of the condition precedent.
In the case of subsequent, vesting is complete and not postponed.
In the case of condition precedent, an interest once vested can never be divested by reason of non-fulfillment of the condition.
In the case of condition subsequent, interest even though vested, is liable to be divested by reason of the non-fulfillment of the condition.
In the case of condition precedent, an estate is not in the grantee until the condition precedent is performed.
In the case of subsequent, the estate immediately vests in the grantee and remains in him till the condition is broken.
In the case of condition precedent, transfer will be void if the condition precedent is impossible to perform, or immoral or opposed to public policy.
In the case subsequent, the transfer becomes absolute and the condition will be ignored if that condition is impossible of performance or immoral or against public policy.
In the case of condition precedent, the condition precedent must be valid in law.
In the case of subsequent, it need not be so, and the invalidity of the conditions can be ignored.
In the case of condition precedent, the doctrine of cy pres applies and the condition precedent is fulfilled if it is subsequently complied with.
The doctrine of cy pres does not apply.
Table 1: Condition Precedent vs. Subsequent
For example, in a sale/purchase agreement (CP) are events which must be satisfied before title to the property will actually vest with the purchaser. (CP’s) stipulate for example obtaining clearances from the statutory authorities, payment of sums due to public authorities, passing of relevant resolutions, certification of no material adverse changes etc. Equally, important are (CS) that provide an escape clause just in case the party’s legal status changes ceasing his right to property under negotiation, or the party goes bankrupt, or the property is confiscated etc.
Conditions & contracts
The purpose of the contract shall decide the kind of conditions to be incorporated. A party may require satisfaction of many conditions before becoming obliged to perform itself or may want to exit the extract upon a particular default.
A contract or contractual obligation that comes into effect upon successful occurrence of the stipulated future uncertain event. For example, before a Merger or Acquisition can take place a (CP) clause may require shareholder approval or clearance from competition law authorities etc. Therefore, contractual relationships shall commence only thereafter. Likewise, high-value business transactions that involve prolonged negotiations prescribe a closing date before which all conditions precedent are to be met otherwise the deal shall fall through. A condition precedent is not intended as an exit but rather as a protection of one party against hidden defects.
In contrast to (CP) conditions subsequent describe facts or events pursuant to which a right, obligation or contractual relationship may be terminated. While drafting a (CS) clause keep the following points in mind:
- Illustrate the condition which shall trigger the (CS).
- Whose responsibility it is to fulfill the condition.
- Mention the time limit.
- Consequences of having met the condition or on failing.
- Methodology of resolving the condition if dispute arises.
(CS) is capable of putting in peril the enforceability of the entire agreement. To better understand (CS) let us take the example of an appeal decided by Appellate Tribunal of Electricity in a matter between (M/s Adani Power Limited vs. Gujarat Electricity Regulatory Commission, 2010). Briefly, there was a Power Purchase Agreement (PPA) between Adani Power Limited APL/Seller and Gujrat Holding Company GHC/Procurer. As per the agreement one of the (CS) was that the agreement could be terminated by the GHC/Procurer on default by APL/Seller.
Secondly, as per (CP) APL/Seller was obligated to inscribe a Fuel Supply Agreement (FSA) with suppliers of fuel and share the same with GHC/Procurer. However, if APL/Seller fails to do so within 3 months (starting after 14 months of issuance of Letter of Intent) then it shall be liable to furnish additional Performance Guarantee. If the same is not furnished, then either of the two parties shall have the right to terminate the agreement by giving 7 days advance notice.
Or if additional Performance Guarantee is furnished but FSA is not signed for a period of 8 months then again; the agreement could be terminated at the asking of any of the parties. In such cases APL/Seller shall be liable to pay to GHC/Procurer damages @Rs. 10 lakhs/MW of the Contracted Capacity.
On the pretext that no FSA has been signed, APL/Seller served notice to GHC/Procurer to terminate the contract. GHC/Procurer challenged the termination notice before the Gujrat Electricity Regulatory Commission (State Commission). State Commission set aside the termination notice and directed APL/Seller to honor the PPA. The same was under challenge in the present appeal.
Based upon facts and arguments heard during the case it was discovered that APL/Seller had in fact concluded a FSA with Adani Enterprises Limited but did not disclose so to the State Commission. Therefore, once FSA is drawn or (CP) is satisfied, then (CS) of terminating the contract cannot be invoked. Actually, APL/Seller was wanting to exit the contract as it was getting a better price for its power from other customers in the market than that negotiated with GHC/Procurer.
Citing numerous judgments from the Supreme Court the tribunal concluded that the appellant cannot be allowed to take advantage of its own wrong. And directed APL/Seller to supply power to GHC/Procurer as per PPA.
Conditions should be expressed and not implied which shall otherwise open the doors for endless and expensive litigation. Normally courts while deciding if the condition has been met or violated rely upon applying the principle of good faith as it shall appear to a reasonable person. Indicate right or obligation of the condition by using words provided that, unless or if in the conditional clause.
M/s Adani Power Limited vs. Gujarat Electricity Regulatory Commission, Appeal No. 184 of 2010 (Appellate Tribunal for Electricity September 7, 2010).
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