16.1 Conditions & Excuse of Conditions

16.1 Conditions & Excuse of Conditions

A contract duty is either unconditional or subject to a condition. When a duty is conditional, the obligor need not perform until the condition occurs or is excused. On the MBE, the two recurring tasks are deciding whether contract language creates a condition at all and, if it does, whether its nonoccurrence is excused.

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1. Conditions: Nature, Classification & Operation

A condition is an event, not certain to occur, that must occur (unless excused) before performance under a contract becomes due, or that terminates an existing duty of performance (Restatement (Second) of Contracts § 224).

                         ┌─────────────────────────────┐
                         │   IS THERE A CONDITION?     │
                         └──────────────┬──────────────┘
                                        │
                ┌───────────────────────┴───────────────────────┐
                ▼                                               ▼
      ┌──────────────────┐                            ┌──────────────────┐
      │ Express Condition│                            │Constructive Cond.│
      ├──────────────────┤                            ├──────────────────┤
      │ Explicit words   │                            │ Implied by law   │
      │ ('if', 'on cond')│                            │ Order of duties  │
      │ STRICT compliance│                            │ SUBSTANTIAL perf │
      └────────┬─────────┘                            └────────┬─────────┘
               │                                               │
               ▼                                               ▼
      ┌──────────────────┐                            ┌──────────────────┐
      │Failure: Excuses  │                            │Failure: Minor vs │
      │counter-duty; not │                            │Material Breach   │
      │breach unless promised                         │analysis applies  │
      └──────────────────┘                            └──────────────────┘

A. Express Conditions vs. Constructive (Implied) Conditions

1. Express Conditions: Created by the explicit agreement of the parties using unmistakable conditional phrasing: "on condition that," "provided that," "if," "subject to," "contingent upon," or "only if."

   • Standard of Compliance: Express conditions require strict, literal compliance. Substantial performance is legally insufficient to satisfy an express condition.
   • Legal Effect of Failure: If an express condition fails to occur, the other party's dependent duty of counter-performance is completely excused.
   • Condition vs. Promise: Failure of a pure condition is not a breach of contract; it merely excuses performance. However, if a party promises that the condition will occur (a promissory condition), non-occurrence both excuses counter-performance AND subjects the promisor to breach of contract damages.

2. Constructive (Implied-in-Law) Conditions: Implied by courts in the interest of justice to determine the sequence and dependence of mutual performances where the contract is silent.

   • Standard of Compliance: Constructive conditions are satisfied by substantial performance. Strict literal compliance is not required.
   • Order of Performance:
     • Where one party's performance requires a period of time and the other does not (e.g., building a house versus paying money), the performance taking time must be completed first as a constructive condition precedent to the payment.
     • Where performances can be rendered simultaneously (e.g., deed for cash at a real estate closing), the performances are constructive conditions concurrent: each party must tender performance to put the other in default.

B. Temporal Classification of Conditions

• Condition Precedent: An event that must occur before a party's duty to perform arises. The plaintiff bears the burden of pleading and proving the occurrence of a condition precedent.
  • Example: Buyer agrees to purchase a home "provided buyer secures a 30-year fixed mortgage at 6.5% or lower within 30 days." Securing financing is a condition precedent to Buyer's duty to purchase.
• Condition Concurrent: Events that are mutually dependent and must occur simultaneously.
  • Example: Standard cash-on-delivery (C.O.D.) sales of goods: delivery and payment are concurrent conditions.
• Condition Subsequent: An event that extinguishes or cuts off an already existing absolute duty of performance. The defendant bears the burden of pleading and proving a condition subsequent.
  • Example: An insurance policy provides: "The insurer has a duty to pay valid casualty claims, but that duty terminates if the insured fails to file suit within one year of the loss." Filing suit within one year is a condition subsequent that cuts off the insurer's accrued duty.

C. Satisfaction Conditions

Contracts frequently condition an obligor's payment duty on satisfaction with the other party's performance:

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2. Excuses for the Non-Occurrence of Conditions

Where an express condition fails to occur, the obligor's duty is discharged unless the non-occurrence of the condition is legally excused under one of the doctrines below or the additional excuses described after them:

                      ┌────────────────────────────────────────┐
                      │     EXCUSES FOR NON-OCCURRENCE         │
                      └───────────────────┬────────────────────┘
                                          │
     ┌───────────────────┬────────────────┴───────────────────┬───────────────────┐
     ▼                   ▼                                    ▼                   ▼
┌──────────────┐  ┌──────────────┐                     ┌──────────────┐    ┌──────────────┐
│ Wrongful     │  │   Waiver &   │                     │  Promissory  │    │Disproportion-│
│ Prevention   │  │ Retraction   │                     │   Estoppel   │    │ate Forfeiture│
├──────────────┤  ├──────────────┤                     ├──────────────┤    ├──────────────┤
│Bad faith act │  │Voluntary     │                     │Detrimental   │    │Technical non-│
│prevents cond │  │relinquishment│                     │reliance on   │    │material cond │
│from happening│  │before due    │                     │oral waiver   │    │excused (R.229│
└──────────────┘  └──────────────┘                     └──────────────┘    └──────────────┘

A. Wrongful Prevention / Bad Faith Interference (The Prevention Doctrine)

Under the implied covenant of good faith and fair dealing, a party who wrongfully prevents, hinders, or causes the non-occurrence of a condition cannot take advantage of the failure.

• Rule: If an obligor prevents the condition from occurring through bad faith action or inaction, the condition is judicially eliminated (excused), making the obligor's duty absolute.
• Example: Buyer agrees to buy Seller's commercial building contingent on Buyer obtaining a 7% bank loan. Buyer intentionally fails to submit financial statements to any lending institution. Buyer cannot rely on the financing condition to escape the purchase obligation; the condition is excused.

B. Waiver and Retraction

A party whose duty is subject to a condition may voluntarily choose to perform despite the non-occurrence of the condition.

• Scope of Waiver: A party can only waive a condition that was inserted solely for that party's own protection.
• Waiver of Non-Material Conditions: An obligor may waive a condition before or after its occurrence date. No consideration is required to waive a technical, ancillary condition (e.g., submitting notice of loss within 10 days).
• Retraction of Pre-Performance Waiver: If a party waives a condition before the time for the condition's occurrence arrives, the party may retract the waiver and reinstate the condition, PROVIDED that:
  1. The other party has not materially changed position in reliance on the waiver; AND
  2. Reasonable notification of retraction is given before the deadline for occurrence.

C. Estoppel

If an obligor indicates by words or conduct that they will not insist upon strict occurrence of a condition, and the other party reasonably and detrimentally relies on that statement by failing to fulfill the condition, the obligor is equitably estopped from asserting the non-occurrence of the condition.

D. Disproportionate Forfeiture (Restatement (Second) of Contracts § 229)

To the extent that the non-occurrence of a condition would cause extreme, disproportionate forfeiture, a court of equity may excuse the non-occurrence of the condition unless its occurrence was a material part of the agreed exchange.

• Example: A contractor completes a commercial warehouse 99.8% to specification, but fails to submit an architectural certificate before invoicing because the architect died. Where withholding payment would inflict catastrophic forfeiture for a technical omission, equity will excuse the condition.

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Applying Conditions

Condition or Promise?

• Preference against forfeiture: When it is doubtful whether an event is a condition, courts prefer an interpretation that reduces the risk of forfeiture, unless the event is within the obligee's control or the obligee clearly assumed the risk (Restatement § 227).
• "Pay when paid" clauses: A subcontract stating that the general contractor will pay the subcontractor "within 30 days after receipt of payment from the owner" is often read as fixing a reasonable time for payment, not as making the owner's payment a condition, so the general contractor must pay within a reasonable time even if the owner never pays (Thos. J. Dyer Co. v. Bishop International Engineering Co., 6th Cir. 1962). Many states enforce a clearly drafted "pay if paid" clause that expressly shifts the risk of the owner's nonpayment to the subcontractor.
• Promissory conditions: If a party both promises that an event will occur and makes it a condition, its nonoccurrence both excuses the other party's duty and makes the promisor liable for breach.

Additional Excuses

• Repudiation: If a party's repudiation contributes materially to the nonoccurrence of a condition of its own duty, the nonoccurrence is excused (Restatement § 255). A buyer who announces it will not close cannot rely on the seller's failure to tender a deed.
• Impracticability of a condition: If a nonmaterial condition becomes impracticable—such as a required inspection by an agency that no longer exists—its nonoccurrence is excused when forfeiture would otherwise result (Restatement § 271).
• Waiver after the fact: A promise to perform despite the nonoccurrence of a condition is binding without consideration unless the condition was a material part of the agreed exchange or its uncertainty was a risk the promisor assumed (Restatement § 84).
• Good-faith efforts: When a party's duty depends on an event within its partial control—such as obtaining financing, permits, or regulatory approval—the implied duty of good faith requires reasonable efforts to bring it about. A party who makes no effort cannot rely on the condition's failure.

Constructive Conditions and Tender

• Under Restatement § 237, each party's substantial performance of its duties that are due earlier or at the same time is a constructive condition of the other party's remaining duties.
• When performances are due at the same time, such as a deed and the purchase price at closing, neither party is in breach until the other has tendered its own performance—offered to perform with the present ability to do so.
• When one party's performance takes time and the other's does not, the longer performance must generally come first, which is why builders and employees ordinarily are paid after, not before, they perform (unless the contract provides progress payments).