Key Takeaways

  • A contingent contract is enforceable only if a specific uncertain event occurs or does not occur.
  • Common types include those based on the occurrence/non-occurrence of an event, within or outside of a timeframe.
  • These contracts allow parties to allocate risk, build flexibility into agreements, and “bet” on differing assumptions about the future.
  • They are often used in insurance, construction, employment, and real estate transactions.
  • Key elements include lawful object, dependency on a collateral event, and conditional enforceability.
  • Improperly drafted contingent clauses can lead to disputes or void contracts.
  • They can be strategic tools in negotiation, allowing parties to overcome impasses and align incentives.

Among the major features of contingent contract is the dependency of its performance on the happening or non-happening of an uncertain event, collateral to the contract.

What Is a Contingent Contract?

A contract which is contingent or dependent upon the occurrence or nonoccurrence of some event is called a contingent contract. Insurance contracts are good examples of contingent contracts where the insurance company is required to compensate the policy holder only if a specified future event (accident, hospitalization, etc.) happens.

Although a contingent contract is based upon an absolute promise to do something in the case of a specific future event, the promise is conditional in the sense that the party is liable to perform only if the said event happens (or does not happen).

Based upon the conditions, contracts can be broadly classified into two types:

  • Absolute Contracts: An absolute contract has no condition and it must be performed irrespective of the circumstances.
  • Contingent Contracts: A contingent contract contains a condition which makes the parties liable to perform the obligations only if the event, collateral to the contract, happens.

The parties to a contingent contract must perform their duties if the imposed condition is met. The contract becomes void if the condition is not met. Thus, contingent contracts are meant to be performed only under specific circumstances.

All types of insurance, indemnity, and guarantee contracts are considered as contingent contracts.

Contingent Contract Types

Contracts contingent upon the occurrence of an uncertain event: These contracts become valid only if the uncertain event mentioned in the contract occurs. For instance, let's say A and B enter into a contract wherein A promises to sell his goods in transit to B provided the goods safely reach the harbor. Since, the sale of goods by A is dependent upon a condition (that the goods reach the harbor), this is a contingent contract. If the ship does not make it to the harbor, the contract becomes void.

Contracts contingent upon the non-occurrence of an uncertain event: Sometimes, a contingent contract may depend upon the nonoccurrence of an uncertain event. For example, if A promises to sell his goods in transit to B if the ship carrying the goods does not come back, then the contract becomes valid if the ship sinks in the sea; if it safely reaches the harbor, the contract becomes void.

Contracts contingent upon the occurrence of an uncertain event within a specified timeframe: In these contracts, the event must occur within the period specified in the contract. For example, A promises to sell the goods in transit to B, if the ship carrying the goods safely arrives the harbor within eight days. If the ship comes on the ninth day or anytime thereafter, the contract becomes void.

Contracts contingent upon the nonoccurrence of an uncertain event within a specified timeframe: For example, let's say, A contracts to sell the goods in transit to B if the ship carrying the goods does not reach the harbor within eight days. Then, the contract becomes void if the ship arrives on the sixth day or anytime before eight days. On the other hand, if the ship does not come until eight days, the contract becomes valid; it does not matter whether or not it comes or does not come after the eighth day has passed.

Contracts contingent upon an impossible event: If the performance of a contract is dependent upon an impossible event, such a contract is ab initio void, i.e., void right from the beginning. For example, A promises to pay B $7,000 if B marries C, who died five years back. Now, since C is already dead, it's not possible for B to marry her. So, the contract becomes null and void.

Features of a Contingent Contract

  • The performance of a contingent contract depends upon whether or not a future event takes place.
  • A contingent contract cannot be enforced unless the specified event takes place.
  • If the event on which the contract is based becomes impossible, then the contract becomes void.
  • A contract based upon the non-happening of an event becomes enforceable only when the event becomes impossible.
  • A contingent contract based upon how a person acts in the future is considered impossible to perform if such person acts in way that renders him impossible to act in the manner required by the contract within any definite period of time.

Real Estate Contingent Contracts

In real estate, contingent contracts are frequently used to protect buyers and sellers from uncertainties. Common contingencies include:

  • Financing Contingency: The buyer’s obligation is contingent on obtaining a mortgage.
  • Home Sale Contingency: The buyer must first sell their current home to proceed.
  • Inspection Contingency: The buyer may back out or renegotiate if the property inspection reveals significant defects.
  • Appraisal Contingency: Protects the buyer if the property is appraised for less than the purchase price.

These clauses allow transactions to move forward while giving both parties time to resolve key issues. If a contingency is unmet, the contract may become void, allowing either party to walk away without penalty.

Contingent Contracts in Negotiation Strategy

In negotiation, a contingent contract can be a powerful tool for resolving deadlocks when parties disagree on future outcomes. Instead of persuading the other side, negotiators can “bet” on their predictions:

  • Example: A contractor might promise to complete a project within 60 days. The client, skeptical, proposes a clause reducing payment if the deadline is missed. If the contractor is confident, he’ll accept the risk.
  • Strategic Value: These contracts enable parties to proceed with deals despite divergent expectations by tying outcomes to measurable benchmarks.
  • Reduced Need for Concessions: They eliminate the need to fully reconcile opposing forecasts, allowing each party to “live with” their own assumptions.

Such arrangements promote trust and accountability while maintaining forward momentum in dealmaking.

Advantages and Risks of Contingent Contracts

Advantages:

  • Risk Management: Transfers or shares risk between parties.
  • Encourages Agreement: Helps parties overcome deadlocks by “betting” on their own expectations.
  • Incentive Alignment: Can reward compliance or penalize nonperformance.
  • Self-Enforcing: Once the triggering event occurs, the obligation is clear, reducing the need for renegotiation.

Risks:

  • Ambiguity: Poorly worded contingencies can cause disputes or litigation.
  • Dependency on External Events: Events outside the parties' control may hinder performance.
  • Delayed Enforcement: Parties must wait until the event occurs or becomes impossible, which may create uncertainty.
  • Misuse in Negotiation: Overreliance on contingencies may lead to speculative agreements or moral hazard.

Common Use Cases for Contingent Contracts

Contingent contracts are widely used across various industries to manage uncertainty, allocate risk, or align incentives. Common scenarios include:

  • Insurance Contracts: Payout is contingent on a covered loss or event, like fire, death, or theft.
  • Construction Projects: Payment terms might depend on timely project milestones or successful inspections.
  • Employment Agreements: Performance bonuses or promotions may be contingent on meeting key performance indicators (KPIs).
  • M&A Transactions: Earnouts or purchase price adjustments are often contingent on future earnings or regulatory approvals.
  • Real Estate Contracts: Sales may be contingent on financing, inspections, or sale of the buyer’s current home.

These applications demonstrate how contingent contracts provide flexibility while protecting both parties from unforeseeable events.

Legal Requirements for a Valid Contingent Contract

To be legally enforceable, a contingent contract must meet the following requirements:

  • Lawful Object: The contract must be formed for a lawful purpose. It cannot be contingent on an illegal act.
  • Future Uncertain Event: The contract must depend on a future event that is uncertain at the time the agreement is made.
  • Collateral Event: The event must not be part of the consideration or performance; it must be collateral (i.e., secondary) to the contract.
  • Performance Conditionality: Performance must be explicitly tied to the occurrence or non-occurrence of the event.
  • Enforceability Timing: The contract is only enforceable upon the fulfillment (or impossibility) of the specified condition.
  • Mutual Consent: All parties must agree to the contingent condition knowingly and willingly.

Frequently Asked Questions

  1. What is a contingent contract in simple terms?
    It’s a contract that becomes enforceable only if a specific future event happens or doesn’t happen.
  2. Are all insurance contracts contingent?
    Yes, insurance contracts are classic examples of contingent contracts because payment is dependent on the occurrence of a covered event.
  3. How does a contingent contract differ from an absolute contract?
    An absolute contract requires performance regardless of circumstances, while a contingent contract requires performance only if a certain event occurs.
  4. Can contingent contracts be enforced in court?
    Yes, but only if the triggering event has occurred or has become impossible, and the contract meets legal validity requirements.
  5. Are contingent contracts used in business negotiations?
    Absolutely. They’re especially useful when parties disagree on future outcomes and want to align interests without compromising core beliefs.

If you need help with features of contingent contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.