Contracts: Recognizing the Condition Precedent Requirement
Carol Keough January 30, 2013Many Texas Contracts have condition precedent language in them and recognizing your obligations or the other party’s obligations to perform a condition precedent is important to understanding the duties of the parties to perform under the contract. When a condition precedent is nor performed by one party, it can sometimes excuse the other party from performing at all. As stated by the Texas Supreme Court, a “condition precedent” to a contract is an act or event that must occur before the defendant is required to perform its own obligations. See Solar Applications Eng’g v. T.A. Oper. Corp., 327 S.W.3d 104, 108 (Tex. 2010). If the plaintiff is required to perform before the defendant is obligated to perform, the plaintiff must establish that every condition preceduent under the contract has been met before it can sue on the contract. Solar Applications, 327 S.W.3d at 108.
In Solar Applications, the Texas Supreme Court examined a condition precedent involving a general contractor and owner who dispute performance and final payment under a construction contract. TA, the owner, entered a contract for approximately $4 million dollars to build a truck stop, restaurant and convenience store in San Antonio, Texas. As in most construction contracts, the parties establish a schedule of work. After Solar substantially completed the project, disputes arose regarding the completion of certain remaining work and the attachment of liens on the property by subcontractors and Solar. TA eventually terminated the contract and refused to make final payment to Solar stating that Solar had not complied with a lien-release provision in the contract by not submitting a lien-release affidavit. TA relied on this lien-release provision to be a condition precedent excusing TA from making final payment to Solar.
Solar sued TA for breach of contract to recover the contract balance, and TA counterclaimed for delay and defective work. At trial, the verdict substantially favored Solar, with the jury awarding actual damages of approximately $400,000. On appeal, TA argued that because Solar did not provide a lien-release affidavit then Solar cannot recover for breach of contract. The court of appeals did find the lien-release provision to be a condition precedent and overturned the jury award to Solar.
When the Solar Applications case came to the Texas Supreme Court, they examined a condition precedent as compared to a covenant. Solar argued that the lien-release provision is not a condition precedent because it lacks conditional language normally associated with express conditions. See Solar, 327 S.W.3d at 108 (citing Criswell v. European Crossroads Shopping Ctr., Ltd., 792 S.W.2d 945, 948 (Tex.1990)). “In order to make performance specifically conditional, a term such as ‘if’, ‘provided that’, ‘on condition that’, or some similar phrase of conditional language must normally be included.” Solar, 327 S.W.3d at 108 (citing Criswell, 792 S.W.2d at 948 (citing Landscape Design v. Harold Thomas Excavating, 604 S.W.2d 374, 377 (Tex.Civ.App.-Dallas 1980, writ ref’d n.r.e.)). “While there is no requirement that such phrases be utilized, their absence is probative of the parties intention that a promise be made, rather than a condition imposed.” Solar, 327 S.W.3d at 108 (citing Criswell, 792 S.W.2d at 948 (citing Hohenberg Bros. Co. v.. George E. Gibbons & Co., 537 S.W.2d 1, 3 (Tex.1976)). When no conditional language for a condition precedent is used and another reasonable interpretation of the contract is possible, “the terms will be construed as a covenant in order to prevent a forfeiture.” Id.
After examining the language of the contract, the Texas Supreme Court held that the lien-release provision is a covenant, not a condition precedent to Solar’s recovery on the contract. See Solar, 327 S.W.3d at 108. The Court found that the contract language that Solar will provide “complete and legally effective releases or waivers of all Lien rights” does not contain language that is traditionally associated with a condition precedent such as ‘if’, ‘provided that’, ‘on condition that’, or some similar phrase of conditional language. The Court also found that the language preceding the lien-release provision did not make performance conditional. In the absence of any conditional language, as stated above, a reasonable reading of the lien-release provision is that it is a promise or covenant by Solar to provide a lien-release affidavit in exchange for receiving final payment instead of a condition precedent.
The Solar Applications case highlights the issues a Business faces when determining not to perform because they believe a contract excuses their performance. In Texas, breach of contract cases can result in the losing party paying attorney fees for the other side. Failing to properly recognize a condition precedent under Texas Law can be an expensive lesson.