Catastrophic Conditions Precedent

Last week I was working with a specialist subcontractor client to improve their management of contractual risk (as their MD put it). As part of a workshop on Contract Awareness, I asked various staff to read a variety of T&C and answer questions such as:

  • when are you going to get paid?
  • what process do you need to follow to get paid?
  • what sort of variations can they instruct you to do>
  • how are variations valued (and by whom/when)?
  • what happens if there are defects?
  • who can end the contract (terminate)?

Not only did the contracts contradict themselves, but the process didn’t reflect what happened in practice. These contracts have become a tick-box for an internal system, but once signed are just shoved into a drawer.

Catastrophic?

When we got into the nitty-gritty, it turned out that many of the processes that would normally entitle their company to say payment, extensions, more money for variations, interest on late payment and so on, were dreaded conditions precedent.

Let’s look at this beauty:

It shall be a condition precedent to any payment becoming due under this Subcontract that the Subcontractor shall have [complied with seven separate requirements*]

The minute that any of those seven requirements are not strictly met, then no payments are due under the subcontract.

If you think that is a positive benefit for the contractor, you’d be wrong! The condition precedent does not mean that the contractor does not have to pay for the subcontract works at all. It means:

  1. the subcontract is not the means by which the contractor is obliged to pay the subcontractor
  2. the subcontract may not determine the amount due to the subcontractor.

Once the subcontractor starts work, then it will be entitled to payment, whether under the subcontract, or because there is an oral contract with an implied term, or under principles of unjust enrichment (equity) where there is no contract. The subcontractor will get paid, whereas the contractor will lose its control mechanisms and payment processes. This clause creates a mess of catastrophic proportions (the nuclear option, if you like).

What should you do?

If you have a condition precedent:

  1. find out exactly how it affects your rights and remedies
  2. check it meets the criteria listed here
  3. decide if it helps you do business
  4. think again!

*Of the seven requirements, one is unrelated to payment at all and five others could (and should) be completed before the Subcontractor starts work.

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