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A stitch in time...saves nine. Suspensive conditions and the consequences

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A suspensive condition (also known as a condition precedent), suspends the operation of all or some of the obligations flowing from a contract until the occurrence of a future event, generally specified in a contract.  Once the condition is fulfilled the contract is deemed to have been in force from the date agreed between the parties, in the contract.  However, if a suspensive condition is not fulfilled, no binding contract between the parties comes into existence.

Regrettably, suspensive conditions can also be the subject of dispute between parties to a contract:
  • an offer to purchase may be subject to a suspensive condition in that the purchaser must meet certain requirements for example: providing the seller with a pre-arrangement agreement from a financial institution securing the price with a mortgage bond within 30 days of the acceptance of an offer (Phepeng and Another v Estate Combrinck and Others 2017 (4) SA 266 (FB);
  • a sale transaction may be subject to a suspensive condition of security for payment of the purchase price in the form of a bank guarantee (Southern Era Resources Ltd v Farndell No 2010 (4) SA 200 (SCA).
The purpose, and the significance of the proper fulfilment of a suspensive condition was illustrated by the Supreme Court of Appeal (SCA) in Africast Proprietary Limited v Pangbourne Properties Limited (359/13) [2014] ZASCA 33.
In the case of Africast v Pangbourne the SCA had to consider the date on which a contract had been "concluded", and whether the contract had lapsed because of the non-fulfilment of a suspensive condition. 

The parties in this case concluded a contract for the development of commercial property in an area in Gauteng.  The condition was that Pangbourne would give written notice of the approval by its board of directors to Africast, within seven working days of the conclusion of the contract.

The SCA was of the view that the question was dependent on the construction of the provision embodying the suspensive condition.  The suspensive condition clause was drafted as follows:
"This agreement is subject to the suspensive condition (stipulated for the benefit of Pangbourne Company and which may be waived by written notice given by Pangbourne Company to the Seller Company [Africast] on or before the date for fulfilment of this condition) that within 7 days (excluding Saturday, Sundays and public holidays) after the date on which this agreement is concluded (or such other period/s as the parties may agree to in writing from time to time) Pangbourne Company gives Seller Company written notice that its board of directors has approved the purchase of the property by Pangbourne Company in terms of this agreement. This condition is not capable of fictional fulfilment."

The contract was signed on 11 April 2007 and Pangbourne’s board of directors approved the contract on 20 April 2007.  However, the written approval was only provided to Africast on 25 April 2007 which was after the required seven-day period.  Pangbourne then decided after 18 months that since the suspensive condition had not been met within the stipulated period, it was not bound by the contract and refused to deliver the required guarantees.  At that stage buildings had already been constructed by Africast in terms of the contract.  Africast regarded Pangbourne’s decision as a repudiation of the contract: and consequently, cancelled the contract and sued for damages for breach of contract.

The SCA confirmed Pangbourne’s view that since the suspensive condition in the contract had not been fulfilled timeously, no contract had come into existence, even though Africast had performed fully.  It is important to note that the SCA came to this conclusion notwithstanding the fact that both parties had performed in terms of the agreement for some 18 months.

The SCA has thus made it clear that if the parties fail to fulfil suspensive conditions, as agreed in a contract, and the parties still perform under the contract, which the party believes to be binding, that party will be unable to claim specific performance or damages.

It is fair to say that the consequences of not meeting a suspensive condition timeously can be dire to any contractual transaction, not to mention when there are interlinked or inter-conditional transactions (where the lapse of one could lead to the lapse of other transactions). 

The SCA judgement in the Africast v Pangbourne case illustrates the importance of, amongst other things:
  • ensuring that the parties to a contract understand the nature and consequences of suspensive conditions in the contract before agreeing to them;
  • drafting clear provisions in a contract, to avoid disputes around what constitutes fulfilment of suspensive condition;
  • the timeous compliance of suspensive conditions in a contract;
  • having a system in place to manage and ensure the timeous compliance of suspensive conditions in a contract;
  • having proof, by the relevant fulfilment date, that the relevant suspensive condition has been fulfilled; and
  • not implementing the transaction before the parties have agreed that all the suspensive conditions in a contract have been fulfilled.
If an agreement has lapsed, and the parties agree (unlike was the case in Africast v Pangbourne), there are mechanisms available to the parties to have the contract reinstated.  However, preventing the lapse of a contract, through timely effort will prevent more work later.
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