Contracts Subject to Suspensive Conditions
In commercial transactions, it is common for contracts to include a clause stating that the agreement is “subject to board approval” or similar wording. This clause renders the entire agreement suspensive, meaning it does not come into full legal force and effect unless and until the specified condition is fulfilled.
From a legal perspective, this clause constitutes a suspensive condition in terms of the law of contract. The effect of such a clause is as follows:
- No binding agreement arises between the parties until the suspensive condition is met;
- If the relevant board (of directors, trustees, or members) fails or refuses to grant approval within the agreed timeframe, the agreement automatically lapses and no cancellation or repudiation is required;
- If no timeframe is stipulated, approval must be granted within a reasonable period, failing which the agreement becomes void for non-fulfilment of the suspensive condition.
Importantly, performance by either party prior to fulfilment of the suspensive condition is done at their own risk. For example, if payment is made or possession is taken prior to the condition being met and the board subsequently refuses approval, the parties may find themselves in a legally uncertain position.
To mitigate these risks, parties should:
- Clearly define the nature of the approval required;
- Include a specific deadline for the condition to be fulfilled;
- Ensure that any interim performance, such as payment of deposits or delivery of certain documentation or certain actions, is made conditional and reversible.
The Supreme Court of Appeal has consistently held that where a contract is subject to a true suspensive condition, it is not enforceable until that condition is fulfilled. Any conduct inconsistent with that principle could give rise to disputes or unintended legal obligations.
Careful drafting and a clear understanding of the legal nature of suspensive conditions are essential in all commercial agreements, particularly where multiple stakeholders are involved in the approval process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
