- A condition precedent is an event or circumstance that must occur before a party's obligations under the contract — or in some cases the whole contract — become active.
- - Financing conditions — an obligation to purchase equipment or property that only becomes binding once the buyer secures acceptable financing.
A signed contract feels like a done deal. But many commercial contracts include a clause that says, in effect, "this agreement only actually takes effect once a certain thing happens." That clause is a condition precedent, and understanding how it works — and what happens if the condition never comes to pass — matters just as much as understanding the deal's headline terms.
Conditions precedent show up constantly in ordinary Ontario commercial dealings: a supply agreement conditional on securing financing, a lease conditional on obtaining a permit, a services contract conditional on a third party's consent. Getting the drafting wrong on this one clause can leave a business either locked into a deal it thought was conditional, or unable to enforce a deal it thought was already binding.
This article explains what a condition precedent actually does, how it differs from other contract terms, and what to watch for when negotiating one.
What a Condition Precedent Actually Does
A condition precedent is an event or circumstance that must occur before a party's obligations under the contract — or in some cases the whole contract — become active. Until the condition is met (or waived, if the clause allows that), the relevant obligations simply don't arise.
This is different from an ordinary contractual obligation that both parties are already bound to perform. A condition precedent effectively pauses part or all of the deal until something outside either party's certain control (or sometimes squarely within one party's control) happens.
Common Examples in Ontario Commercial Contracts
- Financing conditions — an obligation to purchase equipment or property that only becomes binding once the buyer secures acceptable financing.
- Regulatory or licensing conditions — a services or supply arrangement conditional on one party obtaining a required permit, licence, or approval.
- Third-party consent conditions — a contract that depends on a landlord, lender, or other party consenting to something (an assignment, a change of use, a change of control).
- Due diligence conditions — a party's obligations becoming binding only once it has completed a satisfactory review of specified information.
- Board or shareholder approval conditions — obligations conditional on internal corporate approval being obtained by a stated date.
Condition Precedent vs. Condition Subsequent vs. Covenant
These terms are often used loosely, but they mean different things:
| Term | What it does |
|---|---|
| Condition precedent | Must happen before an obligation arises — the obligation doesn't exist yet |
| Condition subsequent | An event that, if it happens after the contract takes effect, can end or suspend an existing obligation |
| Covenant (ordinary promise) | An obligation that exists from signing, that a party can be found in breach of if not performed |
Confusing a covenant with a condition precedent is a common and costly drafting mistake — if the clause is really meant to suspend an obligation until an event occurs, saying so clearly (rather than phrasing it as an ordinary promise) avoids a dispute over what kind of clause it actually is.
What Happens If the Condition Is Never Met
What happens next depends entirely on how the clause is drafted. A well-drafted condition precedent clause should specify:
- [ ] The deadline by which the condition must be satisfied.
- [ ] Who bears the responsibility to try to satisfy it — is a party required to make reasonable efforts, or is satisfaction entirely outside anyone's control?
- [ ] What happens if it's not met by the deadline — does the contract automatically terminate, does either party get a right (but not an obligation) to terminate, or does the deadline simply extend?
- [ ] Whether the condition can be waived, by whom, and how (in writing, unilaterally, or only by mutual agreement).
Without clear answers to these questions built into the clause, a failed condition can leave both sides genuinely unsure whether the deal is dead, paused, or still technically alive.
Drafting Considerations
- A condition that benefits only one party (a financing condition that only protects the buyer, for example) should usually specify that only that party can waive it.
- A vague deadline ("within a reasonable time") invites disputes; a specific date is almost always better.
- If satisfying the condition depends partly on one party's own effort (applying for financing, pursuing a permit), consider requiring "commercially reasonable efforts" rather than leaving the obligation to try entirely unstated.
- Consider what happens to any deposit or work already performed if the condition fails — this is frequently the most contentious issue in practice, and silence in the contract usually makes it worse, not neutral.
Frequently asked questions
Is a condition precedent the same as a contingency clause?
They're generally used to describe the same idea — an event that must occur before an obligation becomes binding. "Condition precedent" is the more precise legal term; "contingency" is common shorthand for the same concept in everyday business language.
Can a party waive a condition precedent that was meant to protect the other side?
Only the party (or parties) the condition was designed to protect can typically waive it, and only if the clause allows for waiver at all. A poorly drafted clause that doesn't address waiver clearly can create real uncertainty about who controls that decision.
What happens to a deposit if a financing condition isn't met?
This depends entirely on what the contract says. Some agreements provide for a full refund if a genuine, good-faith effort to secure financing failed; others treat a missed condition differently depending on the circumstances. This is exactly the kind of detail worth nailing down before signing, not after the condition fails.
Do conditions precedent apply outside of purchase agreements?
Yes — they're common in leases, services agreements, financing documents, and joint venture arrangements, anywhere one party's obligations should sensibly depend on an outside event occurring first.
This is a corporate question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.