Following entry of a company into insolvency proceedings, a transaction counterparty announced the termination of the agreement due to the non-fulfillment of a condition precedent and began dealing directly with a foreign manufacturer despite contract terms stipulating non-compete.
The Court held that the contract expired but the non-compete provision is valid. A condition precedent is an external event which occurrence is a prerequisite for the contractual obligations to take effect; should it fail to occur by the stipulated date, the contract is terminated. Primary obligations are intended to realize the fundamental transaction, whereas secondary obligations regulate the legal relationship in the event that the transaction’s purpose fails or concludes. While the termination of a contract dissolves primary obligations, secondary obligations such as non-compete and arbitration clauses survive. In this case, although the agreement was terminated due to the non-fulfillment of the condition precedent on time, the counterparty acted to secure franchises while bypassing the first party. The non-compete clause was classified as a "secondary obligation" that survives the agreement’s termination for a period of five years. Consequently, an injunction was issued, prohibiting independent contact with the manufacturer.