The Austin Court of Appeals recently ruled that a building permit wasn’t a condition precedent for a construction project. That caught our attention. Can you build a commercial project without a permit?
But as we read the case, we see the court’s reasoning. And it reminds us of an important legal principle that should inform our contract drafting and negotiation.
The case was a civil suit brought by the project owner against its tenant improvement contractor for work on a medical spa on Austin’s South Congress Avenue. The owner claimed that the contractor didn’t perform the work properly and didn’t finish construction. The contractor argued that delays and problems were caused by the owner, alleging numerous failures, including the owner’s failure to secure a building permit.
The case may be an outlier. The appellate opinion may have been influenced by the trial court’s finding that the contractor breached the contract, demanded extracontractual payments, and failed to register as a contractor with the City of Austin, thereby preventing the owner from getting the permit.
But what caught our eye was the finding that the building permit procurement wasn’t a condition precedent to construction. From our practical perspective, it seems that a building permit is required for construction to begin or proceed. We pursued that theory in a recent case where we obtained damages for a contractor client whose nine-month project was delayed by the owner’s 18-month dithering about how to solve sanitary sewer routing to satisfy the City of Houston’s building permit requirements.
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But our client’s circumstances differed from the Austin project contract. In our case, there was no question that building authorities stopped the construction, which could not resume until the permits were in place. In the Austin project, construction somehow continued without the building permit. The Austin appellate court dismissed the owner’s permitting defense. And the court cited no evidence that the lack of permitting led to delays or extra costs.
The opinion’s reasoning explains that “condition precedent” has a special contractual meaning that is different from a contractual promise. A promise is an unconditional commitment. Simple examples might include a builder’s promise to complete the project per plans and specifications or a substantial completion deadline. These promises are enforceable, and their breach subjects the promising contractor to damages.
A condition precedent, however, serves a gatekeeping function. Until the condition is met, a performing party’s promise is not binding and carries no duty. When Popeye’s friend Wimpy promised that he would “gladly pay you Tuesday for a hamburger today,” the joke questioned whether Wimpy really would pay up. But for our purposes, let’s turn it around. Would Wimpy have to pay if you didn’t provide the burger? You would be foolish to demand payment. In legal terms, a court might conclude that providing the hamburger was a condition precedent to payment, so your failure to provide the burger excused the promise of payment.
And putting aside the comics, in the world of construction you’ll see conditions precedent sprinkled throughout your contracts. They may say that giving notice of a claim is a condition precedent to recovery of additional time or money, or that providing lien releases, as-builts, and other closeout documents are conditions precedent to final payment.
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A condition precedent can create a harsh result. Could a contractor really lose its right to pursue a claim because notice wasn’t given or provided in a certain way? A court’s (or arbitrator’s) analysis thus seeks the parties’ intent. Did they intend the obligation as a promise or a condition precedent?
In the Austin appellate court’s reasoning, the permit was not a condition precedent. The court said that “[i]n construing a contract, finding a condition precedent to liability is to be avoided when another reasonable reading of the contract is possible.” The court quoted an earlier precedent saying that “because of their harshness in operation, conditions are not favorites of the law.” Courts are reluctant to interpret ambiguous contract provisions as conditions precedent because doing so can unfairly let one party avoid responsibility even after the other party has done meaningful work or made reasonable efforts to do so.
In considering the facts, the case noted that the contract language simply said that the owner “shall obtain necessary building permits.” The contract didn’t include any language indicating that permit acquisition had to occur to trigger the contractor’s obligation to proceed.
The parties must express their intent that the condition would trigger the builder’s obligation. The court explained that the parties wouldn’t have to use the term “condition precedent” to show the permit was needed to trigger the builder’s obligation. “Generally, words such as ‘if,’ ‘provided that,’ ‘on condition that,’ or other conditional language indicate that the parties intended the act or event to be a condition precedent.”
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We’re not convinced that this opinion is a hall pass allowing owners to shirk responsibility for obtaining building permits. But it does remind us that contracts should clearly express the intent of the parties with respect to any obligations that are required for starting or progressing a project.
Consider access to the site. In past years we have seen contracts that didn’t specify owner responsibility to provide access to the project, let alone make it a condition precedent. Yet courts often found that an owner who didn’t provide access had breached an implied covenant to allow entry to perform the work. A careful contractor might be well advised to specify in a contract that it needs entry to the property to build the work. That access is a condition precedent to commencing and continuing the work.
Consider other practical prerequisites that might be taken for granted:
- Environmental permits
- Plans and specifications (Dare we say complete and accurate plans and specifications?)
- Adequate laydown or shakedown areas
- Information about adequate fill or borrow materials
- Payment of undisputed amounts for project progress
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Your drafting or negotiation might ensure that the owner not only makes these promises but also clearly identifies them as conditions precedent.
And take care to see which of your contractual obligations are framed as a condition precedent. Does failure to give written notice of a claim within a certain short time period really need to be a condition precedent, jeopardizing recovery for the delay and cost?
If the owner’s obligations listed above aren’t conditions precedent but only promises, all may not be lost. If a party breaches a promise, contract provisions may — and should — provide remedies in time and cost for breach of those obligations. Likewise, a promise to give notice by a certain date doesn’t have to be a condition precedent. If phrased as a promise, it could still give rise to owner damages caused by the late notice.
But pursuing those remedies may be time-consuming, costly, and distracting. Contractors might be well advised to phrase certain owner obligations — like getting a permit — as a condition precedent. This would require the owner to focus on solving that problem now, helping to avoid or minimize later argument about damages.
