It might feel risky to enter into a contract when you’re uncertain about what the future holds. Fortunately, that’s what contingent contracts are for.
Discover what contingent contracts are and how they work in this Juro explainer.
What is a contingent contract?
A contingent contract is a contract that includes terms that only become effective when certain conditions have been met. In other words, specific terms within the contract will be contingent on a particular outcome either happening (or not), hence the name.
That is why a contingent contract is the opposite of an absolute contract.
An absolute contract requires that the parties perform the contract terms without any conditions.
Meanwhile, a contingent contract will only require parties to fulfill certain obligations in certain circumstances, or once certain conditions have been met.
When is a contingent contract used?
A contingent contract is often used when parties fail to reach an agreement during contract negotiations. Rather than scrapping the contract altogether, contingent contracts enable parties to reach a compromise that works for them both.
A contingent contract is also used when action is only required by parties if certain events occur. Insurance contracts are a great example of this: individuals will only ever need their insurance companies to compensate them if whatever they have insured is lost or damaged. Until this happens, the insurance company doesn’t owe this obligation.
Contingent contract examples
Let’s look at a couple of examples of contingent contracts to give you a better idea of what they look like in practice.
Imagine you’re a baker and you’ve created a new flavour of cake. This flavour is so good, you’re confident it will sell quickly and in large quantities.
To get the product in front of more people, you decide to contact a local convenience store and ask if they would like to sell 200 cakes each month on your behalf. You tell them that they can have a percentage of the profits, which they consider.
The problem is, the convenience store owners are skeptical about how well the product will sell. Instead of accepting 200 cakes each month, they want to accept 50. This isn’t what you had in mind, so you’re reluctant to do the deal.
But to prevent both parties from losing out, you decide to create a contingent contract instead. This contract states that, if the 50 cakes sell out within a week, then the convenience store will accept the remaining 150 to sell. If they don’t, they will only keep and pay for the 50.
What makes this a contingent contract is that the convenience store is only obliged to accept and pay for the additional 150 cakes if the first 50 sell within a certain timeframe. In other words, the sale of the remaining 150 cakes is contingent on the first 50 selling quickly.
Another common example of contingent contracts is an insurance contract. Also known as aleatory contracts, insurance contracts will only require an insurance company to pay out to their customers if certain events have occurred.
Take a home insurance contract, for example. The contract between the parties will clearly state that the insurance company is not obliged to pay out to a homeowner unless something happens to their property and is covered in their policy.
If their home is affected by an accidental fire, and their plan covers this scenario, then the insurance company will likely need to pay out for any damage and losses to your home caused by the smoke or fire.
However, if there isn’t a fire and your property remains unaffected, you’ll obviously not be owed this money by the insurance company.
It sounds simple. But you’d be surprised how many businesses overlook contingent contracts and their benefits.
What are the advantages of using contingent contracts?
Contingent contracts can be a great tool for many businesses as they afford more flexibility than regular contracts. They also have a few other important advantages.
1. Makes it possible to operate in uncertainty
One of the biggest advantages of using contingent contracts is that it enables businesses and individuals to account for uncertainty.
If we go back to our cake example earlier, we couldn’t say with certainty that all 200 cakes would sell out within a month. But the convenience store couldn’t say with certainty that they wouldn’t, either. A contingent contract acknowledges this lack of predictability and makes it possible to draft a contract that protects both parties’ interests anyway.
This is an attractive prospect for many businesses seeking to minimize contract risk. If the convenience store doesn’t manage to sell the 50 cakes in the first week, they’ve not committed to the additional 150 cakes. This means that they are able to reduce their potential losses if they aren’t selling well.
2. Removes the need for an all-or-nothing approach
One of the biggest contract management mistakes businesses make is that they take an all-or-nothing approach to negotiations. All too often, the stubbornness of both parties means that they walk away empty handed.
But contingent contracts offer a lot of flexibility and opportunity for compromise. Back to the cakes. As the baker, you could have easily said that you were only willing to sell the 200 cakes from the offset. Any fewer, and the deal was off.
This would mean that you’ve lost the opportunity to sell those 200 cakes altogether. But with the contingent contract in place, that opportunity still stands.
The same goes for the convenience store. If they had outright rejected the additional 150 cakes, regardless of how quickly they sold, they could be losing out on the profit from the additional 150 cakes.
What are the disadvantages of contingent contracts?
One drawback of contingent contracts is that they are often more difficult to draft than absolute contracts.
This is because more terms and conditions need to be captured within the contract. These terms also need to be described precisely to ensure that the contract remains enforceable and that each party is aware of exactly when certain obligations come into play.
They’re often also harder to negotiate, since they’re typically used when parties are struggling to reach an agreement over the terms of a transaction. Fortunately, there’s a way to make negotiating contingent contracts easier. Let’s check it out.
How to negotiate contingent contracts more effectively
Contingent contracts can be tough to negotiate, and this is made harder when you have to move between multiple different tools.
A traditional contract workflow involves contracts created in Word, which are then shared with counterparties via email. The counterparty usually downloads the file and moves it into Microsoft Word for redlining. Once redlined, they attach the new version of the contract to an email and send it back to the contract owner.
If the contract owner is happy with the suggested changes, great. If they aren’t, then there’s usually more redlining to come. This process is repeated again and again until both parties are happy with the terms within the contingent contract.
Negotiating contingent contracts in this way is rarely smooth sailing. There are often multiple versions of the same contract floating around, it’s hard to identify which changes were made most recently, and there’s often friction and delays waiting for counterparties to respond.
Fortunately, contingent contracts can be negotiated far more efficiently using an all-in-one contract automation tool like Juro. This is thanks to the platform’s advanced negotiation functionality.
- Split internal & external versions that enable Juro users to toggle between two different versions of the contract - one where they can collaborate internally and hide comments from counterparties, and another where they can negotiate with counterparties in real time.
- Automatic redlining that makes adding redlines to contingent contracts effortless. All of these redlines are then captured accurately in a timeline of changes, making it easy for parties to identify which redlines have been made, by who, and when.
- Visual audit trail that enables users to prove how a contract was agreed in the event of disputes. This is particularly useful for contingent contracts where parties may change their mind after signing a contract.
- Commenting functionality that enables legal and business teams to add comments to specific clauses, terms and words within a contract. Juro users can also discuss these areas of contention using comment threads, or tag individuals to prompt their input.
Manage contingent contracts in Juro
Juro doesn’t only make it easier to manage contracts at the negotiation stage. Juro enables all teams to streamline the creation, execution and management of contracts at scale. To find out more, fill in the form below.