4.1 Conditions

Condition: A contract or a contractual obligation may be made conditional upon the occurrence of a future uncertain event, so that the contract or the contractual obligation only takes effect if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition). (Unidroit Principles Article 5.3.1.

Relevance of 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 become effective, depending on the formulation. This may even apply to the enforceability of the entire agreement.

Conditions should relate to future or uncertain facts or events. Most legal systems require that a condition refer to a future or uncertain fact or event. This distinguishes conditions from the legal concept of mistake (Irrtum, erreur, dwaling). The concept of mistake implies that a contract can be terminated if the terminating party made a serious mistake, such that it would have concluded the contract on materially different terms and conditions or would not have concluded the contract at all, and, having regard to the circumstances, the mistake must not reasonably be borne by the mistaken party.

To include a condition that refers to an unknown but existing fact or event (or to a fact or event that is uncertain for the parties but certain for others) is therefore not so much a question of conditionality of the agreement, but rather an agreement between the parties that the referenced fact or event is important enough to trigger a termination. Nevertheless, if a straightforward condition is satisfied but for some apparently insignificant fact or event, the rights or obligations that are the subject of the condition will not come into force. That is the effect of a condition.

Conditions as an exit. In many cases, the contracting parties may believe that signing an agreement concludes the deal, when in fact there is still work to be done before the transaction is completed. In those cases, a condition sometimes serves as leverage to renegotiate key deal terms. In other words, a condition is not intended as an exit from the transaction but rather to protect one party against ‘hidden defects’ (with the possibility to optimise the terms of a final (unconditional) transaction.

Potestative conditions. A condition sometimes provides one party with a relatively large degree of freedom to decide whether or not it is satisfied. If the liberty essentially means that a party can walk away freely from the transaction or postpone the moment at which it decides to enter into the transaction, this is referred to as a ‘potestative condition’. Effectively, such a ‘subjective condition’ implies that the party has never been truly bound to the ‘agreed’ transaction since that party has always been free to terminate ‘at will’. If that is true, it is questionable whether there was mutual consent or a meeting of minds regarding the object of the agreement. On the European continent, potestative conditions are invalid or ineffective. Depending on the content of the condition, the principle of good faith would impose legal consequences that may, for example, range from the complete ineffectiveness of the condition to a more objective (and reasonable) test of whether the condition is satisfied, or even an obligation on a party to make best efforts to ascertain that the condition is satisfied.

The potestative nature of a condition is not always apparent. For example, the following phrases contain a prevailing subjective element:

…in form and substance satisfactory to [one party]…

…in form and substance satisfactory to both parties…

…[Purchaser] being satisfied in all respects with…

…The Parties having entered into an agreement, allocating each Party’s rights and obligations in a mutually satisfactory manner.

The questionability of overly subjective conditions can be remedied in several ways. Specifying a standard of reasonableness in each of the conditions would mean that the beneficiary of the condition cannot avoid closing the transaction by providing a simple statement that the condition has not been satisfied. The standard of reasonableness implies an objective test or at least a duty to explain (on reasonably plausible grounds) why the condition has not been satisfied. Similarly, the conditions could be phrased more objectively.

In examples, the required form and substance could refer to market standards or customs or even to the internal policies generally applied by one party. Another good option would be to leave open the determination of whether the condition has been satisfied. Alternatively, a condition could be elaborated upon by attaching an agreed framework or the main terms of such agreement.

Conditions, reasonable efforts and good faith. Most conditions require that one party undertake to perform a certain fact or event. This would imply that the same party also has the power to prevent the satisfaction of a condition. However, this is not true. Many legal systems impose a duty to act in good faith (or a similar concept) on such party, requiring it to make reasonable endeavours to achieve the stipulated results. The specific effects of this principle, and the particular actions required in the context, largely depend on the circumstances of the case.