Drafting contingent contracts can be tricky. You need to pinpoint conditions that trigger obligations and ensure everything is crystal clear to avoid future disputes.
This article simplifies that process. We will explore what contingent contracts are, why they are useful, and how you can draft them effectively.
Plus, we will provide a free template to help you get started right away.
What is a contingent contract?
A contingent contract involves terms that are enforceable by law only when specific, future events occur. If the event doesn't happen, the contract may not be enforceable.
Unlike standard contracts, which are automatically enforceable once signed, a contingent contract becomes valid only if certain conditions are met.
Also read: How to Write a Contract Effectively
When is a contingent contract used?
Contingent contracts are versatile and used in various situations where outcomes are uncertain. They provide a structured response to specific conditions, reducing risks for all parties involved.
- Real estate: In real estate deals, a purchase might depend on the buyer selling their current home. The contract becomes valid only when their home is sold
- Employment agreements: Employment contracts might include clauses that make certain benefits contingent upon the employee meeting specific performance targets
- Insurance policies: Insurance agreements are often contingent contracts. For example, a health insurance policy requires the insurer to pay for medical expenses only if specific medical conditions are met
Also read: Real Estate Contract Management: Best Practices
Benefits of using contingent contracts
Contingent contracts are quite the strategic tool in our legal arsenal. They allow us to manage risks smartly by activating terms only when certain conditions are met. This way, your organization isn't caught off-guard by unexpected obligations.
#1 Risk management
By setting specific terms that activate only under certain conditions, these contracts allow you to sidestep unexpected obligations, keeping risks at bay.
Also read: Effective Contract Risk Management: Top Tips & Strategies
#2 Clarity in obligations
Contingent contracts ensure everyone knows what's expected, reducing misunderstandings and disputes, as obligations are clearly defined and triggered by specific events.
#3 Conditional commitment
These commitments are fair and tailored to actual scenarios, ensuring that obligations are not only reasonable but also relevant to the conditions at hand.
#4 Flexibility
Contingent contracts adapt to changes, providing the necessary flexibility to adjust to new circumstances without renegotiating the entire agreement.
#5 Enforceability
When properly drafted, they provide a solid legal framework to address any disputes or breaches, ensuring legal protection for all involved.
Key elements of a contingent contract
To ensure a contingent contract is effective and enforceable, certain foundational elements must be carefully crafted and agreed upon.
- Offer and acceptance: Every contract starts with a clear offer from one party and the acceptance by the other. This basic principle holds true for contingent contracts as well, ensuring that there is a mutual agreement on the proposed terms before any obligations are set
- Consideration: Both parties must exchange something of value, which can be goods, services, or a promise to act or refrain from acting
- Condition precedent: This is what sets contingent contracts apart. The contract’s obligations kick in only if specific conditions are met. These conditions must be clearly defined to avoid any ambiguity about when the contract should be executed
- Mutuality of obligation: The contract must involve obligations on both sides that depend on the condition being met. This mutual dependency ensures that all parties are equally committed to the contract’s terms
- Legal purpose and competent parties: The contract must serve a lawful purpose, and all parties involved must be legally capable of entering into a contract. This means they must be of legal age, sound mind, and not coerced or impaired
- Specificity of terms: It's critical to spell out the terms of the contract clearly, especially the conditions that trigger obligations. Clear terms help prevent misunderstandings and ensure that the contract can be effectively enforced if disputes arise.
Download: Free contingent contract template
We’re providing a free template to help you draft your own contingent contracts effectively. This template is designed to be a starting point, adaptable to various scenarios where contingent terms are needed.
Begin by reviewing the template to understand the structure and the clauses included. Customize the specific conditions, obligations, and terms to suit the particular needs of your agreement.
The template includes key sections such as the definition of the contract’s purpose, the detailed conditions precedent, the obligations of each party, consideration details, and terms for contract termination. It’s set up to guide you through filling in the specific details pertinent to your situation, ensuring that nothing is overlooked.
Use this template as a framework to ensure all necessary elements of a contingent contract are covered. It’s crucial to adapt the clauses to reflect the true intent of the parties involved and the specifics of the underlying agreement.
Best practices for drafting a contingent contract
#1 Define the conditions clearly to activate the contract obligations
When you're putting together a contingent contract, you need to spell out the conditions that trigger the obligations. Here’s how you can make sure everything is crystal clear:
- Use straightforward language: Write the conditions in simple terms. It’s better if everyone involved can understand them without needing a dictionary. This clarity will cut down on misunderstandings and help avoid legal headaches later on
- Detail exactly when obligations kick in: Clearly describe the circumstances under which the contract will come into effect. For example, if a deal hinges on the buyer securing a loan, specify the exact financial requirements and the timeframe within which this must happen
- Check for vague terms: Before you finalize the contract, go over it again—or better yet, have someone else check it too—to make sure every term is clear and unambiguous. This double-check is a safeguard against potential disputes
#2 Include detailed descriptions of all parties' obligations
In your contingent contracts, include thorough details about what each party is expected to do, both before and after the conditions are met. Here’s how to make sure your obligations are well-detailed:
- Specify obligations clearly: List out exactly what each party is responsible for doing. Be as specific as possible to avoid any ambiguity that could lead to disputes
- Outline pre- and post-condition responsibilities: Clearly differentiate between what needs to happen before the triggering condition is met and what must occur afterward. This helps prevent any confusion about the timing of obligations
- Document everything: Ensure that all agreed-upon obligations are documented in the contract. This written record will be invaluable if there's ever a disagreement about who was supposed to do what.=
#3 Keep the contract simple to avoid misunderstandings
It's tempting to cover every possible scenario in a contract, but overly complex agreements can be a pitfall. Here’s how to keep your contingent contracts straightforward:
- Focus on essential elements: Stick to the crucial points without delving into excessive detail that could confuse the parties involved
- Use clear language: Avoid legal jargon and complex constructions. Plain language helps ensure that all parties understand their obligations and rights
- Streamline your provisions: While it’s important to be thorough, try to consolidate similar provisions and avoid redundancy. This makes the contract easier to follow and enforce
#4 Regularly update your contracts to keep them relevant and enforceable
Keep contingent contracts up-to-date to ensure they remain effective and enforceable as circumstances change. Here's how you can stay on top of contract updates:
- Schedule reviews: Set periodic reviews for your contracts to assess their relevance against current laws and business conditions. This can be annually or in response to significant legal or operational changes
- Adapt to changes: Be proactive in updating terms and conditions in your contracts as required by changes in the law or your business environment
- Use version control: Keep track of changes with version control systems. This ensures that everyone involved is working from the most current version of the contract and understands any amendments made
#5 Anticipate and resolve disputes effectively
It’s only wise to prepare for potential disputes when drafting contingent contracts. Here’s how to effectively include terms for dispute resolution:
- Specify resolution methods: Clearly outline the steps for dispute resolution within the contract. Options might include mediation, arbitration, or litigation. Specify which method to use in various scenarios
- Define the process: Detail the process each party should follow if a dispute arises. This includes timelines for raising concerns and the steps for escalation
- Choose neutral ground: If arbitration or mediation is chosen, agree on a neutral third party or service in advance to avoid biases
Also read: Finding Common Ground: How to Resolve Contract Disputes
#6 Leverage technology to draft contingent contracts with ease
I get it; many lawyers are hesitant to integrate new technologies into their practice, often preferring traditional methods they know well.
However, embracing technology like SpotDraft can significantly reduce the time and energy you spend on routine legal tasks. Here’s why it’s worth considering:
- Create contracts quickly: With SpotDraft, you can generate contracts in minutes using customizable templates. These templates come with legal guardrails and approval routing, enabling your business teams to create new agreements with just a few clicks
- Customizable template builder: Transform your existing library of contract documents into reusable templates effortlessly. SpotDraft’s no-code template builder, equipped with a Microsoft Word Plugin, allows you to design and modify templates without needing technical skills
- Automate and integrate: Pull data automatically from your CRM, HRMS, and other business tools to create contracts. This integration speeds up the contract creation process and reduces manual data entry errors
- Mitigate risk at scale: SpotDraft templates include conditional clause logic to ensure your contracts are always up-to-date with the latest legal standards and organizational policies. Automate contract approval routing to ensure every contract is reviewed and approved as necessary before finalization
Want to give it a try?
Start drafting contingent contract with our free template
As you draft your contingent agreement, it's important to align the contract's details with your unique needs to ensure it serves your goals effectively.
If you're looking to get started quickly, our free contingent contract template can help. It's easy to use and will guide you through the necessary steps to ensure your contract is robust and tailored to your situation.
