suspensive & resolutory condition

To be or not to be - the effect of suspensive and resolutive conditions

Conditions are widely used in the drafting of contracts, but the precise consequences of different classes of conditions are often unknown to the parties themselves resulting in unexpected consequences when the contractual relationship unravels. We will briefly examine two common types of conditions, namely resolutive conditions and suspensive conditions, and the concomitant effect on the rights and obligations of parties.

In its most basic form a condition in a contract makes certain rights and obligations (and often the existence of the entire contract) dependant on the occurrence of a specified uncertain future event. Conditions are invaluable in contracts for they allow parties to determine in advance how the relationship between them will alter should a certain event occur. This provides the contracting parties with an element of certainty and a platform for negotiation.

Suspensive conditions

A suspensive condition is a condition which (as the name suggests) suspends rights and obligations until the uncertain future event occurs.

Upon the occurrence of the event, the suspended part of the contract (or indeed the entire contract) is brought to life. If the suspensive condition is never fulfilled, the suspended rights and obligations never come into existence. It is as though they never existed.

For example: Mr X sells his property to Mr Y on 1 April 2009 on condition that Mr Y obtains a mortgage bond. On 1 July, Mr Y obtains a mortgage bond and on 1 August the property is transferred into his name. The date of disposal is 1 July 2009, the date of the fulfilment of the suspensive condition. If Mr Y is unable to obtain a mortgage bond the sale never occurs. It is as if there was no agreement between the parties at all.

Resolutive conditions

Whereas the fulfilment of a suspensive condition breathes life into otherwise inoperative rights and obligations, the fulfilment of a resolutive condition ends the existence of rights and obligations.

In the case of a resolutive condition, there is no suspension or postponement of terms in a contract. Rights and obligations come into existence immediately upon agreement between the parties. If a resolutive condition is fulfilled, the operation of the rights and obligations cease.

For example: On 15 January 2004 Mr. X sold his property to Oak Tree (Pty) Ltd. The sale agreement provided that the sale would be cancelled and the parties would restore each other to their original position if the purchaser was unsuccessful in obtaining rezoning. Some time after taking possession of the property, the purchaser’s rezoning application failed. The sale of the property had to be transferred back to the Mr X and the purchase price remitted to Oak Tree (Pty) Ltd.

The importance of the distinction between the two

The question of whether a particular condition is resolutive or suspensive in nature becomes critical when one has to examine whether and when certain rights vest in a party to a contract. The use of resolutive conditions in a contract needs to be carefully considered. A fulfilled resolutive condition terminates existing rights and obligations and requires the parties to restore their pre-contractual position. The parties may, alternatively, make use of suspensive conditions and avoid the duties of unbundling, restoration and the possible enforcement of the original position.