28 April 2021 by and Corporate & Commercial Alert

The nuance and pitfalls associated with conditions precedent

It is routine for agreements to contain conditions precedent (CPs) that suspend the validity and enforceability of certain provisions pending the occurrence of future uncertain events. If the future uncertain events do not occur, the provisions in question never come into operation.

Typically, CPs will only suspend the legal effect of key commercial provisions of an agreement while the balance of the agreement will remain in full force and effect from the signature date.

The Supreme Court of Appeal (SCA) provided further insight as to the interpretation and application of CPs in the recent judgment of Chester v Snowy Owl Properties and Another [2021] ZASCA 30 (Chester Case).

The Chester Case concerned an appeal in relation to an agreement for the sale of immovable property (Sale Agreement) under which the appellant sought, among other things, an order compelling the transfer of immovable property.

In the court a quo, the first respondent asserted that clause 22.1 of the Sale Agreement, which contains the words “[t]he whole of this agreement is subject to the following conditions precedent being met prior to the transfer date…”, constituted a CP that became impossible to fulfil and consequently the Sale Agreement was void, thereby releasing the first respondent from all concomitant obligations.

The appellant, advancing circumstantial evidence, opposed the first respondent’s assertion but nonetheless pleaded in the alternative that if clause 22.1 of the Sale Agreement did constitute a CP, then the same was either:

  • for the sole benefit of the appellant and was thus capable of waiver by them; or
  • deemed to be fulfilled in accordance with the doctrine of functional fulfilment.

The SCA concurred with the court a quo in finding that on a straightforward interpretation of clause 22.1 of the Sale Agreement (read in context) the logical conclusion was that, absent fulfilment, there could be no valid and enforceable Sale Agreement.

The SCA held that to interpret the words that the Sale Agreement was “subject to” the CPs other than as contemplated by the parties, would give the clause a construction which was not commercially sensible.

To most, the conclusion reached by the SCA in the Chester Case is an obvious one.  This being said, the judgment (against the background of the protracted and, presumably, expensive legal battle) acts as a necessary reminder about the nuance and potential pitfalls associated with CPs.

The SCA alluded to ubiquitous factors that should be considered when concluding an agreement subject to CPs, namely:

  • an agreement should clearly state in whose favour CPs exist so as to create certainty about which party has the right to extend or waive the fulfilment thereof;
  • the doctrine of fictional fulfilment is only enlivened when a party to an agreement, with the deliberate intention to repudiate, conducts themselves in a manner designed to prevent the fulfilment of a CP. Only in such circumstances will the doctrine provide the innocent party with an equitable remedy, whereby the CP is deemed to be fulfilled and the other person (who prevented its fulfilment) is bound by the relevant obligations;
  • the common law parole evidence rule continues to exist as a part of our law. If parties intend for a document to constitute the complete record of an agreement between the parties, then (generally) extrinsic evidence should not be permitted to rebut the same; and
  • caveat subscriptor (the rule that a signatory to a document signifies their assent to the content thereof) applies as a general principle in our law and a party who alleges a position contrary to the ordinary meaning and effect of the content of a document that they have signed, bears the onus of proving the same.

The Chester Case demonstrates that courts are inclined to adopt a sceptical view about circumstantial evidence advanced to contradict the literal interpretation of agreed and documented contractual provisions.

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