What Exactly are Constructive Conditions and How Do They Work
A constructive condition is a type of obligation within a contractual agreement. Such conditions are not expressly outlined within a contract but are so essential to the contract’s integrity that they must be implied by law. This means that without the constructive condition, the contract would be impossible or extremely irrational to perform. These conditions, while they must be implied into a contract, are nearly always easily understandable for the simple reason that if they weren’t, they are not true constructive conditions and therefore do not meet the standards outlined previously .
A simple example of a constructive condition is the requirement in a closing on a house that the seller vacate the house. While it would be analytically possible to enter into a contract without such an express clause, it would be intuitively unreasonable to close on a house you are not permitted to occupy. As such, the condition that you must vacate your home before closing is a constructive condition.
Legal Foundation of Constructive Conditions
The legal basis for constructive conditions is found primarily in the common law of contractual conditions, which has been governed by a series of key statutes and case law over the centuries.
With the exception of specific remedial provisions, such as those found in the Law Reform (Miscellaneous Provisions) Act 1934, the development of the principles of the common law has been based upon judges’ rulings and decisions in specific cases. Thus, the most significant points of reference are the key cases as applied in subsequent cases, and the relevant sections of the Law of Property Act 1937, the Sale of Goods Act 1979, the Sale of Goods (Amendment) Act 1994 and the Sale of Goods and Services Act 1982.
The construction of constructive conditions and their interpretation have changed over time, and until the 1960s it was firmly established in this country that there can be no condition precedent where the performance of one obligation would cause the other or others to be incapable of performance. This has now been changed by the House of Lords.
The judgment in Stevenson v Rogers, which was handed down on 19 July 1999, has now repaired the relationship between conditions and obligations. Lord Hoffmann, whose approach to the matter was approved by Lords Goff, Steyn, Clyde and Hobhouse, said in his speech that:
"Where, however, the performance of one of the simultaneous obligations involves the supply of goods, the use of the term ‘condition’ as a synonym for ‘warranting’ makes sense. A supplier is prepared to guarantee the quality or fitness for purpose of goods in order that he may obtain the buyer’s promise to pay the price in return. If at the same time the buyer is allowed to reserve a right to change his mind because of a lack of conformity between the goods and its warranty, the buyer is granted an undue advantage over the supplier. That is why such a warranting obligation is described as a condition precedent."
These principles are supported by the relevant sections of the Sale of Goods Act 1979.
Constructive Conditions Take Four Forms
There are two legal types of "constructive conditions" in contract law—conditions precedent and conditions subsequent.
A condition precedent is a condition that must be satisfied before there is a duty or obligation to perform under a contract. If the condition is not met, the duty to perform is excused. For example, if an insurance policy or governmental approval is required before a policyholder can bring a claim or before a party can close on an agreement, absolute liability is not triggered until the condition occurs. Thus, for example, a breach of contract claim cannot be sustained where a settlement agreement requires court approval and the parties fail to secure such approval cause the parties may not have had a duty to perform the settlement agreement some 20 months after the signing of the agreement when no court approval was still secured.
A condition precedent can be expressed, which means unwritten but unambiguously indicated on the face of the agreement (e.g., "this agreement will become effective upon the execution or satisfaction of the conditions precedent"); or implied by law, such as the absence of fraud, duress, or undue influence. An example of an implied condition precedent is a provision that provides that an artist or writer will be paid a royalty, but only "as soon as practicable" after her work is commercially exploited. In such case, the creator is obligated to mitigate her damages if such payment is unreasonably delayed and is penalized if it is determined that the creator has sufficient market sway to delay or block commercial exploitation of her work.
A condition subsequent does not create a duty to perform. Rather, this type of condition gives a party a right to discontinue performance. For example, an employment contract may provide that an employee need not perform his duties in the event of a reorganization. In such case, the employee is not under an obligation to continue working if the company is reorganizing. The company, on the other hand, does have the right to terminate the employee without breaching the contract.
Since a condition subsequent does not create a contractual obligation to perform, it actually acts to exclude performance or to excuse nonperformance. For example, a tenant may have a lease with the condition that its lease obligation will terminate if the building is sold; if sold, then the tenant is relieved of all future obligations even before the lease has expired. Thus, if the owner sells the building six months into a one-year lease, the tenant is not liable for the remaining six months. Likewise, if a lease contains a condition that the tenant shall pay in full at the end of each quarter, if not then the lease is terminated. The landlord must give notice to the tenant to demand payment.
How To Apply Constructive Conditions To Fixturing Obligations
A constructive condition is a term in a contract that the performance of one party to the agreement either: 1) cannot be due until the other party to the agreement has performed a contractual duty; or 2) is conditioned upon the reasonable performance of a duty of an other party to the agreement. A constructive condition may also be that the performance of an act is due only upon the occurrence of some act by the other party to the contract, which act has been demanded.
Unlike a condition precedent, which amounts to a condition precedent to the very existence of the parties’ obligation(s) under a contract, a constructive condition is not a condition precedent to the existence of the parties’ contractual obligations. Rather, a constructive condition exists when an express condition is implied in a covenant or agreement by operation of law, the violation of which will result in a breach of the other covenant or agreement.
Constructive conditions are significant for two reasons related to the performance obligation of the parties to a contract. First, constructive conditions affect the time for the performance of a contractual obligation. For example, if the performance of one party to an agreement is a constructive condition precedent to the performance of another party, that is, the performance of one of the parties cannot be due until the other has performed a contractual duty, then the failure of that other party to perform will excuse the performance of the party whose performance is dependent on the other. Second, because a constructive condition is a term in an agreement that the performance of one party to the agreement is a constructive condition precedent to the performance of another party, a party whose performance is dependent on the other must plead and prove the performance of the other party in order to receive specific performance under the agreement.
A party to an agreement has a defense to the non-performance of its duties under the contract if the other party is in default of its duties under the contract. However, generally, a party’s performance is not excused if it is only minor, inconsequential or immaterial.
Common Examples of Constructive Conditions
Common scenarios involving constructive conditions include:
Payment for services rendered: Contracts for the performance of services often contain a requirement that payment shall be made only after completion or partial completion of the work.
Allocation of contract price: When the price of contract is broken into smaller increments, without an express right of retention for non-payment of all the installments, buyers often seek to withhold small portions of the price until the final installment has been paid, thereby relying on the doctrine of retention in order to obtain compliance.
Release of guarantee: In construction contracts, the contractor sometimes deposits the performance bond in order to save expense and time spent with issuance by a bank. When the client seeks to recover the bond prior to completion of all construction work, it relies upon the subarticle concerning contributive release .
Performance by a third party: The courts have held that the performance of the contract by a third party constitutes a condition precedent to the obligation of the parties. Thus, if the performance is not rendered, the parties are freed of their duties.
Non-performance due to third party: The defendant has a defense against fulfillment of the obligation when the non-performance occurred due to the act of a third party that was involuntary and unforeseeable. This doctrine does not apply to voluntary acts of a third party who is an employee or other party with whom the obligor had direct relations.
Unexpected loss, destruction or deterioration of work: The obligation to deliver or transfer the property is excused when the property is destroyed or lost beyond the control of the obligor.
Disputes and Consequences of Constructive Conditions
Constructive conditions often give rise to contentious and wasteful disputes or even administrative proceedings that stem from perceived infringements. They are also known to slow down the performance of contracts and adversely affect the furthering of commercial transactions. Despite their pervasiveness, courts have rarely had to deal with constructive conditions per se. These have generally been characterized as a unique set of facts which call for an appropriate solution. A few basic principles, however, can be culled from case law.
Contrary to what has been stated in earlier cases such as Continental Gummi, a party cannot be held to an uncertain condition. That is, the uncertainty of a condition is not necessarily the case to be made out in order to terminate a contract on the basis of non-performance due to an indeterminate impossibility. In Oil Investments, a court held that the condition in question should be deconstructed into more particular components and effects to assess whether aspects of it were certain and capable of performance.
Courts have frequently found that new conditions can be added to contracts if they do not prejudice the basic object in question. Examples of this include the circumstances which called for a public health inspection certificate in Stockholm (1973) 1 All SA 237 (A); the need for building materials to obtain the endorsement of a consulting engineer in Hudig 1992 (4) SA (A) 774; and the need for a notarially executed contract where one was originally contemplated. Courts have thus been willing to allow parties to extend and add to their arrangements through the creation and imposition of constructive conditions or obligations.
Constructive conditions are: either implied conditions in terms of the general law requirement of reasonableness and proportionality; discretions that derive from the contract itself or its tenor; or situations where a party has declined to attend by choice because the relevant minister in question was unavailable to consider an application by that party for a certain permit. In cases of mining rights, for example, there is no need for the involvement of the minister immediately, but while the right is still purely personal and not yet transferable, the same standard of availability will apply. Courts will not allow an unreasonable delay to arise and certainly will not encourage it. Factors to be considered thus include the lapse of a reasonable period and availability of alternative forums, worlds and players. An interpreting outside party might well step in at some stage to make an objection and to initiate legal proceedings in the absence of the aggrieved party.
In general, the question of whether or not constructive conditions are present and the determination thereof in concrete scenarios will thus hinge on whether or not an extension, an addition or a limit is permissible, and whether the circumstances involved reflect, or favour, the counterpart’s intention (with regard to the perception of the transaction, contract, application or deal in question).
Guidelines for Drafting Constructive Conditions
In general, the clearer the condition, the better. In particular, avoid negatives, conditional clauses, or vague statements. For example, a sentence that reads "when he finds an acceptable price" might be intended as a condition (i.e., "if and when"). In such a case, there’s also a concern that a recipient may take it literally and believe it imposes a minimum price. The solution is to say "if at an acceptable price," or "provided at an acceptable price." Also avoid requirements for an undefined minimum time or quantity, such as "for some time" or "in reasonable quantities." The problems with such statements are numerous.
For example, if the buyer is to be under no obligation to buy before some point in future, does this make the seller nervous? Does this mean that if sales to date are consistent with the forecast, does the buyer have to be under no obligation to buy more than planned sales going forward? It’s entirely reasonable for the seller to want to make some minimal commitment for that timeline. If so, the words "at its sole discretion" should be used to clarify that the seller is free to decide for itself what to buy and sell.
The next stage in evolution is to include a clear but limited right to amend the condition. For example, "the timing of a loan will be adjusted based on market interest rates," or "the price shall be based on 13% of the initial market price for XYZ."
Finally, additionally consider the use of a judicial remedy in the event of a dispute (see the provisions concerning remedies) to further manage the risk. Any of the three clauses or combinations thereof might be useful, depending on the particulars of the situation.
Key Takeaways and Concluding Perspectives
Constructive conditions are often the most challenging to identify, prove, and defend. Because an aggrieved contractor continues to perform work despite resistance from the owner, the amount of work performed, the reason for continuing, and the evidence supporting those reasons are all important considerations in actions involving constructive conditions. The most effective way to deal with constructive conditions is to avoid them altogether. Having a clear written contract and maintaining an open, cooperative relationship with the owner are the best tools for avoiding constructive conditions.
If avoidance is not an option and constructive conditions do arise, notification is half the battle. A contractor is much better off establishing a record that problems with the work led to declines in productivity. Delay claims under close oversight by an owner and inclusion of unexpected costs from a contractor’s declining productivity often have a much lower recovery potential than delay claims that involve potential business impacts . Requiring notification creates a record that notifies the owner of the impact to production and hopefully preserves the claim.
Proper production monitoring requires a clear allocation of work and effective data collection from the field. Recording information related to quantity of work and labor productivity, as well as the reasons for declining productivity, not only helps to create a record for potential claims, but also helps to identify potential problems early in the project, improving the contractor’s chance of addressing issues before they grow out of control.
The lesson related to scheduling seems ironic: stop looking at your schedule. The best schedule in the world is worthless if it is not being reviewed regularly. "Up to date" and "accurate" are not the same thing. These are two different questions. You must track the actual performance on the project to accurately identify problem areas. Once you have those, you can more accurately look at the schedule and assess the impact to the project.
As painful as it can be, documenting your schedule progress is critical to accurately identifying work problems that will lead to claims.