What's a condition precedent?
Eisiminger v. Perspecta Inc. (Fairfax July 21, 2021)
A company buys a stake in another company from a group of sellers. The equity purchase agreement states the buyer and sellers will take a particular tax election. The election will result in a multi-million-dollar tax benefit to the buyer and tax liability to the sellers. The agreement also states that the buyer would pay the sellers an amount equal to the tax liability.
When the buyer does not pay this amount, the sellers bring suit for breach of contract. The buyer moves to have the case thrown out. The buyer points out that the sellers’ lawsuit does not allege that they have actually paid the tax liability. And the buyer argues that the sellers’ payment is a “condition precedent” to the buyer’s duty to pay the sellers. Is it?
Condition precedent is a fancy phrase for a simple idea. Contract terms can be dependent on an event happening. That is, a term can be conditional, taking effect only after the occurrence of a preceding event.
For example, a contract might state “If a dispute arises regarding this agreement, and the dispute is not resolved by mediation within 60 days of a written demand for mediation, then either party may file suit.” This creates a condition precedent for filing suit. Before doing so, a party must make a written demand for mediation (and wait 60 days).
To decide whether a contract term creates a condition precedent, courts examine the contract’s text. No magic words or phrases are required. But words and phrases such as “if . . . then,” “provided that,” “when,” “after,” “as soon as,” and “subject to” traditionally indicate conditions.
Here, the equity purchase agreement stated that the buyer would pay the sellers an amount equal their tax liability. It didn’t state that the buyer would pay this amount provided that the sellers actually paid the tax. It didn’t state the buyer would do so when the sellers did so. It did not state that the buyer would do so after the sellers did so. In sum, it did not create a condition precedent.
To learn more about Virginia contract law concepts, including conditions, check out Virginia Contract Law.