Conditional Contracts – Applying the Letter of the Law
SHARE
Conditional Contracts – Applying the Letter of the Law
Where the completion of a sale contract is conditional upon the satisfaction of a condition(s), the framing of those conditions in clear and unambiguous language is very important. Of equal importance, is having an understanding of how those conditions will be interpreted, if they come before a court.
In Rentokil Initial 1927 Plc v Goodman Derrick LLP the court was asked to determine a dispute arising from a contract conditional upon the grant of planning permission. As is usual, a number of matters were specified in the contract which would be treated as being unreasonable (such that the buyer would not be subject to an obligation to complete the purchase) if incorporated within any planning permission. One of the matters stipulated was that any planning permission granted must not be limited to a set period of time. The planning consent which was obtained provided (as would be expected) that it must be implemented within three years from the date of grant. Applying a strict interpretation of the terms of the sale contract, the buyer claimed that the planning permission was subject to an unacceptable condition and that it was therefore not obliged to complete the purchase.
The court decided that the sale contract needed to be construed in the context of an objective assessment of the reasonableness of the planning consent (and any conditions within it). The wording within the contract therefore needed to be interpreted so as to allow matters to be treated as “unacceptable” only if they were unusual or unexpected and might realistically prevent the redevelopment proposed from proceeding.
Thankfully, common sense prevailed and, given the normal practice of planning permissions being subject to a requirement that they must be implemented within a three year period, the imposition of that condition was not considered to be something which could or should be treated as an unacceptable condition entitling the buyer to withdraw from the transaction.
The process of negotiating a conditional contract is often complex. Any framework within the contract needs to be workable from the standpoint of both parties. That will entail a degree of compromise when framing conditions precedent. The Rentokil case makes it clear that the more detail which can be specified, when setting out conditions, the less likelihood there is of a dispute arising about the interpretation of the contract. The case also emphasises that a judgment will often have to be made by one or both parties as to whether a condition has been satisfied. Where that satisfaction is determined by reference to the opinion of one of the parties, that opinion must be framed by the view which would have been reached by a reasonably minded person placed in that situation (as highlighted in our recent blog).
Applying the reasoning in Abu Dhabi National Tanker Co v Product Star Shipping Ltd (a case concerning the charter of a ship in which the owners had an unqualified discretion to determine whether any port to which a vessel was directed was dangerous and in which the High Court concluded “the discretion must be exercised honestly and in good faith but having regard to the provisions of the contract by which it is conferred it must not be exercised arbitrarily, capriciously or unreasonably”.
If you wish to discuss any of the issues raised in this blog, please contact Mark Withers at: mark.withers@parissmith.co.uk