May 30, 2022
The contingency contract - what is it, and how can it be used?
Contingency contracts are a term that must be fully understood before entering into such an agreement. If you do not fully grasp the implications of a contingency contract or a contingency clause within a contract, you could find yourself in some legal hot water. Here, we examine what does a contingency contract mean and what is contingency contract usage like in real-world examples.
What is a contingency contract?
A simple contingency contract definition is a contract that contains a contingency clause that identifies an action or condition that must be achieved for the rest of the contract to be binding. A contingency contract can be highly effective in achieving desired outcomes and actions in the future.
By writing down that a contract or agreement can only ever occur, should another condition be met, one party can be galvanized and motivated to achieve that condition far more effectively than without a contingency contract in place. Therefore, they have been seen as a powerful means to mitigate against risk and yet still reach a much-wanted result. They also allow for differences of opinion to be taken into account regarding future actions, which helps sign a contract, to begin with.
Contingency contracts, therefore, need to abide by several rules for them to be valuable and enforceable. Firstly, contingency contracts need to be conditional. I.e., the rest of the agreement will not be binding if one provision or condition is not met. Or, in some instances, if one provision is avoided.
Secondly, the way a contingency clause is included in a contract must be measurable. There can be no room for confusion or misunderstanding, or differences of interpretation. Instead, the clause must detail precisely what the contingency is based upon.
Then, often for a contingency contract to be effective, a deadline is required to be included in the wording. Without it, it is difficult to impossible to measure the actions needed. Plus, so many contracts are time-sensitive too.
Use cases of contingency contracts
One of the best examples of a contingency contract in the real world is within real estate. Using a contingency contract or a contingency clause in a contract can help a house sale go through - whereas, without it, either party may not agree due to the unknowns of the future.
For example, one party may make an offer on a house to a seller, which is accepted. However, that offer is contingent upon a survey coming back with a robust, clean bill of health. Surveys can be helpful in highlighting future problems with the property, among other issues. If a clean bill of health is not achieved by a surveyor, then the offer no longer holds. However, should the survey come back with no issues, the offer then turns into a binding agreement for the house sale to continue. Such a contingency contract may include details about the time frame in which the survey must be conducted, and if that survey is not held within that time frame, the buyer may therefore still have to continue with the purchase.
Contingency contracts, however, are actually also used to help parents and teachers concerning a child’s behavior. Entering into a contingency contract in such a case can help encourage positive behavior from a child as they need to meet a target to trigger an event they want to happen. For example, a parents’ teenager can go to a concert or festival if they complete their homework on time every night for a month.
Overall takeaways of contingency contracts
Contingency contracts can provide a great deal of protection - for both parties involved. Therefore, they can make the contract stronger and ensure the strength of any future agreements resulting from a contingency agreement. At Contractbook, we have gone one further and automated contingency contracts. It means that whenever a contingency contract is fulfilled, it can self-execute and trigger new actions. New contracts can therefore be quickly drawn up and signed, if that stage is needed at all. In many cases, the parties involved will simply be subject to the new contract immediately and have to follow the provisions laid out within it.
When used in conjunction with Contractbook’s software, contingency contracts can create a great deal of value. They can allow an initial contract to be completed with subsequent ones drawn up immediately when an event has been triggered. In doing so, they can eliminate the need to have an agreement totally resolved at the outset. Thus a working relationship can begin far more quickly than without a contingency clause.