This article attempts to crystallise the legal principles governing conditions precedent, conditions subsequent and an absolute obligation, under Indian contract law.
Condition Precedent
Section 7 of the Contract Act, 1872, as amended (“Contract Act”), provides that for a proposal to crystallize into a contract, acceptance must be absolute and unqualified. Therefore, a conditional acceptance is a counter proposal and does not form a contract.
If a proposal contains a condition precedent, under Section 6(3) of the Contract Act, upon the failure of the acceptor to fulfil the condition precedent – the proposal is revoked. Under Section 8 of the Contract Act, a proposal that contains a condition precedent, is only accepted upon the performance of that condition precedent by the acceptor.
Thus, in case of a condition precedent, a promise or contract does not come into existence until the condition precedent is performed.
Condition Subsequent
Under Section 31 of the Contract Act, a contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
According to the first part of Section 32 of the Contract Act, such a contract cannot be enforced until such condition subsequent is satisfied. However, according to the second part of Section 32 of the Contract Act, a contingent contract becomes void if the condition subsequent becomes impossible.
Analysis of the distinction
The Supreme Court explained the distinction between a condition precedent and a condition subsequent in Philip John v. Commissioner of Income Tax, AIR 1964 SC 587, in the context of a gift of an immovable property, and held that “condition precedent is one to be performed before the gift takes effect; a condition subsequent is one to be performed after the gift had taken effect, and if the condition is unfulfilled that will put an end to the gift.”
This decision was followed in Subbegowda v. Thimmegowda, (2004) 9 SCC 734, in the context of transfer of property by deeds. The Supreme Court explained that a condition “may be condition precedent – a condition which must be performed before the grant or alienation takes effect to create an interest in property, or may be condition subsequent – a condition which has an effect of enlarging or defeating the interest already created or vested.”
The Andhra Pradesh High Court in Raghunandhan Reddy v. The State of Hyderabad, AIR 1963 AP 110, also explained that in a condition subsequent the promisor’s duty is perfect from inception but later events absolve him from performance wholly or in part, according to the express or implied terms of the contract. A condition subsequent “follows the performance of the contract, and operates to defeat or annul it, upon the subsequent failure of either party to comply with the condition”.
However, in some decisions Indian courts have wrongly referred to a condition precedent as a condition subsequent or a contingent contract. For example, the error in the usage of terminology in Chitibobu Adenna v. Garimalla Jaggarrayadu, reported at AIR 1916 Mad 75 and UP Rajkiya Nirman Nigam Ltd. v Indure Pvt. Ltd., reported at (1996) 2 SCC 667.
Whether a condition is a condition precedent or a condition subsequent will depend upon the existence (or otherwise) of a concluded contract amongst the parties and the nature of the condition. This evaluation will depend on facts and circumstances of each case. For example, in the case of a letter of intent issued by one party, conditional upon the submission of a bank guarantee and execution of a formal contract, the performance of these conditions has been held to be a condition precedent to the formation of a contract in Rajasthan Cooperative Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service Pvt. Ltd., (1996) 10 SCC 405.
On the other hand, in the case where the exchange of correspondence and related documents, together with the conduct of the parties and attending circumstances lead to the conclusion that a contract had been concluded amongst the parties, the subsequent execution of a mere formal contract was held to be a condition subsequent to the contract. For example, in Jawahar Lal v. Union of India, AIR 1962 SC 378, the letter of acceptance of a bid by the Government of India was made subject to the deposit by the successful bidder of ten percent (10%) of the contract amount as security. However, the letter of acceptance stated that the contract was concluded although a formal acceptance would be issued only after the security deposit. The Supreme Court held that “.….. reading the letter as a whole it would not be possible to accept the appellant’s argument that the letter was intended to make a substantial variation in the contract by making the deposit of security a condition precedent instead of a condition subsequent… …”. This principle was followed by the Calcutta High Court in D. Wren International Ltd. v Engineers India Ltd, AIR 1996 Calcutta 424.
In an old decision titled Jainarain Ram Lundia v. Surajmull Sagarmuli, AIR 1949 FC 211, the Federal Court held that when parties enter into an agreement on the understanding that some other person should be a party to it, no “perfected contract” is possible till this other person does not join. However, in the facts of this case it did not agree that there was “no perfected contract” amongst the parties. In my view, the expression “no perfected contract” was used in this case to refer to a contingent contract and the expression “an essential condition” was used to refer to a condition subsequent to a contract.
Condition Subsequent v. Obligation
If a condition subsequent is an obligation of one of the parties, such a condition ceases to be a contingency and takes form of an absolute obligation or a term of the contract.
Consequence of non-performance of such a condition results into discharge of performance by the innocent party under Sections 39 and 55 of the Contract Act and gives a remedy to claim damages for breach under Section 73 of the Contract Act.
The Supreme Court in the case of J.P.Builders v A. Ramadas Rao, (2011) 1 SCC 429, while dealing with a case of sale of a property and a condition of clearance of mortgage of bank held that as obtaining such clearance was the obligation of the seller, the contract could not be held to be contingent. This principle was followed by the Bombay High Court in Om Builders v. Anil Chinbai Kilachand, 2015 SCC OnLine Bombay 5010.
Summary
A condition precedent is a condition that must be performed for a contract to be formed.
A condition subsequent is a condition independent of the performance of either party. The non-performance of which, discharges the parties from performance of the contract, such that no liabilities are assumed by either party.
An absolute obligation is a condition dependant on the performance of one of the parties. The non-performance of which, results in breach by the performing party who had to perform it and discharges the other party from its performance.
Whether a particular condition is a condition precedent or a condition subsequent will always depend on the existence (or otherwise) of a concluded contract amongst the parties, depending upon the facts and circumstances of each case.
Whether a particular condition is a condition subsequent or term of the contract will always depend on the term being an obligation (or not) of one of the parties.
However, the determination whether a particular condition is a condition precedent, condition subsequent or term will dictate the effect of its non-performance under contract law.
