The United States Court of Appeals for the 4th Circuit recently issued an opinion that clarifies an important element of contract law - the “prevention doctrine”. Essentially, this doctrine states that a promisor can’t get out of delivering on a promise that is subject to a condition precedent by preventing that condition precedent from being satisfied.
To use a simple example, if I sign a contract obligating me to buy my neighbor’s car upon it passing an inspection, I can’t get out of that agreement by secretly damaging the engine so it fails the inspection. That may seem obvious, but as is often the case in law, there are nuanced situations where the applicability of this doctrine may not be so clear.
In this case (Curtis Cox v. SNAP, Inc.), the Court dealt with a company’s obligation to repurchase stock options it had agreed to issue to a service provider. The company argued that because it never issued the options in the first place (in breach of its contract), the service provider’s only remedy was to sue for that failure, and as the statute of limitations for that claim already had expired before the service provider brought suit, the service provider was out of luck.
The Court held that the prevention doctrine does not require an affirmative nefarious act, but applies equally to situations where the promisor’s failure to act at least materially contributed to the condition not being satisfied. Specifically, the Court ruled that by breaching its agreement to issue the options in the first place, the company forfeited its right to rely on their issuance as an unfulfilled condition precedent to its obligation to repurchase them. As a result, the service provider was entitled to enforce the repurchase obligation even though the statute of limitations for enforcing the original agreement to issue the options had passed.
A more detailed analysis and complete facts of the case (as well as a link to the full opinion) may be found on the Maryland Business Law Developments blog.