The final types of contract terms which make up most properly constructed agreements are conditions, discretionary authority, and declarations. We will begin with declarations because they are the simplest to understand. Simply put a declaration is a statement of fact as to which the parties agree. It is simple to understand because no rights or remedies are associated with declarations; their breach may not be give rise to a lawsuit.
As an example, all definitions in a contract are declarations; they have no substantive effect on their own. No party promises to do or not do something, and no representation or warranty was made. All declarations will have legal effect in that in the above example, a definition is binding on the contract in question. The definitions were agreed upon, and are to be used in interpretation of the agreement. Some declarations have legal and substantive effect; such as a declaration which states the agreement’s choice of law, i.e. The laws of Texas are to govern the entire contract. Although there are no rights or remedies with a breach of such a provision, it has substantive effect because it establishes a policy which governs the agreement itself.
A condition is a state of facts which must exist before a party is obligated to perform. To be a condition, the event which triggers the performance must not be certain to occur. Therefore, passage of time cannot be a condition. A condition may be created before a right is exercised, or a covenant must be performed. The typical form that conditions take is the “if… then” grammatical structure. For example, “if an inspection is performed within one week of the execution of this agreement and the results are satisfactory, then the buyer shall purchase the vehicle.” This contract term combines a condition with a covenant.
Conditions may be ongoing, meaning that a certain state of affairs must exist throughout the duration of the agreement for one party to be required to perform. If the condition is not satisfied at any time, the performing party may choose whether to perform, waiving the condition, or terminate the agreement, or seek any other remedy outlined in the agreement. Some conditions may be worded so that their breach does not terminate the entire agreement, but only cancels one party’s duty to perform some action, and the agreement will otherwise continue.
Discretionary authority grants the holder the choice or permission to act. The holder is not required to exercise the authority granted. Commonly, discretionary authority is granted with a condition preceding it. Hence, a state of facts must exist before a party may exercise its discretionary authority. For example, in every loan agreement conditions exist which will allow a bank to accelerate its loan, such as default, unauthorized assignment of the loan, transfer of title, failure to maintain insurance, pay taxes, etc. In such events, the bank may, but is not required to accelerate its loan.
Conditions serve to allocate risk, meaning that discretionary authority should usually not be unlimited and unrestrained in any given agreement. Discretionary authority is not the same as a right, because in a right, there is a right to receive some performance and a commensurate duty to perform. In discretionary authority there is no mandatory right to receive performance from the other party; only one party has the authority to act if it so elects.