Review: Spotting Conditions Precedent

Conditions precedent [conditions that don’t build trust] are requirements that must be met before either (1) the contract as a whole comes into existence, or (2) a specific right under that contract will apply.

Your contract won’t always use the phrase ‘condition precedent’, which makes them harder to spot… Here’s a brief spotters’ guide:

Examples conditions precedent

Letters of intent may include conditions precedent on signing or on providing documents, such as:

It is a condition of this letter that the Contractor will provide evidence of its insurances before it starts work

Subcontracts may try to cajole the subcontractor into applying for payment at the right time by stating:

It is a condition precedent to payment under this subcontract that the subcontractor will make an application in the approved form at the right time

JCT 2016 DB includes a requirement for the Employer to issue documents before deducting liquidated (delay) damages:

Provided the Employer has issued a Non-Completion Notice and Pay Less Notice, he may give notice of his intention to deduct LADs [clause 2.29.1, paraphrased]

NEC3 contains a strict procedure relating to compensation events:

If the Contractor does not notify the Project Manager of a compensation event within 8 weeks of becoming aware of the event, he is not entitled to more money or more time [clause 61.3, paraphrased]

Alternatives to conditions precedent

The purpose of a condition precedent is to make sure that one of the contracting partners follows the procedure properly. But the consequences can be incredibly harsh, especially those relating to payment – the client has received the benefit so surely they should pay something?

Instead of this adversarial approach, why not adopt one of the principles in Seven Habits of Highly Effective People (Stephen R Covey). Focus on creating procedures which are win-win such as:

  • if documents should be provided before works start, then don’t sign until they are provided
  • if documents are provided during the project, include an admin fee (liquidated damages) if they are not provided correctly eg If the subcontractor’s invoice is not provided on time or is in the wrong form, the contractor may deduct <insert sum or % of contract price> as agreed damages to cover the contractor’s extra administrative costs
  • if the timing of documents is not critical, you can apply for specific performance to get them signed (Liberty Cuddy v Mercian)
  • if information is needed regularly, then state that payment will be made at the next period/stage if the information is submitted correctly (postponing rather than refusing payment)
  • if notices are needed to meet procedures under other agreements, use a condition precedent but make sure (1) the start point is specific and objectively measurable (2) the time period is realistic and achievable (3) the consequences are clear and (4) both parties agree to this approach.

What should you do?

When you plan and create a contract, decide what processes are really important and build them into the contract. If you spot a condition precedent, negotiate an alternative while ensuring this is not just because your processes are lax.

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