Updated: Mar 28
In the last part of this series, we will consider three further features which must be mentioned in the context of the structure of a commercial contract. These are:
· Conditions precedent
· Interpretation section
What is a ‘condition precedent’?
A condition precedent is a contractual stipulation which must be satisfied before a contractual right or obligation comes into effect. In other words, some sort of event, which is expressly written down in the contract, must happen before a contractual right or obligation is activated.
Conditions precedent can relate to
· the whole of the contract
· individual rights and obligations expressly set out in the body of the contract.
An example of the former would be, for example, where one of the parties agreed to obtain a patent or some other intellectual property right, usually by a particular date. Failure to do so would mean that the whole agreement would not come into force.
Conditions precedent may be found in many kinds of commercial contract. However, they are particularly common in construction contracts, where they are often used as a management tool in large construction projects, particularly in relation to matters such as payment, extensions of time for completing agreed works, and the application of liquidated damages .
Like all commercial contract clauses, conditions precedent must be very carefully drafted in order to be effective. It is not necessary to use the words ‘condition precedent’ but it is advisable to do so, as it makes the intention of the parties perfectly clear. Look at the following extract from a contract and decide whether:
· it introduces conditions precedent, and
· if so, which words suggest that it does.
“This Agreement is subject to the following conditions being fulfilled:….”
In this extract, we do not see the words ‘condition precedent’ being used. So, what do you think? Are these words sufficient to introduce conditions precedent?
The answer to that question is, maybe. The words that suggest that the extract is introducing conditions precedent are “subject to”. When you see these words in this kind of context, they usually suggest that something is affected by, or possibly affected by, something else. However, the problem here is that whether they create a condition precedent will depend on such things as how those words are used in other parts of the contract and how the contract, as a whole, is interpreted. The point here is that when you use the specific words
‘condition(s) precedent’, there can usually be no doubt about what the parties are intending the words to mean.
What is also very important is that the object of the condition precedent should be clearly defined. The ‘object’ of the condition precedent is the event that is being made conditional (for example, the service of a notice or the obtaining of a particular licence).
When drafting conditions precedent, you should consider the following, among other things:
· any deadline for the fulfilment of the condition(s) including, perhaps, a ‘long-stop date’
· notification method and procedure for fulfilment of the condition(s)
· what the precise consequences of non-fulfilment of the condition(s) is
· the precise steps that the party bearing the obligation of fulfilling the condition must take to do so
· precisely how the fulfilment of the condition(s) is to be determined.
A contract which is subject to a condition precedent is also called a 'conditional contract'.
In part 6 of this series, we considered the ‘Definitions Section’ of a commercial contract. We saw that one of the purposes of this kind of section is to make the interpretation of a contract easier. An Interpretation Section in a commercial contract has the same purpose. However, it deals with the interpretation of standard words and phrases, rather than ones which specifically relate to that particular contract. For example:
“Any reference to words in the singular in this Agreement include the plural meaning and vice versa.”
So, for example, “If any fridge is defective…” would be interpreted to include “If any fridges are defective….”
If a contract is quite complex, or lengthy, or matters in the contract need to be dealt with in more detail, the contract may contain a schedule, or schedules. For example, if the price to be paid for goods supplied under the contract is to be calculated in a particular way or according to a particular formula, it is usually best to do this in a schedule, which is then attached to the contract.
Schedules can be a useful and organised way of dealing with matters in a contract in an organised and ordered way. They may include exhibits and other documents referred to in the contract itself. In our International Distribution Agreement, one possible use for the Schedule would be in relation to ‘the Territory’. So that nobody is in any doubt about what the Territory concerned might be, a map could be attached as a Schedule, with the extent of the Territory clearly outlined (for example, in red pen).
This concludes our short series on ‘The Structure of a Commercial Contract’. We hope you found it useful. In order to check your understanding, we will post a short exercise on some of the terminology you have learned during the series as Part 9.
 For an explanation of ‘liquidated damages’:
© Cambridge Legal English Academy 2021