Recent LLF Victory By Brian LeVay and Alexander Passo Reflects The Critical Importance of Conditions Precedent In Contracts
Legendary musician Bo Diddley once sang that “before you accuse me, take a look at yourself.” While it was unlikely that he was referring to lawsuits involving commercial contracts, those words aptly describe how unfulfilled conditions precedent in an agreement can preclude and defeat what might otherwise be a viable breach of contract claim. So, before you accuse another party of violating the terms of a contract (or are on the receiving end of such allegations), take a look at the document to see whether any such perquisites have been satisfied.
A recent dismissal of a lawsuit obtained by LLF’s Brian LeVay and Alexander Passo on behalf of a real estate holding company demonstrates the power of conditions precedent as a defense to breach of contract claims and how the failure of such conditions can relieve a party of any further performance obligations under the agreement.
What Are Conditions Precedent In a Contract?
Contracts are about promises. One party promises to do, make, sell, or deliver something in exchange for a promise from the other party to pay them or otherwise provide consideration for this exchange of commitments. The failure of one party to abide by their promises can constitute a breach of contract that could entitle the non-breaching party to damages and other remedies as set forth in the agreement.
But many contracts also contain conditions, which are similar but distinct from promises made by the parties. Illinois courts have defined a condition precedent as “one that must be met before a contract becomes effective or that is to be performed by one party to an existing contract before the other party is obligated to perform.’” Catholic Charities v. Thorpe, 741 N.E.2d 651, 653 (2000). Put another way, a condition precedent is “an event which must occur, or an act which must be performed by one party to an existing contract before the other part is obligated to perform.” Vuagniaux v. Korte, 273 Ill. App. 3d 305, 309 (5th Dist. 1995)
The subtle distinctions between contractual promises and conditions can be illustrated as follows:
- Promises: “Company will deliver 1,000 widgets to Customer by X date for which Customer will pay Company $100,000.”
- Conditions: “Customer’s obligations under the contract are subject to the condition that Customer obtain financing for its purchase by X date. If Customer fails to obtain such financing, the contract is terminated and Customer is relieved of any further obligations under the contract.”
In the former example, the failure of the customer to pay upon delivery of the widgets is a breach of the contract. In the latter, the failure of the customer to obtain financing means that its obligation to pay is relieved and both parties no longer need to fulfill their promises in the agreement.
A Powerful Defense To Breach of Contract Claims
The battle between a claimed breach of contract and an unsatisfied condition precedent that terminates the contract was illustrated in a recent case in which the LeVay and Passo obtained dismissal of a lawsuit at the outset of the case in favor of a real estate holding company.
After a storm damaged its properties in North Dakota, the holding company hired a contractor to repair the properties’ roofs. Prior to executing their agreement, the contractor represented that it would only be enforceable if the company’s insurance carrier approved its estimate. The written contract between the holding company and contractor contained a provision reflecting that representation:
“This Agreement does not obligate the customer or [the contractor] in any way unless claim is approved by Insurance Company and accepted by [contractor].”
The insurance company never accepted the estimate provided by the contractor, thus relieving the holding company of any obligations pursuant to the foregoing provision. Nevertheless, the contractor sued the company for damages as a result of purchasing materials for the work that would be performed under the purported agreement. On behalf of the holding company, the firm asserted a defense that the insurer’s approval was a condition precedent to the holding company’s obligations under the contract and that the non-occurrence of the condition precluded any claims. The firm filed a motion to dismiss on behalf of the holding company, which the court granted, agreeing that the non-occurrence of the condition precedent – the insurer’s approval of the claim - terminated the agreement.
This case is a reminder that parties need to look at the whole agreement, not just the agreed-upon performance promises, before they either allege a breach of contract or consider settling such a claim made against them, as an unfulfilled condition precedent can doom a breach of contract lawsuit. Similarly, when negotiating an agreement, the inclusion of a condition precedent can be an important backstop that protects a party from liability when specified circumstances make performance undesirable.