A contingent contract may sound like an oxymoron, as the finality of contracts is often emphasized. Still, the flexibility of negotiating contingent agreements can help keep a contract intact, even if the parties’ position changes. Negotiating the terms of a contract can be difficult, and when the parties cannot reach an agreement because of something that may happen in the future, they may decide to use a contingent contract to form an agreement.
Contingent contracts can be a powerful negotiating tool to keep a contract on the table when the parties have difficulties creating the terms. Yet, some parties will be hesitant to agree to a contingent contract because there may be risks associated with the contingent portion, and the parties may not fully understand the implications of these types of contracts.
This article will examine contingent contracts and how they are formed, what types they may take on, how to present one, and the effectiveness of contingent terms. It aims to ensure that readers feel confident in their contracts moving forward, whether contingent or not.
Contingent Contract Defined
A contingent contract is simply a contract in which one or more of the terms are contingent on a fact or condition happening or not happening. Contingent means that the terms will only take effect or lose their effect if unforeseen circumstances occur. It is the opposite of an absolute contract, which means that no conditions can affect the occurrence of the terms in the contract. Instead, the terms will only take effect if certain conditions occur.
Predictions about how the events following the agreement will play out will always exist in contract negotiations. Still, a contingent agreement allows the parties to change or alter the contract due to unforeseen circumstances. They are most commonly used to motivate compliance with the contract or punish a party after parties fail to comply. However, there are various types of contingent contracts, which will be discussed below.
Elements of a Contingent Contract:
To better understand this type of contract, it is essential to understand the necessary elements to create a contingent contract. Including these elements in a contract will give the contract the flexibility that a contingent contract needs. To ensure that the contract is contingent, it needs to include:
Event
The contract must refer to future events or conditions that will happen or not happen.
Collateral
The event in the contract must be collateral to the agreement. This means that it is not part of the performance required by the contract. If one party is necessary to complete the event for the other party to be required to complete their task, this is part of the performance and is essential to the contract, not collateral.
Conditional
The contract’s performance must depend on an event that is both future and uncertain. If an event is sure to happen, it is not a contingent contract because the only condition is the passage of time. This contract requires dependence on an event that may or may not happen.
Independent
Another critical aspect of the future events that trigger the action is that it cannot be under the promisor’s control. This means that the parties to the contract cannot be responsible for whether or not the event happens. If an agreement is contingent upon the actions of one of the parties, those actions are likely part of the performance of the contract.
These elements are necessary if you are attempting to create one of these contracts or negotiate deals. Looking for these elements may also help identify whether an agreement or contract offer is contingent and help the parties make informed decisions about the contract negotiations.
Contingent Contracts Examples
Another way to learn to identify contingent contracts is to look at typical examples of agreements that would be considered contingencies and those that may look like contingency contracts but are not. First, let’s assume that Aly owns a soap and candle-making company. She recently expanded her business nationwide and wants to ship through ShipCo, Sandi’s shipping company.
The two of them have a meeting to iron out their contract. Because Aly’s business, Aly’s Candles, is new, Sandi is looking at a possible contingent contract to protect their interests. They are considering the following contract options.
Option 1
Aly has a potential investor interested in her company. If the investor backs Aly’s business by next month, Sandi will offer Aly a discounted shipping rate for one year. This is a contingent contract because Sandi’s performance is conditioned on the outside investor’s investment in Aly’s business, a collateral event outside Sandi’s control.
Option 2
Aly offers Sandi a contract that says she will receive the discounted rate if she sends at least 50 packages through ShipCo monthly. This is not a contingent contract because Aly controls the number of packages she sends, and the discounted rate is the consideration Sandi will give for the number of boxes.
Option 3
Sandi’s company, ShipCo, also specializes in international shipping. Sandi offers Aly the national rate at a barely discounted rate, but a clause allows Aly to fulfill international orders at a deeply discounted rate. This is a contingent contract partly because the deep discount offered is contingent on Aly’s Candles getting an international order, an independent event that is collateral to the agreement.
Option 4
Sandi offers another six-month contract, during which she will send packages. If Aly’s Candles does not receive a valid one-star review during that time, the contract will be extended with ShipCo’s trusted vendor rate. This is also contingent, at least in the extension, because the extension is based on Aly’s Candles not getting a low review online.
Plenty of other contract examples could be discussed; however, the critical factor to consider when identifying or creating a contingent agreement is whether performance depends on an independent collateral event.
Types of a Contingent Contact
Outside of identifying what a contingent contract means, it may be helpful to understand the types of contingent agreements that may be helpful in bargaining and knowing options to present. The common types are:
Occurrence of an uncertain event
This type of contact will affect the performance of the contract if unforeseeable future events occur. In the common examples above, the international order would be an excellent example because the global order is an uncertain event that could or might not happen.
Nonoccurrence of an Uncertain Event
This contract will be dependent on an event that does not happen. The example above, which lists the one-star review option, would be an excellent example if there was no time frame because Sandi’s performance wholly depended on no posted reviews.
Occurrence with a time frame
Similar to the first type, this contract will have performance dependent on the occurrence of a particular event within a set period. Option 1 above is an excellent example of this type because it requires an investor to back Aly’s company within a month, which is the timeframe within which the event must occur.
Nonoccurrence with a time frame
Similar to the type before, a contract contingent upon the non-occurrence of a particular event within a specific timeframe will condition performance on a particular event not occurring within a timeframe. Option 4 is the perfect example of this. Sandi’s performance is contingent on Aly’s Candles not getting a valid one-star review within six months or the nonoccurrence of a one-star review.
Impossible
The final kind of contingent contract is one type that the parties involved should seek to avoid. This contract is contingent upon an impossible event or an event that is guaranteed not to happen. These contracts are void immediately and cannot be completed. An example of this type would be option one if the investor has already told Aly she will not invest in her company. Therefore, the contract would be void because it would be impossible for Sandi’s performance to occur without the investor being in the picture any longer.
Contingent contracts can only take these forms. If you change any other aspects of the contract, it will likely shift into an absolute contract or be excluded because the condition will be under a party’s control. Therefore, these types should be considered when creating a contingent contract.
Effectiveness of Contingent Contracts
Before examining situations where these types of contracts are a good option, the parties must consider their effectiveness and whether they protect the interests they are designed to protect. These contracts are often effective when crafted well, but their effectiveness can depend on what interests are intended to be protected in the contract. Understanding what and who the contingency protects is vital to consider its effectiveness. To examine how well contingencies perform, consider the interests it seeks to protect.
Negotiating contingent contracts is no small feat. The most common interest protected by these contracts is fear. This can come from various places and will likely be an undercurrent in other interests in the contract. This is most commonly the interest when one of the parties is nervous about an event, so they build protection for themselves into the contingency if the event happens. These can be incredibly effective when a party is reluctant to commit, and the event that makes them nervous is unlikely to happen.
Another common interest in these types of contracts is protection. This is typically based on fear but is tied directly to something else they need to protect. In our example above, Sandi is nervous about agreeing too much with Aly because Aly’s Candles is new, and Sandi has a business reputation to protect. When contingencies are built into a contract based on protection, they are often successful in this protection but are somewhat challenging to create consideration for.
Bargaining for a Contingent Contract
If a party wants to add a contingent term at the bargaining table, they may need to be creative. These contracts are prevalent in some industries, yet the parties are unsure or unaware of how contingencies work in many companies and when they negotiate deals. Highlighting the advantages of contingent contracts can help demonstrate the benefits and increase the chances of achieving a contract with a contingency to protect interests.
When looking to create a contingency in a contract, the parties have the unique opportunity to make the very issues that they are struggling to reconcile a contract term. Presenting contingencies as this type of value will often help encourage the other party to agree. Some common advantages of these contracts that can demonstrate their value include:
Avoid Disagreement
By agreeing to make the performance on some or all of the contracts contingent on an unforeseen event, the parties will avoid any considerable disagreements by making either option play out depending on the event’s outcome. It allows the parties to bet on their predictions and receive what they need from the contract.
Avoid Litigation
These contracts also avoid litigation because the parties have the answers for the event’s outcomes without needing a court to interpret the contract. By creating options within the contract, the parties can avoid further disagreement.
Avoid Renegotiating
When parties create absolute contracts or refuse to create one until an event occurs, they risk needing to reconvene to renegotiate the terms of the agreement. By creating contingencies in the contract that dictate the outcome without renegotiating.
Avoid Imbalance
Negotiations often involve one party having more information than the other. Creating a contingent contract with options allows the party who knows less to discover more about the contract and be locked into a decision when they receive that information. In this case, contingent agreements allow the parties to even the playing field through the conditions.
Summary
By highlighting these and other advantages of these contracts, a party can create value in the negotiations and gain ground in their contract. Finding ways to avoid disagreement by agreeing with options based on unforeseen events will help the parties enter into a working relationship and encourage interaction in the future.
Contact ADR Times to learn more about contingent contracts, dispute resolution contacts, and more!
- The Benefit of the Doubt: A Gateway to Trust - April 5, 2024
- Furlough Vs. Layoff: The Difference for Employees - April 4, 2024
- What Is Furlough? What You Need To Know - April 3, 2024