DEFINITION of Condition Precedent
A condition precedent is a legal term describing a condition or event that must come to pass before a specific contract is considered in effect or any obligations are expected of either party.
There may also be condition precedents in the ongoing life of a contract, which simply state that if condition X occurs, event Y will then occur. Condition X is the condition precedent.
BREAKING DOWN Condition Precedent
For example, in real estate, a mortgage contract will have a condition precedent that an inspection to assess the condition and value of the property must occur. That assessment must be agreed to by both the buyer and the lender before the mortgage contract takes effect.
Condition precedents are also quite common in wills and trusts, where the transfer of money or property only occurs after certain stipulations are met, such as an heir being married or reaching a certain age.
How Condition Precedent Applies to Individual and Business Contracts
Complex stipulations may constitute the condition precedents for an estate or contract. For example, the assets of an estate might be held in trust with specific disbursements only granted to the recipients at specific milestones. This can include graduating from different levels of schooling, having children of their own, or buying a home.
Business contracts can feature numerous condition precedents that dictate the handling of different activities. The contract might include a clause that requires the parties to seek arbitration in case of any disputes before litigation can be sought in court. Hiring contracts can include condition precedents that establish guidelines for compensation and relief for the new hire. This may especially be the case for upper management and senior executives. A chief executive’s contract might include condition precedents for earning annual bonuses and salary increases. The CEO might only receive bonuses if the company achieves revenue or profit targets outlined in the contract.
Retirement terms can also include condition precedents. Pensions typically are paid only after an employee has completed a certain number of years of work in good standing at a company. If an employee is fired from their position prior to reaching the designated date, they risk losing some if not all of their retirement benefits.
Merger and acquisition deals may include condition precedents that govern the payout terms. A company that is acquired to operate as a subsidiary might need to produce results on a new product or generate a certain degree of sales within a set timeframe. Once those conditions are met, the next installment of the acquisition payments will be made.