The Reluctance of Tennessee Courts to Allow Defenses Based on the Non-Occurrence of a Condition Precedent to Succeed

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.

The Supreme Court of Tennessee disagreed and found that the clause did not create a condition precedent, reversing the decision of the Court of Appeals of Tennessee. The three primary reasons relied on by the Supreme Court in reaching its decision were: (1)  conditions precedent are disfavored and will not be found unless there is language which clearly establishes that the parties considered the matter to be a condition precedent; (2) that rule applies with even more force with respect to “pay when paid” clauses; and (3) the parties’ contract contained another clause that used specific language establishing that that matter  was considered a condition precedent, therefore, the omission of the phrase “condition precedent” with respect to the clause at issue must have been intentional.

To illustrate further how repugnant conditions precedent are to Tennessee courts in breach of contract cases, consider the case of Ensureus v. Oliver (Tenn. Ct. App. 2015).  In that case, the seller of a business expressly agreed to shred certain files prior to the closing, and the agreement contained language establishing that both parties understood and agreed that that obligation was indeed a condition precedent.  So, there was no room for the court to interpret the agreement to find that there was no clear evidence that the parties had agreed that the obligation to shred the files was a condition precedent.  The seller did not shred the files and the buyer alleged that he had no obligation to pay the purchase price because of the failure of seller to satisfy that condition precedent.

The court in the Ensureus case pointed out that the buyer could point to no damages which he had suffered as a result of the seller’s failure to shred the files.  It then reasoned that, under the circumstances, the seller’s failure to satisfy the condition precedent should not be able to be used by the buyer to invalidate the parties’ agreement, which is what the buyer was attempting.

In Tennessee breach of contract cases, counsel and parties should remember that, while an argument that a condition precedent was not satisfied may seem technically appealing, succeeding with such an argument in a Tennessee court is an entirely different matter altogether.

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