Conditions and Promises of Performance in SPAs under English Law

The duty of performance under many contracts is contingent upon the occurrence of a designated condition or promise. A condition is an act or event, other than a lapse of time, that affects a duty to render a promised performance that is specified in a contract. A condition may be viewed as a qualification placed upon a promise. A promise or duty is absolute or unconditional when it does not depend on any external events. Nothing but a lapse of time is necessary to make its performance due. When the time for performance of an unconditional promise arrives, immediate performance is due. A dependent or conditional promise is not effective until the occurrence of some external event that the parties have specified. An implied condition is one that the parties should have reasonably comprehended to be part of the contract because of its presence by implication. Conditions are often colloquially (=informally) referred to as outs, because a failure by one party to satisfy its conditions enables the other party to get out of the contract. For this reason, conditions are often vigorously negotiated.

Types of Conditions Conditions precedent, conditions concurrent, and conditions subsequent are types of conditions that are commonly found in contracts. A condition precedent is an event that must exist as a fact before the promisor incurs any liability pursuant to it. Parties often enter into contracts which are subject to the satisfaction of certain outstanding conditions, known as conditions precedent (or CPs). There is no deal, until the condition is fulfilled, satisfied or waived. CPs arise mainly in the context of contracts and deeds. In a contract, a condition precedent is an event which must take place before a party to a contract must perform or do their part. Typical CPs in the context of sale and purchase agreements (SPAs) may include clearances being obtained to the acquisition from regulatory authorities, consents being obtained from material customers/suppliers to the change of control of the target (=the company being acquired), relevant resolutions being passed by the buyer and/or seller and no material adverse change occurring in respect of the target.

A condition concurrent must exist as a fact when both parties to a contract are to perform simultaneously. Neither party has a duty to perform until the other has performed or has tendered performance. Practically speaking, however, the party who wants to complete the transaction must perform in order to establish the duty of performance by the other party. The performances are concurrently contingent upon each other. Concurrent conditions are usually found in contracts for the sale of goods and in contracts for the conveyance of land.

A condition subsequent is one that, when it exists, ends the duty of performance or payment under the contract. For example, suppose that an insurance contract provides that suit against it for a loss covered by the policy must be commenced within one year of the insured’s loss. If the destruction of the insured’s building by fire is a risk that the policy covers, then the insured must file suit against the insurer within the time specified, or the condition subsequent will end the duty of the company pursuant to the policy.

Substantial Performance The failure to comply strictly with the terms of a condition will not prevent recovery if there has been substantial performance of the contractual obligation. Courts created this doctrine in order to prevent forfeitures and to ensure justice. Where recovery is permitted for substantial performance, it is offset by damages for injuries caused by failure to render complete performance. Courts determine whether there has been a breach or a substantial performance of a contract by evaluating the purpose to be served; the excuse for deviation from the letter of the contract; and the cruelty of enforced adherence to the contract. If the deviation from the contract were accidental and resulted in only a trivial difference between what was required by the contract and what was performed, the plaintiff will receive only nominal damages.

Satisfactory Performance A contract may be contingent upon the satisfaction of a person’s opinion, taste, or fancy. Most courts apply a good-faith test in determining whether rejection of a performance was reasonable. If a rejection is made in bad faith, the court will enforce the contract.

If satisfaction can be measured with reference to the commercial value or caliber of the subject matter of the contract, the performance must be proved to be deficient in these respects and the dissatisfaction must be proven to be sufficiently reasonable and well-founded to justify non-enforcement of the contract. The test is: What would satisfy a reasonable person? The condition of satisfaction need not be met when the expression of dissatisfaction is made in bad faith and not related to the quality or commercial value of the subject of the contract.

Divisible Contracts The entire performance of a contract can be a condition to the other party’s duty to perform. If the contract is legally divisible, the performance of a divisible portion can fulfill the condition precedent to the other party’s corresponding divisible performance. A contract is divisible when the performance of each party is divided into two or more parts; each party owes the other a corresponding number of performances; and the performance of each part by one party is the agreed exchange for a corresponding part by the other party. If it is divisible, the contract, for certain purposes, is treated as though it were a number of contracts, as in employment contracts and leases. If an employer hires a prospective employee for one year at a weekly salary, the contract is divisible. Each week’s performance is a constructive or implied condition precedent to the employee’s right to a week’s salary. The right to the salary is not contingent on performance of the obligation to work for one year. In most contracts of employment, the courts allow recovery to the employee for the number of weeks or months of service rendered, on the theory that such contract is divisible. The same is true for a lease of real property or an apartment. If the lease is breached before the entire term has expired, the tenant is liable for the remaining rent as each month occurs, but is not liable prior to that time. In effect, the court treats the lease as a contract for each month, with rent due on the first of each month. In a divisible contract, the performance of a separate unit that is treated as a separate contract entitles the performing party to immediate payment, whereas in an entire contract, the party who is first to perform must render full performance in order to be entitled to performance from the other party.

Breach of Conditions Compliance with a condition can be excused under certain circumstances. As a general rule, if the facts would excuse compliance with a condition, they will also excuse performance of a promise. An excuse for nonperformance of a condition can exist in many forms, such as a waiver (the intentional relinquishment of a known right) of performance of the condition.

If an unintentional failure to perform a condition would result in a Foreiture, a court may excuse compliance in order to prevent injustice. The duty of performance by the other party arises just as though the condition has been fulfilled if compliance with a condition is excused.