What is a Condition Precedent in a Contract? And How is it relevant?

Background:
In the late of August 2021, PayU (a Netherlands based fintech group) announced acquisition of BillDesk (an Indian payment gateway provider) for a whooping USD 4.7 Billion, which was supposed to be the second largest buyout of an Indian digital technology company after Walmart’s acquisition of Flipkart for USD 16 Billion back in 2018. [1]

More than a year after the announcement, in early September, 2022, the Competition Commission of India had approved the buyout thereby, paving a way for the closing of the transaction. [2] However, on October 03, 2022, Prosus (an investor in PayU) had called off the buyout of BillDesk by PayU after 13 months of first announcing it. [3] What were the reasons you ask? Well, Prosus made a statement saying that, “certain conditions precedent were not fulfilled by the September 30, 2022 long stop date, causing the agreement to be terminated automatically.[4]

This brings us to the core question, what are conditions precedent in an agreement? And how are they relevant?

Contracts create obligations on either of the parties to undertake certain actions or refrain from taking actions. However, either party to the contract may impose certain conditions to be fulfilled before such obligations become binding on them. Such conditions in a contract are referred to as conditions precedent (CP).

CPs in a contract are ideally imposed to get both the parties to a pedestal to enable them to (a) consummate the obligations under the contract; and/or (b) solidify the intention of the parties to the contract.

In general, CPs in a contract are time-bound and are required to be completed within a particular timeframe (which is also referred to as a long stop date). In the event any CPs remain unfulfilled within the long stop date, the agreement is automatically terminated unless such CP is waived by the party imposing it.

Illustration: Party ‘A’ owns and operates a pharmaceuticals manufacturing unit. Party ‘B’ owns and markets a pharmaceutical brand. Party ‘A’ offers to manufacture drugs for Party ‘B’ under the brand name owned by Party ‘B’. Party ‘B’ accepts the offer of Party ‘A’ subject to the condition that Party ‘A’ should set up a testing laboratory at the manufacturing unit. In this illustration, setting up of a testing laboratory at the unit is a CP to the transaction, and no party will be bound to undertake the transaction until and unless the CP is fulfilled by Party A or is waived by Party B.

Conditions precedent in an investment/acquisition agreement:
Ideally, the CPs in any investment or acquisition agreement are of the following nature: (a) statutory CPs; and (b) CPs from the due diligence exercise.

In most of the investment transactions, the investor undertakes (or should undertake) a due diligence exercise on the target entity to identify the risks and liabilities involved, and to ensure that their investment is adequately protected. Basis the findings of a due diligence exercise, the investor may impose certain CPs on the target to make it investable (in the views and standards of such
investor).

Further, every investment transaction is backed by several statutory requirements under different applicable laws including obtaining of approvals, making disclosures or relevant filings with the authorities (such as obtaining approval of the Competition Commission of India for undertaking PayU’s acquisition of BillDesk). These statutory requirements, which are prerequisite to the transaction, also form a part of the CPs list to be fulfilled.

Central constituents of a condition precedent clause:
While the broader understanding of the CPs in a contract is imperative, the parties to a contract should carefully assess the following constituents of a CP clause in any agreement:

(a) The Condition itself: This is more relevant from the party required to fulfil the condition. Primarily, such party shall evaluate whether the condition imposed is feasible or not. If the conditions imposed are unreasonable or are not feasible, the same should be communicated to the party imposing it. Secondly, the party shall assess whether the condition is material for the transaction or for the party imposing it. If the condition is not material, the same can either be waived or be transferred to a condition required to be fulfilled post the closing of the transaction (also referred to as conditions subsequent).

(b) Long Stop Date: Long stop date determines the timeframe within which the parties are required to fulfil the CPs in an agreement. The parties shall ideally take into consideration the commercial exigencies and the feasibility of the CPs for determining the long stop date. In an investment agreement, the promoters may accept for a shorter timeframe for the completion of the CPs to be able to raise money quickly. However, the promoters shall evaluate whether such CPs can be fulfilled within the prescribed timeframe or not.

(c) Consequences of non-fulfilment of a CP: In most of the agreements, in the event of non-fulfilment of a CP, the agreement is terminated either automatically or at the discretion of the imposing party. However, in such cases, the imposing party may at their inclination waive the non-fulfilled CPs. Evaluating the materiality of the non-fulfilled CP, the imposing party may be requested to waive such CP instead of terminating the agreement contemporaneously.

1 https://techcrunch.com/2021/08/30/prosus-acquires-indian-payments-giant-billdesk-for-4-7b-will-merge-
with-its-payu-fintech-group/

2 https://economictimes.indiatimes.com/tech/startups/cci-clears-payus-4-7-billion-billdesk-acquisition-after-a-
year/articleshow/94008196.cms?from=mdr

3 https://economictimes.indiatimes.com/tech/startups/prosus-owned-payu-scraps-4-7-billion-billdesk-deal-
after-cci-nod/articleshow/94614657.cms

4 https://www.prosus.com/news/termination-of-agreement-to-acquire-billdesk/

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