Making Sense of Conditional Agreements in Legal Contracts

What is a Conditional Agreement?

An agreement is said to be conditional when the parties agree that it is to take effect only when an event or a course of events have transpired. A conditional agreement provides that a party is obligated to do something or refrain from doing something, but only in the event that certain conditions are later met. In a conditional agreement, the performance of the contract has not yet occurred, and the parties recognize that the contract may never come to fruition.
An example of a conditional agreement is a purchase agreement for land. In such an agreement, one party might condition its performance on the delivery of a satisfactory title and the obtaining of zoning permits. Performance of the contract would only take place if those conditions exist. Likewise, if the conditions do not take place, there is no performance and no contract.
A conditional agreement is distinct from a conditional offer, which is an offer that is contingent upon the occurrence of a condition (for example , an offer for settlement in which the parties agree that their acceptance will be binding if a certain event occurs). In a conditional offer, the offer itself is related to a conditional event (the event in which the offer will become binding, such as the signing of a confidentiality agreement), and the offer (as opposed to the entire agreement) is not binding until the condition occurs. A conditional offer becomes binding upon acceptance and if the condition specified in the offer occurs.
A conditional agreement is also distinct from a contingent agreement, which is an agreement in which the parties are legally bound to perform the contract. If the court pronounces the agreement as contingent, the agreement in question is enforceable and becomes mandatory if certain events occur. The parties are bound to execute the instrument when those events transpire.
Thus, while a conditional agreement is technically binding, it does not trigger performance unless certain conditions are fulfilled.

Main Features of a Conditional Agreement

For an agreement to be conditional, it must contain the following 3 elements:

1. Statement identifying the conditions which must occur before the contract becomes binding.

The contract must specifically describe the conditions which must occur before the agreement becomes binding on the parties. As a result, sufficient detail should be included in the agreement as to the conditions that need to occur before the agreement will be binding. For example, in the event the negotiation of a lease will require the consent of the Landlord and the governing board of the municipality, then identify the approval of the governing board as a condition of the deal.

2. Obligation on the part of one or more parties to take all steps within their control to enable the conditions to be satisfied.

In most cases, the party responsible for satisfying the condition should be identified. The means by which the conditional item will be satisfied should include the following: (i) required notice, (ii) time frames for satisfaction and (iii) reasonable actions which can be taken. The failure of an offending party to take reasonable actions to satisfy a condition may result in a breach of the conditional agreement and the ability of the aggrieved party to either compel specific performance of the conditional agreement or recover damages for the impeded transaction.
In addition to specifying the conditions that must occur in order for the contract to become binding, the conditional agreement should also set an outside time limit on when the transaction must close. Stated differently, in the event the identified conditions are never satisfied, the outside time limit can set a firm deadline as when the agreement should terminate.

3. Outside time limits as to satisfaction of the conditions.

As discussed in paragraph 2 above, once the outside date is reached and the necessary conditions have not been satisfied, the parties to the conditional agreement may be entitled to terminate the agreement. At common law, the failure of one party to act in good faith to satisfy a condition would result in the other party to treating the contract as being void and effectively terminating the transaction.
If properly drafted, the conditional agreement should provide the parties the option to either terminate the agreement or to proceed with the transaction even though the proper conditions were not satisfied. In most instances, if the conditions are not met, the terminating party should treat the failure to satisfy the condition as a breach of contract.

Common Applications of a Conditional Agreement

Conditional agreements find application across a wide range of industries. They are especially common in corporate law for structuring business acquisitions, and in real estate transactions for the sale of land or buildings subject to a condition. In these situations, the contract for the purchase and sale of a business or investment property usually becomes a conditional agreement requiring the vendor to remedy or rectify an issue or to fulfill an obligation before the purchaser will be obliged to proceed with the transaction. Failure on the part of the vendor to meet the condition will result in the purchaser having no obligation to complete the transaction. This allows the parties sufficient time to negotiate the right price for the transaction before closing the deal.
It is also common in the real estate market to enter into conditional agreements for the purchase of real estate. These may include a condition whereby the offer is conditional upon the purchaser obtaining a mortgage by way of a first charge on the property. Should the purchaser in this case fail to obtain a mortgage, the contract would become a non-enforceable agreement and would likely be terminated.
Another example of a use for conditional agreements is the issuance of a letter of intent, which is often employed by the parties to a proposed business transaction when there is sufficient confidence in entering into a deal. It is likely that the parties involved will draft an agreement reflecting various aspects or general terms of the deal proposed, and would be delivered to the other party. In such an agreement, the parties often indicate whether the transaction is to be consummated and the conditions on which the transaction would do so. If the agreement is executed, a pro forma for a future agreement will be achieved, thereby eliminating any dispute in the later stages of the transaction.
Conditional agreements are also common in the context of hedge funds and collective investment vehicles. Conditional agreements govern the offering of securities in Canada, and involve a standard form of agreement for underwriting a new issue. They include conditions precedent and also represent a 20-day search out period, which means an applicant can waive the condition after the lapse of a period of 20 days.

Legal Considerations and Implications

The legal implications of entering into a conditional agreement should be fully understood before finalising the arrangement. Parties should consider carefully the enforceability of their obligations and rights under the contract, particularly where the agreement is very one-sided and/or contains unilateral rights. For example, a contract which gives one party the sole right to terminate before settlement or in which the other party must seek the prior written consent of the first party before undertaking an act will likely create enforceable obligations if the agreement becomes unconditional. However, if the agreement is likely to remain conditional for an extended period of time, such clauses may be less significant. Background and intentions of the parties in entering into the arrangement may also be relevant.
It now appears to be accepted by the Courts that a conditional agreement cannot be severed , although a condition cannot be "frustrated" where that will result in an absurdity. Although there may be limited circumstances in which a conditional agreement can be severed, where the condition has been satisfied in part, it is essential that the parties have anticipated this situation and have included the necessary provisions in their agreement.
Parties should also consider the situation where they wish to bring a claim for damages or otherwise for breach of an agreement which is conditional. While the approach to the recovery of damages for breach of a conditional agreement remains somewhat unclear, the usual principles relating to damages should apply – the injured party should not be in a better position than it would have been if the agreement had been performed. This may require the injured party to recover the loss it could have recovered had the agreement become unconditional when it should have, for example if performance of the agreement was prevented by the other party’s conduct.

Writing a Conditional Agreement

There are two key considerations in the drafting of a conditional agreement, the first one involving the precise target date for the satisfaction of any conditions. The second issue relates to how any conditions to an agreement should be identified and described in the written agreement and what circumstances will result in them being treated as being satisfied. Agreements may include a number of conditions. For example, these could be: In relation to the conditions set out above we consider: Although the legal effect of the condition is to operate as a complete fetter to the right of a party to sue for breach, the following are a selection of a wider range of issues that clients should be aware of: This list of issues, while long, is not exhaustive and so it is advisable to obtain expert advice on any issues that might arise in the drafting of a conditional agreement in addition to those identified above.

Interpreting Conflict’s in a Conditional Agreement

Even with the best intentions and careful drafting, disputes may arise under a conditional agreement. These disputes may involve the granting body, which has concerns about whether the end user can or will satisfy all conditions in the given time period; they may involve the end user, who may be in disagreement with the granting body over conditions; or they may involve other persons the subject of the conditional agreement. Many disputes may involve the differing interpretations of particular agreements. When trying to solve a dispute , parties have a range of options. One method is an amicable negotiation which involves communication and compromise. This way of resolving a dispute is typically stipulated in the agreement and applicable to any disagreements that arise. Another is mediation. Mediation uses a neutral third party to resolve a dispute or aim to reach a settlement. Determining the terms of the agreement can also be useful, and gives parties more control over the dispute. Litigation is actually the last option.