Conditional contract (also known as hypothetical contract) is a contract agreement that can be enforceable only if and when certain conditions are met. If the specified time passes, the contract is invalid. The condition can be also a performance of another agreement. The contract remains conditional until these required conditions are not fulfilled. After that, the contract becomes unconditional and the parties need to carry out the terms of it. This usually means that a buyer must buy and the seller must sell. Conditions can be incorporate by both a seller and a buyer and they need to be clear and precise .
When conditional contract should be used and when it should not
Conditional contract may be used when there are obligations that have to fulfilled or certain doubts about another party. However, parties should consider not entering into a conditional agreement and wait for the completing of formalities instead of making an agreement in the early stage. Besides, if there is another unconditional contract connected to the sale, making a conditional contract can be risky. If the unconditional contract is breached, it can cause a problem with fulfilling the conditional contract which can be delayed or even also breached.
The most common conditions are:
- regulatory - one of the parties have to receive some permissions or licences (such as a premises licence),
- connected agreements - a conditional agreement can depend on another agreement (for example, a seller needs to wait for finalizing a contract),
- planning permission - a buyer may want to have a planning permission in order to feel safe about legality of the property.
Advantages and disadvantages of conditional contract
In certain scenarios conditional contract may be beneficial for both a seller and a buyer. When the buyer incorporates conditions, he can protect himself from a danger of a seller not fulfilling the agreement on time. On the other hand, the buyer has time to collecting money or some other necessary resources. But it can be a trouble for the seller because he needs to wait for the selling and he misses an opportunity to sell the property to another buyer. If it is the seller who incorporates conditions, he has time for fulfilling necessary obligations before the selling but the buyer has to wait for the performance of the agreement.
A specific type of conditional contract is option agreement. In this agreement a party can buy a property in a particular amount of time. The buyer can also not buy this property. If he misses the deadline, the option is invalid and then everything is as before the option contract .
Examples of Conditional contract
- A conditional contract can be used in real estate transactions. For example, a buyer may enter into a conditional contract to purchase a property, with the condition that the buyer is able to obtain financing. If the buyer is unable to obtain financing, the contract will be null and void.
- A conditional contract can also be used in employment contracts. For example, an employer may enter into an agreement with an employee, with the condition that the employee successfully completes a probationary period. If the employee does not successfully complete the probationary period, the contract will be null and void.
- A conditional contract can also be used in business transactions. For example, a company may enter into a conditional contract to purchase a product, with the condition that the product meets certain quality standards. If the product does not meet the quality standards, the contract will be null and void.
- A conditional contract may also be referred to as an executory contract, which is a contract that is not yet fully binding until certain conditions are met. This type of contract requires both parties to agree to the terms before it can be enforced.
- A conditional contract can also be referred to as an option contract, which is a contract in which one party agrees to purchase an item from another party at a specified price, but the purchase is only binding if the buyer decides to exercise the option.
- Another type of conditional contract is a contingent contract, which is a contract that is only binding if a certain event happens. This type of contract is often used in insurance policies and real estate contracts.
In summary, conditional contracts can come in different forms, such as executory, option and contingent contracts. These contracts are only binding if certain conditions are met before or after the contract is signed, and they are often used in insurance and real estate transactions.
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Author: Adrian Poprawa