Suspensive Conditions: Small Clauses With Major Consequences

Agreements often make implementation dependent on something happening first. A purchaser may need to obtain finance, a board or shareholder may need to approve the transaction, or a third party may need to provide written consent.

These provisions are generally described as suspensive conditions (and are also often called conditions precedent). They can determine whether a transaction proceeds at all. Careful drafting and a proper understanding of their effect are therefore essential.

What is a suspensive condition?

A true suspensive condition makes the operation of all or part of an agreement dependent upon the occurrence of a future uncertain event. Until that event occurs, the obligations that depend upon it are suspended. If the condition is fulfilled in the manner and within the period required by the agreement, those obligations become operative.

A familiar example is an agreement for the sale of immovable property made subject to the purchaser obtaining mortgage finance by a specified date. The parties have entered into a contractual relationship, but the obligations dependent on the finance condition remain suspended until it is fulfilled or, where permissible, waived.

The expressions “suspensive condition” and “condition precedent” are frequently used interchangeably in South African law. In this article, “suspensive condition” is used for both. The word “condition” is also used more broadly in contracts to describe an important or material contractual term. A material term is not necessarily a true suspensive condition: a term ordinarily imposes an obligation capable of performance and breach, whereas a true condition makes the operation of the contract, or part of it, dependent upon an uncertain event.

The correct classification therefore depends on the substance and effect of the clause, not simply on whether the drafter has labelled it a “condition”, “condition precedent” or “suspensive condition”.

What is a resolutive condition?

A resolutive condition operates in the opposite direction. The agreement, or the relevant obligations, operates immediately but comes to an end if a specified future uncertain event occurs.

For example, a lease might provide that it takes effect immediately but will terminate if a specified operating licence is finally refused. The tenant may occupy and trade while the application is pending; if the licence is refused, the resolutive condition is triggered, and the lease terminates in accordance with its terms.

Under a suspensive condition, performance is held back pending the event whereas under a resolutive condition, the agreement operates until the event occurs.

Why are suspensive conditions important?

Their function is best illustrated by a practical example. Assume that shares in a company operating a franchised business are sold to a third party, but the franchise agreement requires the franchisor’s prior written consent to a change of control.

If the share sale simply requires transfer on a fixed date, without making the franchisor’s consent a suspensive condition, implementation could place the company in breach of the franchise agreement or materially undermine the value of the business being acquired.

If the consent is made a suspensive condition, the parties can conclude the agreement while making implementation dependent on that consent. If consent is obtained, the transaction proceeds. If it is refused and the condition cannot be waived, the transaction does not proceed.

Suspensive conditions therefore allocate risk by allowing parties to commit to a transaction without requiring implementation before essential legal, regulatory, financial or commercial prerequisites have been satisfied.

Common examples

The appropriate conditions will depend on the transaction. Common examples include:

• a purchaser obtaining finance or a mortgage bond;

• board or shareholder approval of a transaction;

• regulatory, competition or governmental approval;

• consent from a franchisor, landlord, lender, supplier or other contracting party where a transaction or change of control requires consent;

• compliance with rights of first refusal or pre-emptive rights;

• completion of a due diligence investigation;

• the incorporation of a company and, where relevant, the adoption or ratification of a pre-incorporation arrangement;

• completion of another interdependent transaction; and

• the passing of resolutions and satisfaction of statutory requirements under the Companies Act 71 of 2008.

Statutory approvals or corporate resolutions may also be genuine prerequisites to implementation. Where the law requires a particular approval or resolution before a transaction may be implemented, the agreement should identify that requirement clearly and deal expressly with the consequences if it is not obtained.

What happens while the condition is outstanding?

It is sometimes said that there is “no contract” until a suspensive condition is fulfilled. That is too simplistic. In Mia v Verimark Holdings (Pty) Ltd, the Supreme Court of Appeal described the conclusion of a contract subject to a suspensive condition as creating a “very real and definite contractual relationship” between the parties, while the exigible content dependent on the condition remains suspended. The formulation has also been applied in later cases.

This matters in practice. Provisions intended to operate from signature may already bind the parties, such as confidentiality obligations, duties to cooperate in procuring fulfilment, dispute-resolution provisions, and the provisions governing the condition itself.

A well-drafted agreement should therefore identify which provisions apply immediately and which obligations become operative only once the condition has been fulfilled or validly waived.

What happens if the condition is fulfilled?

If a suspensive condition is fulfilled within the stipulated period, the suspended obligations become operative in accordance with the agreement. In Africast (Pty) Ltd v Pangbourne Properties Ltd, the Court explained that a contract containing a suspensive condition is enforceable upon conclusion although some obligations are postponed pending fulfilment. Once fulfilled, the contract and mutual rights are treated as operating with the legal effect attributed to fulfilment. Remo Ventures Pty Ltd v Cecile Van Zyl and Others later restated these principles.

For drafting purposes, it is often useful to define an “Effective Date” by reference to the date on which the last suspensive condition is fulfilled or validly waived. Payment periods, closing obligations and other implementation timelines can then run from a clearly identifiable date rather than from signature.

What happens if the condition is not fulfilled?

If a suspensive condition is not fulfilled within the stipulated period, and is neither validly waived nor extended in time, the obligations dependent upon it fall away. If the condition suspends the whole transaction, the agreement ordinarily lapses in accordance with its terms and the applicable law.

Africast illustrates the importance of the deadline: the agreement lapsed because the stipulated condition was not fulfilled timeously. More recently, in Maria Luisa Palma Codevilla v Kennedy-Smith NO, the Court confirmed that once an agreement has lapsed for non-fulfilment of a suspensive condition there is nothing left to “revive”. A later waiver or purported extension cannot resurrect the lapsed agreement. If the parties still wish to transact, they must conclude a new agreement, which may of course adopt the same commercial terms but must deal afresh with the failed condition and comply with any applicable formalities.

A deadline for fulfilment is therefore not merely administrative. If the parties need more time, any extension should be agreed before the deadline expires and in the manner required by the agreement.

The agreement should also regulate what happens to deposits, documents, possession, confidential information and any performance already rendered, and identify the provisions intended to survive a lapse.

Fictional fulfilment: a party cannot necessarily engineer failure

A party may not always be entitled to rely on non-fulfilment where it deliberately caused the condition to fail. South African law recognises the doctrine of fictional fulfilment.

Broadly, where the party against whom the condition operates deliberately prevents its fulfilment with the required intention of frustrating the obligation, the law may in appropriate circumstances treat the condition as fulfilled against that party.

The doctrine is not automatic. Intention and causation must be established, and fictional fulfilment may be inappropriate where the outcome depends on an independent public or third-party discretion.

For example, suppose a sale is subject to municipal approval of a land-use application, and the seller is obliged to take reasonable steps to pursue it. A deliberate failure by the seller to submit documents within its control may raise questions about prevention of fulfilment, but the court cannot simply deem the municipality’s independent approval to have been granted where the statutory decision requires the municipality to consider the public interest and third-party rights. Hanuscke v Kungwini Local Municipality illustrates this distinction: the outstanding conditions depended on a public process involving interests beyond the contracting parties, and there was no room on those facts for fictional fulfilment.

When may a suspensive condition be waived?

The starting point is to determine for whose benefit the condition was inserted.

If a condition is inserted exclusively for the benefit of one party, that party may generally waive it, provided the condition is legally capable of waiver and the agreement does not provide otherwise. A common example is a finance condition inserted solely for the purchaser’s protection: a purchaser who can fund the purchase independently may, in principle, elect not to insist on the specified finance.

If the condition benefits both parties, one party cannot ordinarily dispense with it unilaterally. Nor can a mandatory statutory requirement, or a consent that the law or a third-party contract actually requires, simply be wished away by describing it as waived.

Timing is critical. A waiver must ordinarily occur before the deadline for fulfilment. Once the agreement has lapsed, there is no subsisting agreement or right to waive. If the parties still wish to proceed, a new agreement is required. Even if the agreement is silent on waiver, a condition inserted solely for one party’s benefit may in principle be waivable. The safer course is to state expressly which conditions may be waived, by whom, by when and in what form.

How should suspensive conditions be drafted?

A good suspensive-condition clause should do more than say that an agreement is “subject to” something happening. It should address the mechanics of the condition with precision.

In particular, the agreement should identify:

• the event or approval required for fulfilment;

• whether the condition suspends the whole agreement or only specified obligations;

• the party responsible for taking the necessary steps;

• whether that party must use reasonable endeavours, best endeavours or some other defined standard;

• the deadline for fulfilment;

• what evidence will demonstrate fulfilment;

• for whose benefit the condition is inserted;

• whether the condition may be waived and, if so, by whom;

• the form and deadline for any waiver;

• how and when the fulfilment date may be extended;

• the consequences of non-fulfilment; and

• which provisions remain binding while the condition is pending and after lapse.

The event should also be stated objectively wherever possible. Expressions such as “subject to satisfactory arrangements” or “subject to approval” can create disputes if the agreement does not identify whose satisfaction or approval is required, the standard to be applied, and the time within which the decision must be made.

The practical lesson

Suspensive conditions are often short clauses with consequences far greater than their length suggests. Poor drafting can leave parties uncertain about whether an agreement is operative, whether an approval was obtained in time, whether a condition can be waived and whether the transaction has lapsed.

The safest approach is to identify genuine prerequisites to implementation at the drafting stage and regulate fulfilment, waiver, extension, non-fulfilment and survival expressly. The important question is not the label attached to the clause, but what it actually does and what the parties intend to happen if the uncertain event does, or does not, occur.

This article is intended as general information on South African contract law and does not constitute legal advice. The legal effect of any condition depends on the wording, context and applicable statutory framework of the particular agreement.

Fraser Stockley

BCom Law; LLB

Partner at Le Roux Vivier Attorneys

Disclaimer: The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the firm. This content is provided for general information only and does not constitute legal advice. While every effort is made to ensure accuracy, the law may change and its application depends on the specific facts of each matter. Readers should seek professional legal advice before acting on any information contained herein. The firm and the author(s) accept no liability for any loss or damage arising from reliance on this content.