What is a condition precedent?

Question

Here is a Wikipedia definition, of something that must happen before something else happens, but I'm not sure how to apply it to the law.

Let's say that there is an angel investor that meets a company with an interesting technology, and proposes to invest an amount, X, in the company for a certain percentage. The contract says something like, "a condition precedent for the investment of X is a demonstration of the company's technology to the investor's reasonable satisfaction." The company delays in doing the demo, but asks for the money. The investor says, "no demo, no money." Is this what "condition precedent" is meant to say?

If there is no express time limit written into the contract, is there an implied, or "reasonable" time limit after which the investor is off the hook? For instance, if the demo took place six months later, can the investor reasonably say, "your technology sounded interesting six months ago, but I fear that it has been made obsolete by now."

Answer 1

In contract law, a condition precedent is a specified event that must occur prior to a party having to perform a contract obligation.

In your example, the demonstration is the condition precedent, and funding is the obligation to be performed. So, yes, "no demo, no money" is another way to put it.

The "investor's reasonable satisfaction" is the standard used to determine whether the condition has been satisfied (and thus whether the obligation will be triggered). The reasonableness standard falls somewhere in the middle segment on a scale of investor-friendly to inventor-friendly contract language. For example, "the investor's sole discretion" is investor-friendly (though likely subject to a good faith duty); "the investor's discretion" is still investor-friendly and is limited by a good faith duty; "the investor's reasonable discretion" anchors the discretion not in what the investor would want to do but in what would be objectively reasonable. Removing investor discretion and replacing it with something like "upon demonstration" would be inventor-friendly.

What is reasonable will vary widely based on the industry and product obsolescence timelines.

Answer 2

“Condition Precedent” has two meanings

Condition Precedent to the formation of the contract

This is a condition on either the offer or acceptance. Until the condition is fulfilled there is no contract.

For example, acceptance of an offer to buy real estate “subject to bank finance”. When the finance is approved, the contract comes into existence automatically. Until it does there is no contract and either party may revoke the offer/acceptance without consequences.

Condition Precedent to an obligation/right under a contract

Here there is a valid contract but the obligation to perform depends on a condition.

For example, the right to payment/obligation to pay may have the delivery of an invoice as a condition precedent.