Everything You Need to Know About Contingent Contracts in 2024

Sometimes throughout the contracting process, you’ll run into outcomes that can’t be negotiated into absolute terms. But, this doesn’t mean your business has to abandon the contractual relationship completely. 

Alternatively, your business can negotiate a contingent contract — a contract with terms that only call for action under specific circumstances. Contingent agreements offer more flexibility while still accounting for uncertainty. This protects your business from liability while minimizing contract risk, such as:

1. Your business over-extending itself to meet possibly unfavorable contract terms
2. The other party/s failing to meet their objectives due to unfavorable market conditions

Negotiating a contingent contract can be difficult, as the terms need to be very precise. To support this, businesses can look into implementing digital contract management software, like SignHouse, to streamline the drafting and signing process for your authorized signatories. 

In this article, we’ll discuss what contingent contracts are and why they may be useful for your business. We’ll also dive into the process of how to approach and manage contingent agreements for your business.

What is a Contingent Contract?

Contingent contracts are all about minimizing risk in the face of uncertain variables. They’re contracts that have terms that only become actionable if something specific happens (or doesn’t happen).

Contingent contracts usually occur for two reasons:

Absolute contract negotiations failed 

Sometimes contracting parties have irreconcilable future projections for key variables that can affect a contract’s outcomes. When a satisfactory term can’t be negotiated, you might need a contingent term. This allows for parties to reach a compromise with actionable steps if a particular event were to occur. 

Actions are only required under specific circumstances

Sometimes actions stipulated in a contract are only required if certain events were to occur. An example of this would be any insurance contract. A party is only owed compensation when something specific has gone wrong.

Why Are Contingent Contracts Useful?

It Reduces Conflict Between Both Parties

When unforeseen events occur, a party’s ability to execute particular contract terms can be negatively affected. When there is no contingency plan in place for these possible events, it can leave a lot of room for conflict to brew between the contracting parties. When left unchecked with no negotiated way forward, sour relationships can form between parties.

Contingent contracts aim to minimize this potential conflict by defining courses of action that must be followed if something unexpected were to occur. This reduces the likelihood of irreversible conflict and helps keep operations running. 

Makes it Possible to Operate in Uncertainty

Contingency contracts account for real-life issues that may be out of either party’s control. By negotiating contingency terms, each party will have a plan of action in the event of something unforeseen that will affect the execution of the contract.  

It Allows Both Parties to Accept Differences

Contract negotiations don’t always produce a neat, easy-to-follow set of terms and conditions. Sometimes, your business may have conflicting future projections to that of the other party. 

These future projections can be for:

• Trade timelines
• Material and travel costs
• Market sale trends

All of these variables (and more) can affect a party’s ability to execute business activities efficiently and fairly. So, if contracting parties have conflicting projections for these market variables, it makes sense to put contingency agreements in place to protect both parties and their investments.   

Contingent contracts allow parties to work together to come up with this contingency plan in the event of unexpected market events actually occurring. This means:

1. Differing opinions become a source of information rather than a hurdle
2. Negotiator bias is minimized
3. Risk is more evenly shared between parties
4. Parties are motivated to fulfill their contractual obligations to avoid the contingency terms

Using a digital contract management software like SignHouse is a great way to streamline the negotiation and drafting process of these contingency agreements. Your business and other contractual parties will be able to securely send, comment and sign the contract online, keeping your contract management processes easy and efficient.  

Types of Contingent Contracts

To better understand the different types of contingent contracts, let’s use the below example:

A owns a baking shop and enters into a contractual relationship with B, a commercial egg supplier. 

1. Contingent upon the occurrence of an uncertain event

Under this type of contingent contract, certain terms become valid only if a specific event occurs. If this event doesn’t occur, then those terms don’t need to be legally honored.

Example

A has a monthly recurring order of 100 units from B at the price point of $500, or $5 per 1 unit. If A requires more than 100 units in any given month, B will supply more units, per A’s request, at a discounted price point of $3 per unit.  

2. Contingent upon the non-occurrence of an uncertain event

This contract type depends on the non-happening of a particular event. If the particular event does not occur, the terms of the contract do not become valid, and no one is held liable. However, if the event does occur, the terms become valid and the affected parties become legally obliged to fulfill the newly valid terms.

Example

A has a monthly recurring order of 100 large eggs from B. If B can not provide 100 large eggs, they must supplement the order with alternative sizes and re-credit A’s account with the cost difference.  

B must only supplement A’s order with alternative egg sizes and provide a re-credit if they fail to provide 100 large eggs. If they successfully deliver 100 large eggs, these terms are not valid. 

3. Contingent upon the occurrence of an uncertain event within a specified timeframe

Much like type #1, this contract type relies on the occurrence of a specific event. However, this event must happen within a specified timeframe for the terms to become valid and for anyone to be held legally liable. 

Example

A has a monthly recurring order of 100 units from B that must be delivered by the first Monday of each month. If B fails to deliver 100 units by the first Monday of the new month, B can only charge A a maximum of 80% of that month’s fee. 

4. Contingent upon the nonoccurrence of an uncertain event within a specified timeframe

Much like type #2, this contract type relies on the non-occurrence of a specific event. However, this non-occurrence must happen within a specified timeframe for the terms to become valid and for anyone to be held legally liable.

Example

A has a monthly recurring order of 100 large egg units from B. If B can not provide 100 large egg units within the first week of every month, they must supplement the difference with alternative sizes and refund the price difference to A.  

B must only supplement A’s order with alternative egg sizes and provide a refund if they fail to provide 100 large units within the first week of the month. If they successfully deliver 100 large units within this week, these terms are invalid.

Contingent Contract Best Practices: Understanding the Essential Elements.

The Event

A contingent contract relies on specific events occurring or not occurring. For a contingent contract to become valid, it must specify the event and any details that may affect the terms, in detail. If the contract does not specify this event, it is not a legally binding document.

The Event Must be Collateral

A contingent contract should never be centered around or depend on the specified event. The event within a contingent contract must be incidental. It could be: 

1. An unexpected event (such as delayed shipping services) that could hinder a party’s ability to uphold certain terms within the contract.
2. An unexpected event (such as an uptick in sales) that should lead to a re-evaluation of profit splits.

Only then, does the contingency agreement come into place and the terms specified within this agreement become valid. 

Performance of the Contract must be Conditional

The event specified within a contingent contract must be two things:

1. A future event
2. An uncertain event

A contingent contract is not dependent on this future event occurring. Rather, it specifies a plan of action if this event were to occur or not occur. The event should be unpredictable and out of the hands of any participating parties.  

For example, let’s use the scenario from the previous section. The contract between A and B revolves around B delivering 100 large units to A every month, for a fee of $500. The alternative product options and fee reductions only become valid if B fails to successfully meet the demands of the original contracted agreement.   

How can SignHouse Support the Contingency Contract Process? 

Achieving a clear, concise, and fair contingency agreement is possible if you implement the right steps and tools. Be prepared and clear in your objectives, and take your time to specify the event/s that may incur a contingency agreement to become valid. 

Digitizing the contingency contract negotiations and the legal signing of the contract is a great way to approach the process. A digital contract management software like SignHouse not only makes it easy to send and sign legal documents, it also includes contract editing tools, and provides access to contract templates. 

Furthermore, your documents will stay secure while allowing both parties to view changes in real time, saving you time, money, and the headache of confusing back and forth! Sign up today and see how we can help you finalize future contingency contracts.