Sometimes in a breach of contract case, or other commercial litigation matter, a party will be met with the defense that it is not entitled to recover because a condition precedent to the parties’ contract was not fulfilled. Under Tennessee law, a party is not required to perform under a contract unless and until a condition precedent agreed upon by both parties has been satisfied. However, and very importantly, to rely successfully on the defense that a condition precedent was not satisfied, a party must first prove that there was a condition precedent.
Because conditions precedent have a tendency to result in harsh and unfair outcomes, Tennessee courts disfavor finding the existence of conditions precedent. Sometimes, even when they do find a condition precedent which was indisputably not satisfied, nevertheless, they do not allow that fact to permit a party to avoid performance.
A leading case on conditions precedent in Tennessee was decided by the Supreme Court of Tennessee in 1996. In that case, Koch v. Construction Technology, Inc., a subcontractor filed a breach of contract case alleging that the general contractor had failed to pay it for the entire amount due for work done on a project owned by the Memphis Housing Authority (“MHA”). In defense, the general contractor claimed that it was not required to pay the entire balance it owed to the subcontractor because a condition precedent to its performance had not been fulfilled.
The written contract between the contractor and subcontractor in the Koch case contained a provision referred to as a “pay when paid” clause. It stated: “Partial payments subject to all applicable provisions of the Contract shall be made when and as payments are received by the Contractor.” The general contractor argued that the only amount for which it had not paid the subcontractor was the amount MHA had not paid it. It also argued that the above language created a condition precedent.