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Thursday, June 07, 2018

Dissolving and suspending conditions in agreements

By Camiel Koster , filed under: Civil

In negotiations, each party wants to build in an “escape” into agreements for uncertain, future events. For instance, the buyer of a house wants to be able to walk away from the deal if the bank does not grant a loan.

Or, if the negotiator of one of the parties is not authorized to close the deal, the deal will be “subject to approval of the board”.

Two types of “escapes” are commonly used, namely dissolving and suspending conditions (in Dutch: “ontbindende en opschortende voorwaarden”). If a contract contains a “dissolving” condition, the agreement formally comes into existence at signing. However, if the dissolving condition is fulfilled, then the agreement is automatically dissolved. If a contract contains a “suspending” condition, the agreement does not come into existence once it is signed (at least it cannot be enforced), until the suspending condition is met, for instance, in the example above, once the board approves the contract.
The differences between the two may seem inconsequential. However, in litigation, the differences between the two can be of crucial importance. It is all about the wording of the condition.

Let’s go back to the buyer of the house. He may formulate his “escape” as a dissolving condition or as a suspending condition. The contract could state: “I buy this house unless I am not able to secure a mortgage loan before January 1”. This would be a dissolving condition: the agreement comes into existence at signing but will be terminated automatically if the buyer does not secure financing. Alternatively, the contract could state: “I buy this house if I secure a mortgage loan before January 1”. This is a suspending condition, and the agreement only comes into existence (becomes enforceable) once the mortgage loan is granted.

Let’s assume that a conflict arises because the buyer wants to walk away from the deal, and the seller takes the buyer to court in an attempt to order buyer to pay for the house. In the first scenario (dissolving condition), the defendant (buyer) will have to prove that the dissolving condition has been fulfilled. The burden of proof rests on the buyer. However, in the second scenario, the plaintiff (seller) will have to prove that the suspending condition has been fulfilled, so the seller will have to prove that the buyer secured a loan. Litigating parties typically do not like to be left with the burden of proof, because if they cannot put forward the necessary proof, they will lose their case.

At first glance, the deal looks the same. There is a seller who wants to sell his house, and a buyer who wants an escape. While this is a simple example, it is clear that formulating dissolving or suspending conditions is fundamental. It may mean the difference between winning or losing a case. At BZSE, we take (contract) drafting seriously, and will analyze whether a dissolving or suspending condition is best for you in your specific case.