Contingent condition

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A contingent condition is a condition which is outside the responsibility of the parties. If the condition is then not fulfilled, (or in some cases, is fulfilled), one or both parties may be entitled to terminate the contract. Examples of contingent conditions include the approval of finance or licenses, or weather conditions. When parties specify that an agreement is subject to the fulfillment of a contingent condition, the following rules are to be kept in mind:

  • The existence of an implied or express duty to co-operate - the parties must still do everything reasonable within their power to ensure the condition is fulfilled.[1]
    • A failure of the duty to co-operate entails that the party could not rely on the non-fulfillment of the contingent condition in order to terminate the contract.[2]
  • Non fulfillment:
    • Non fulfillment occurs when:
      • Events occur which are opposite to the condition.
      • The time period for the event to occur lapses (this may be express, implied, or determined by a standard of reasonableness)
    • The courts are currently undecided on the issue of subjective contingent conditions (ie 'subject to satisfactory finance). Some show support for standard of reasonableness being imposed.[3]
    • Restriction: a party may not rely on non-fulfilment if that party has already repudiated the agreement.
  • The condition may be waived if:
    • Both parties agree to it.
    • The condition is completely to the benefit of one party and it decides to waive it.

The consequences of non-fulfillment of a contingent condition are:

  • Performance is excused.
  • If the contingent condition relates to entire contract, the contract is voidable by either party.

This topic is within Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009), pp. 313-321 [20.05-20.60]

Introduction

[4] Contracts are sometimes conditional upon a certain event, outside of the responsibility of either parties (for example, one party receiving finance). This is called a contingent condition:

  • Contingent because it is outside the responsibility of the parties;
  • Condition because performance is conditional upon the event occurring.

Note that a contingent condition can also mean that a contract is conditional upon an event not occurring (for example, the contract is in place unless one of the parties lose their licence). In either case, a contract may be terminated by either parties upon the failure of a contingent condition.

Distinction from a promissory conditions

[5] Firstly, it should be noted that a contingent condition should not be confused with normal 'conditions' of the contract (promissory conditions), which are a major contractual promise made by a party. A breach of promissory condition will breach the contract and entitle the other party to damages.

Types of contingent conditions

[6] A contingent condition may qualify either the performance or the formation of the contract.

  • Performance - the parties are not obliged to perform the contract until the the condition is fulfilled.
    • However, the agreement still exists, and the parties are still bound by it. They may not do anything inconsistent with the relevant contractual obligations.
    • This means that if a contract is made with performance subject to finance, the contract is in effect before the finance is obtained - the other party can't meanwhile sell the house or whatever he was offering).
  • Formation - the contract is only formed and the parties are only bound by it once the condition is fulfilled.

Precedent/subsequent conditions

[7] In addition, the contingent condition may be either precedent or subsequent to performance:

  • A condition precedent means that the contract/performance will only start once the condition has been fulfilled.
  • A condition subsequent means that the contract/performance starts, and will then be terminated if the condition has been violated.

However, it should be noted that the court considers this an artificial distinction and is of no real significance.

Duty to co-operate

[8] Whilst a contingent condition is not the responsibility of the parties, in some contracts, the parties may be under some obligation to attempt or make an effort to ensure the condition is fulfilled. This obligation can be provided through:

  • An express term (to use 'best efforts' or so)
  • An implied duty to co-operate.
    • A duty to co-operate requires the parties to do everything reasonably within their power to see that the condition is fulfilled.[9]
    • For example, where the contingent condition was obtaining a consent from a minister, the parties had to do all things reasonable to obtain that consent.

If a duty to co-operate is breached, the party in breach will not be entitled to terminate the contract based on the failure of the contingent condition. Furthermore, in some cases, the doctrine of estoppel may operate to the effect that the condition is treated as fulfilled by the courts. This was considered in Mackay v Dick[10]:

  • Buyer tried to terminate a contract because a machine did not satisfy the contingent conditions.
  • Actually, the buyer never even tested it, thus breaching his duty to co-operate.
  • Not entitled to rely on the failure for termination.

If a party breaches the duty to co-operate, the other party will be entitled to damages. However, the damages might be discounted if this is case where even if the party in breach had co-operated the condition might not have been fulfilled.

Non-fulfilment

When will a contingent condition not be fulfilled?

[11] A condition can be considered as not fulfilled if:

  • The events that occur are opposite to the event specified in the condition (for example, the denial of finance)
  • The event does not occur by the time limit. The time limit for when the contingent condition must be fulfilled by can be determined through:
    • An express term
    • If a date is provided for the completion of the contract, the same is used for the fulfillment of the contingent condition.[12]
    • A construction of the contract by the courts as requiring the condition to be filled within a reasonable time frame.[13] Reasonableness is determined according to the circumstances.

Objective / subjective fulfilment of condition

[14] The fulfilment of a contingent condition may also rest on a subjective opinion of one of the parties (for example, where the contingent condition is the purchaser obtaining 'satisfactory finance'). In these cases, the party making the judgment must act honestly when deciding whether the condition has been satisfied.[15].

Another question arises whether a standard of reasonableness should be imposed.

  • Suppose that a purchaser obtains an amount of finance which is very reasonable, but is honestly dissatisfied with it.
  • Should the condition still be deemed unfulfilled?

The High Court has been inconclusive on this issue. The Supreme Court of NSW, in Renard Constructions (ME) Pty Ltd v Minister of Public Works[16], showed a strong support for imposing a standard of reasonableness.

The consequences of non-fulfilment

[17] If the contingent condition is not fulfilled, performance will be excused.

  • It does not matter if the contingent condition seems unimportant or minor. It is essential.
  • The court will only determine that a contingent condition has been fulfilled if there was exact compliance with the provisions.[18]

[19] Whether the entire contract is voidable or merely parts of it is determined by construction. However, as a general rule:

  • If the contingent condition applies to the performance of a specific obligation, the contract will usually remain intact and simply that obligation will be removed.
  • If the contingent condition applies to the performance of the whole contract, the contract will be rendered voidable.
    • This means that the contract is not void yet, but one or both parties is entitled to terminate it (without need to notify the other[20]). Neither party will be liable.
  • Some contracts expressly provide that the non-fulfilment will automatically terminate the contract (rendering it void rather than voidable).
    • The courts have been reluctant to approve of these conditions. They are more inclined to declare contracts voidable than void.
    • However, they have allowed them in cases in which neither party has any control over the contingent condition.[21]

Who can terminate upon non-fulfiment?

[22] Whether just one or both of the parties can elect to terminate after a non-fulfilment is a matter of construction. Usually, both parties have that ability. However, if the condition was no fulfilled because of a failure to co-operate (see above) by one of the parties, that party will not be entitled to terminate on this basis.[23]

Waiver of a contingent condition

[24] A contingent condition may be waived by the parties, in which case they are no longer entitled to terminate the contract upon non-fulfilment.

A contingent condition may be waived by the agreement of both parties. One party can waive a contingent condition (by itself) only where the condition is for the benefit of that party.[25]

  • This can be somewhat vague. Over a few decisions[26], the courts have demonstrated that the contingent condition needs to be only beneficial for the one party and where the other party has absolutely no interest in it.
  • Note that just because a contingent condition is only for the benefit of one party, that doesn't mean that the other party cannot rely on it to terminate the contract. As long as the condition hasn't been waived yet, the other party may still terminate the contract upon non-fulfilment.

Restrictions on termination rights in cases of non-fulfilment

Prevention

[27] A party will not be allowed to rely on non-fulfilment for termination if it prevented performance or intimated that it does not intend to perform the contract.

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Butts v O’Dwyer (1952) 87 CLR 571
  2. Mackay v Dick (1881) 6 App Cas 251
  3. Renard Constructions (ME) Pty Ltd v Minister of Public Works (1992) 26 NSWLR 234
  4. Textbook, p. 313 [20.05]
  5. Textbook, p. 314 [20.10]
  6. Textbook, p. 314 [20.15]
  7. Textbook, p. 315 [20.20]
  8. Textbook, pp. 315-6 [20.25]
  9. Butts v O’Dwyer (1952) 87 CLR 571
  10. (1881) 6 App Cas 251
  11. Textbook, p. 316 [20.30]
  12. Aberfoyle Plantations Ltd v Cheng [1960] AC 115
  13. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
  14. Textbook, pp. 316-7 [20.35]
  15. Meehan v Jones (1982) 149 CLR 571, 589
  16. (1992) 26 NSWLR 234
  17. Textbook, p. 318 [20.37]
  18. Highmist Pty Ltd v Tricare Ltd [2005] QCA 357, [41]
  19. Textbook, pp. 318-9 [20.40]
  20. Perri v Coolangatta Investments Pty Ltd (1982) 149, CLR 537, 546
  21. New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers de France [1919] AC 1, 9
  22. Textbook, pp. 319-20 [20.50]
  23. Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 441
  24. Textbook, pp. 320-1 [20.55]
  25. Gange v Sullivan (1966) 16 CLR 418, 430
  26. Perri v Coolangatta Investments Pty Ltd (1982) 149, CLR 537; Gange v Sullivan (1966) 16 CLR 418; Gough Bay Holdings Pty Lts v Tyrwhitt-Drake [1976] VR 195
  27. Textbook, p. 321 [20.57]
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