6.2 Conditions

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

6.2 CONDITIONS

6.201 Overview. Conditions play a key role in contract performance because their occurrence or nonoccurrence can completely excuse performance or cause substantial forfeiture of rights. The law regarding conditions can be esoteric and convoluted. Courts and commentators speak of conditions precedent, conditions subsequent, concurrent conditions, conditions implied in fact, conditions implied in law, and constructive conditions. Determining their existence, type, and effect may be a challenge. For these reasons, the practitioner dealing with contract matters must understand the types of conditions, their effects, and how the practitioner can help the client deal with them.

Classifications of conditions made by commentators and courts follow two approaches. One approach classifies conditions based on the time the conditioning event is to happen in relation to the promisor's duty to perform a promise. Under this classification, conditions are labeled as conditions precedent, conditions concurrent, and conditions subsequent.

The second approach classifies conditions based on the manner in which the condition arises—whether it is imposed by the parties or is created by law. ¹ Conditions imposed by the parties are known as either express conditions or conditions implied in fact. Conditions created by law are known

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as constructive conditions. This paragraph discusses each of these classifications.

6.202 Conditions Based Upon Time.

A. In General. Courts and commentators have classified conditions based on time into conditions precedent, conditions subsequent, and concurrent conditions.

B. Conditions Precedent.

1. Overview. A condition precedent calls for the performance of some act or the happening of some event after the terms of the contract have been agreed upon but before the contract takes effect. ² Conditions are distinguishable from promises in that conditions create no rights or duties in and of themselves, but are merely limiting or modifying factors. ³ Conditions precedent appear in contracts in many contexts and are often clearly expressed as conditions. One common example is a provision in the American Institute of Architects (AIA) General Conditions of the Contract for Construction that requires the owner, as a condition precedent to the contractor's performance, to furnish evidence to the contractor that the owner is financially able to meet its obligations under the parties' contract. ⁴ However, conditions precedent need not always be expressed clearly in writing.

2. Effects of Conditions Precedent. Generally, conditions precedent must be performed; otherwise, performance of the contract will be

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excused. For example, when a contract provides for the performance of conditions precedent before a party is entitled to payment, the conditions must be performed. ⁵ Conditions precedent are also enforceable against third-party beneficiaries. For example, in State Farm Fire & Casualty Co. v. Nationwide Mutual Insurance Co., ⁶ the court held that an umbrella insurance contract's requirement that the named insured maintain underlying insurance in the amount listed in the declarations is a condition precedent to the umbrella carrier's performance under the insurance contract, and correspondingly, the insured's right to payment up to the amount of his underlying insurance. ⁷ Failure to meet a condition precedent or the nonoccurrence of a condition precedent excuses performance. ⁸

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3. Exceptions to the General Rule. There are several exceptions to the general rule that failure to meet a condition precedent will excuse performance. If a party waives a condition or if the party relying upon the condition is estopped from relying on the condition, the contract may nevertheless be enforced against that party. ⁹ For example, if the party charged with satisfying the condition has prevented or hindered its occurrence by failing to pursue that obligation in good faith, the satisfaction of the condition precedent is not required. ¹⁰ This situation is also referred to as the "prevention doctrine." ¹¹

In Rastek Construction & Development Corp. v. General Land Commercial Real Estate Co., LLC, ¹² the Virginia Supreme Court analyzed the interplay between conditions precedent and the prevention doctrine. In Rastek, after a property sale did not close, the broker claimed it was entitled to its commission under the contract based on the prevention doctrine. ¹³ According to the broker, the seller was unable to bring sufficient funds to closing, and since closing was a condition precedent to payment of the broker's commission, the prevention doctrine applied. ¹⁴ The trial court ruled in favor of the broker and awarded the sales commission.

The Virginia Supreme Court, however, disagreed. The Court explained the general rule that "[a] term that makes an event a condition of one party's duty does not of itself impose a duty on the other party that the

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event occur, and the nonoccurrence of a condition is therefore not of itself a breach of contract by that other party." ¹⁵

In this context, the Court stated the well-recognized principle of contract law referred to as the prevention doctrine: "if one party to a contract hinders, prevents or makes impossible performance by the other party, the latter's failure to perform will be excused." ¹⁶ The Court noted the prevention doctrine may be used defensively or offensively. ¹⁷

Regardless of how a party employs the prevention doctrine, Virginia law requires "that the acts or omissions constituting the alleged prevention of the condition 'must be wrongful, and, accordingly, in excess of [the promisor's] legal rights.'" ¹⁸ Otherwise, the Court explained, "the mere inability of the promisor to satisfy a condition precedent to his contractual duties would transform the condition into a warranty because it would convert a promisor's innocent inability or legal incapability to satisfy the condition . . . into a breach resulting in absolute liability on the promisor . . . ." ¹⁹

Citing prior precedent, the Court reiterated that the prevention doctrine includes a but-for causation requirement: "'If a promisor prevents or hinders the occurrence of a condition . . . and the condition would have occurred . . . except for such prevention or hindrance, the condition is excused, and . . . does not discharge the promisor's duty.'" ²⁰

In the end, the Court held the facts in Rastek did not show a purposeful act or omission that wrongfully prevented the if-and-only-if condition

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of closing from being satisfied. ²¹ As a result, the Court reversed the trial court's judgment and entered judgment in favor of the seller. ²²

4. Practical Examples and Tips.

a. In General. Conditions precedent may be troublesome to the practitioner because of the difficulty in recognizing their existence, when they have been satisfied or excused, and the practical effects of failing to meet them. This affects the practitioner's role as counselor, contract drafter, and advocate. As counselor and contract drafter, the practitioner can do several things to aid the client in this area.

b. Using Language That Clearly States What Is and What Is Not a Condition Precedent. The practitioner can help the client select language that eliminates any ambiguity about whether a condition precedent exists. The importance of stating clearly in a contract the existence or nonexistence of a condition precedent can be illustrated by comparing three examples.

The first example is section 2.2.1 of the AIA General Conditions for use in construction contracts. That section unequivocally requires the owner, on request, to furnish evidence of its ability to pay the contractor prior to beginning work on the construction project concerned by stating, "Prior to commencement of the Work and upon written request by the Contractor, the Owner shall furnish to the Contractor reasonable evidence that the Owner has made financial arrangements to fulfill the Owner's obligations under the Contract. The Contractor shall have no obligation to commence the Work until the Owner provides such evidence. If commencement of the Work is delayed under this Section 2.2.1, the Contract Time shall extended appropriately." ²³ By expressly using the words "[p]rior to commencement of the Work" in the provision, the practitioner eliminates the potential for a later dispute about the condition's existence.

Compare that example with the following: A general contractor and a subcontractor include a clause in their subcontract that says the subcontractor is to be paid when the general contractor is paid by the

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owner. This is known as a "pay-when-paid" clause. Unfortunately, this type of clause does not necessarily make payment to the general contractor a condition precedent to payment to the subcontractor. ²⁴ In this example, clearly stating that payment to the general contractor was a condition precedent to its payment to the subcontractor, could help avoid expensive litigation.

Finally, consider a third example. In a particular industry, custom and usage may supply a condition precedent in the absence of its being written. ²⁵ In more rural areas where municipal sewer lines are not available, there may be a custom requiring that a building lot pass a percolation test to ensure that it will support a septic system approved by local health authorities. Passing the percolation test may be recognized generally as a condition precedent to a contract to sell a particular lot. To overcome this presumption, the contract should expressly state that passage of the percolation test is not a condition precedent to the sale. In other words, there are times when a practitioner may want to specify that certain circumstances are not conditions precedent, particularly circumstances raised by others in the past as conditions precedent. By doing so, the practitioner helps to avoid later attempts by a nonperforming party...