Conditions precedent in commercial contracts
A condition precedent clause is a condition which must be fulfilled before a specified liability can arise. Whilst condition precedent clauses often arise in construction and insurance contracts, they can also arise in standard commercial contracts – sometimes without a party realising that a particular clause is a condition precedent.
Failure to comply with a condition precedent may preclude a party from exercising rights it might otherwise have had. It is therefore important for parties to understand when they have included a condition precedent in their agreement and to manage the contract to minimise risk.
Terms that might arise in this context include clauses which require claims for payment to be made within a particular time period or submitted in a particular format failing which they will not be valid.
Although in a construction context a Scottish case highlighted the potential pitfalls of failing to comply with a condition precedent which could apply equally in other commercial contexts. Whilst the case is not binding on the English courts it will be persuasive if the English courts consider such issues in the future.
Education 4 Ayrshire Limited v South Ayrshire Council
The case related to a construction project in relation to the design and construction of schools for a local authority. The contract included clauses setting out what was to happen in the event that certain circumstances arose, one of which was the discovery of asbestos. Clause 17.1 set out what information the contractor was obliged to give in the event of a delay. The contract also specified:
17.6 …to obtain relief or claim compensation…the Contractor must:
17.6.1 as soon as practicable, and in any event within 20 Business Days after it becomes aware that the Works Compensation Event has caused or likely to cause delay, breach of an obligation under this Agreement or the Contractor to incur costs or lose revenue, give to the Authority a notice of its claim for an extension of time…, payment of compensation and/or relief from its obligations under this Agreement.
17.8 In the event that information is provided after the specified number of Business Days…then the Contractor will not be entitled to any extension of time, compensation, or relief from its obligations under this Agreement in respect of the period of time during which the information is delayed.”
Asbestos was discovered and the claimant, a special purpose vehicle set up for the purpose of the project, wrote to the local authority purportedly in accordance with clause 17. The question before the court was whether the letter which it sent was sufficient notice under clause 17.
The letter stated:
“In accordance with clause 17.1 of the project agreement, we hereby inform you that we anticipate a delay…
To this end please refer to our previous correspondence of 18 April…and the attached correspondence from the Building Contractor…which provides further details and includes the proposed programme for removal of asbestos.
We will submit our full claim in accordance with clause 17.6 of the project agreement.…”
The claimant sought a declaration that there had a delay for a period of 16 weeks, that there had been an event entitling them to a postponement of 16 weeks and that they were entitled to a payment of just over £800,000 plus VAT and interest. The defendant countered that clause 17 was a condition precedent to the right to claim payment or an extension of time, that the claimant had failed to comply with clause 17 and that therefore it was not entitled to the relief sought. The court agreed with the defendant.
It was held that the claimant had to give notice under clause 17.6 within the time limit specified but the letter only dealt with the notice under clause 17.1. The details of any claim under clause 17.6 were referred to in the future tense, i.e. were to follow. The claimant argued that the defendant could have been in no doubt as to what was intended by the letter because of other correspondence and a meeting which had taken place prior to the letter. The court held that the fact that strict formalities were required under the contract showed that a clear notice was required for the condition precedent to be satisfied.
The fact the defendant could have worked out the information from various sources was not enough. The information required in the notice could not be left to be inferred from the letter combined with other facts and circumstances. Lord Glennie stated:
“Where parties have laid down in clear terms what has to be done by one of them if he is to claim certain relief, the court should be slow to relieve that party from the consequence of failure.”
Key points to remember
• Whether a clause is a condition precedent or a contractual term of another character depends on:-
o The form of the clause;
o Relation of the clause to the contract as a whole;
o General considerations of law.
• A condition precedent can operate even though it does not contain an express warning as to the consequences of non-compliance with the clause.
• To be valid the clause must be clear and unequivocal. If there is genuine ambiguity then the clause will not be construed as a condition precedent.
• Parties need to remain familiar with contractual terms, in particular those that require the giving of notice to trigger certain events, e.g. payment, liquidated damages and loss and expense claims. Failure to comply with the requirements of such a clause can act as a complete bar to recovery – even if the claim is otherwise without defence. The court will be slow to interfere with terms agreed between commercial parties even if the result appears otherwise unfair.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.