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Conditions precedent are contractual clauses that require specific events to occur or certain conditions to be satisfied before a contract, or particular obligations within that contract, become fully effective or enforceable.
Conditions precedent are important because they create practical flexibility (and in many cases are a matter of legal or financial necessity) by allowing a party to lawfully terminate or avoid performance if specific conditions aren't met, while counterparties often resist them precisely because they prefer certainty of full contractual performance without easy exit routes.
Conditions precedent are quite commonly included in transactions and contracts (and then possibly negotiated on by the other party) such as :-
Mergers and acquisitions - whether regulatory approvals, shareholder approvals, third-party consents or financing arrangements.
Finance and Banking - in loan agreements and other financing documents, common conditions precedent include corporate authorisations, anti-money laundering checks, satisfactory audited financial statements and compliance certificates or insurance insurance policies being in place.
Property Transactions - conditions precedent often apply in property development, include obtaining relevant planning consents for development or change of use, environmental or structural surveys, vacant possession or finalisation of planning obligations under Section 106 of the Town and Country Planning Act 1990.
Construction Contracts - often similar to other property transactions as above but can also include performance bonds/guarantees, evidence of contractor's all-risk insurance and other required policies and approval of health and safety documentation.
Commercial Contracts - conditions precedent might include industry-specific regulatory approval, securing necessary IP rights, satisfactory results from a trial or quality control processes or issues linked to related contracts with key suppliers or customers.
The following are key parameters that are commonly negotiated :-
Dispute avoidance - conditions should be drafted with sufficient clarity to avoid disputes about whether they have been satisfied.
Objective vs. subjective conditions - whether satisfaction is determined objectively or based on a party's subjective judgment (e.g., "reasonable satisfaction" vs "satisfaction in its sole discretion").
Which party bears responsibility - clear allocation of who must take action to satisfy each condition.
Co-operation obligations - the extent to which counterparties must co-operate to help satisfy conditions.
Cost allocation - who bears the costs associated with satisfying conditions.
Long-stop dates - the final date by which conditions must be satisfied before termination rights arise; and/or
Extension mechanisms - circumstances, if any, under which deadlines can be extended.
Evidence requirements - the form and standard of evidence required to demonstrate satisfaction.
Certification processes - whether formal certification of satisfaction is required and from whom.
Termination rights - whether failure automatically terminates the agreement or merely creates a termination right.
For further advice on structuring, negotiating, or managing conditions precedent in your transactions, please contact our specialist lawyers.
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Partner - Corporate law
Nicholas is a Partner in our Corporate and Commercial team. He mainly operates out of Bedford, Peterborough, and London.
Nicholas qualified as a solicitor in 1995 with a City law firm. Since then he has gained significant experience in the City,...
