Most people will never have heard of an aleatory contract, but almost everyone will be a party to one. But what actually are aleatory contracts, how do they work and are they enforceable? Let’s find out.
What is an aleatory contract?
An aleatory contract is a type of agreement that only requires action from the contracting parties if an uncertain, unforeseen or unpredictable event happens.
Under an aleatory contract, a party will only need to fulfil certain obligations if a chance event has occurred, and if this event was beyond the control of both parties. Common examples of these chance events include death, accidents and natural disasters.
Aleatory contracts were first recognized under Roman law, where the term was commonly used in the context of gambling and other fortuitous scenarios. Fast forward to today, and aleatory contracts are most commonly found in the form of insurance policies.
Aleatory contract example
One example of an aleatory contract is a home insurance contract. Although both parties (the insurer and the insuree) have both entered into the agreement, the insurer will not need to fulfil their contractual obligations unless a certain event occurs which triggers the need for these obligations to be performed.
A triggering event in this type of an aleatory contract could be a natural disaster, which destroys part of the insured property. In the unlikely event that this does happen, the insured party can request that the insurer performs their obligation under the contract, and this performance is usually provided in the form of financial reimbursement for the damage caused.
However, it’s possible that the insured party pays for this protection without ever needing the counterparty to perform their part of the contract. This is because the contract’s performance is contingent on the chance event happening, and if that event doesn’t happen, the insurance company will never need to pay out to compensate for it.
This is distinct from most other types of contracts whereby both parties must fulfil their obligations automatically, not just if a certain event occurs.
Common types of aleatory contracts
Home insurance policies aren’t the only type of aleatory contract. There are also plenty other types of aleatory contract, a few of which we’ve listed below.
1. Health insurance
Health insurance is another common example of an aleatory contract, as individuals often pay for coverage to protect them in the event that they begin to suffer from poor health, or are injured in an accident of some sort.
Although every health insurance policy is different, it’s possible that the insurer may never need to pay the counterparty any money at all, or ever have to cover the cost of their care.
This is because the insurer’s obligations are only triggered by an event whereby the party has fallen unwell, which may never happen during the policy period.
2. Car insurance
Car insurance works in a similar way to health and home insurance, and is another type of aleatory contract. It’s a legal requirement in most jurisdictions for motorists to pay for car insurance, but not all motorists will need or receive a payout from the insurers.
This is because the car insurance companies will only need to fulfil their obligations in the event of an accident, and many motorists are fortunate enough to never experience a car accident, meaning they’ll never need to claim on their insurance.
3. Gambling contracts
A distinct type of aleatory contract is a gambling contract. For example, if an individual decides to put money on a roulette wheel, they are paying this out with no guarantee of receiving anything in return. Even if they put an increasing amount of money onto the roulette wheel, they could still walk away without receiving anything at all.
Only if they actually win in the gambling game will they receive a payout, and since the game is based on chance, there’s no guarantee that will happen.
4. Business disruption insurance
Business disruption insurance is a type of business contract that can also be categorised as an aleatory contract. This type of insurance covers businesses for any potential loss of income that occurs if an unexpected event means you’re unable to carry out business as usual.
The events covered by this type of insurance are usually natural disasters. However, in more recent years, we’ve seen businesses claiming under their business disruption insurance as a result of COVID-19.
Is an aleatory contract enforceable?
Aleatory contracts are enforceable so long as they meet all of the core contract requirements:
- Offer: under an aleatory contract, one party has offered to provide coverage or an opportunity of some sort, in certain circumstances, in exchange for some form of payment
- Acceptance: by entering into the contract (usually by signing it), the counterparty has accepted this offer
- Awareness: both parties are aware of what the relationship entails, and of the possibility that one party may never be required to fulfil their obligations
- Capacity: all parties have contractual capacity
- Consideration: it may appear unequal, but there is consideration provided by both parties since protection against potential threats, or an opportunity to gain something are sufficient forms of consideration
This means that, despite the uncertain nature of aleatory contracts, they remain legally enforceable and will bind parties to the terms contained within them.
Why are aleatory contracts useful?
One of the biggest benefits of aleatory contracts in the context of insurance is that they help businesses and individuals to prepare for unpredictable circumstances. By entering into an aleatory contract for home insurance or car insurance, individuals paying for this insurance can have peace of mind that if unforeseeable events did occur, they’d already be protected.
How to manage aleatory contracts
Unfortunately, aleatory contracts are among the most difficult to manage due to how complex they can be. Here are a few tips you can use to make managing aleatory contracts simpler.
1. Use automated contract templates
While insurance contracts are complex in their nature, they’re also fairly repetitive. In fact, most insurance companies offer a range of set plans, with each plan covering certain circumstances and excluding others.
Rather than drafting each contract individually, which can result in inconsistency and greater risk, it’s worth capturing these specific plans’ terms and conditions within a dynamic template. These automated templates should clearly cover:
- Which events are capable of triggering the contract’s obligations (and which aren’t)
- The payment required to secure this coverage
- The contract’s duration
- Any exclusions and exceptions to the policy
- What happens in the event of a contract breach
Once all of this information is captured comprehensively within your automated contract template, all you need to do is add any variables and values. This can be achieved with the help of conditional logic and using a simple Q&A workflow using a tool like Juro.
2. Get contract authoring right
Aleatory contracts can often be confusing, so it’s important to perfect the contract authoring process.
One tip for drafting aleatory contracts is to reduce the legal jargon to ensure that all parties fully understand the terms of the agreement. This accessibility is important in all contracts, but it’s critical in aleatory contracts where performance is contingent on unpredictable events.
It’s also important to ensure that the terms within the contract are both specific and accurate.
3. Store contracts securely
How you store aleatory contracts is also important. While it’s uncertain whether or not you’ll need to rely on the terms within the contract, there’s always a possibility that you will. Otherwise, what was the purpose of the contract in the first place?
That’s why it’s important to store the contracts somewhere secure and accessible. It’s common for businesses to use shared drives for contract storage. However, contract repositories are a great alternative for growing businesses as many offer features such as OCR which make finding specific contracts and clauses frictionless.
4. Track contract deadlines closely
It’s also worth noting that, like most contracts, aleatory contracts don’t last forever. While life insurance contracts tend to have a long contract duration, these types of contracts still have an end date and need to be renewed. That means managing contract deadlines effectively.
Fortunately, tools like Juro make managing contract renewals and contract extensions simple. Juro users can set up contract reminders for upcoming deadlines to ensure they never miss another contract renewal.
Want a more efficient contract workflow?
If managing contracts is becoming a pain point for your business, it’s worth considering contract automation software. Juro’s all-in-one contract automation platform helps visionary legal counsel and the teams they enable to agree and manage contracts in one unified workspace. Fill in the form below to find out more.