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Contingent Contract: Definition, Example and Related Terms

What is a Contingent Contract ?

A contingent contract is like a conditional promise. It's a contract that only becomes binding and enforceable when a specific event or condition is met.

For example, it's like saying, 'I'll give you a ride if it rains tomorrow.' The promise to give a ride hinges on the condition of it raining. If it doesn't rain, there's no obligation to give the ride.

Contingent contracts are common in various business dealings. For example, a sales contract might state that the sale is only finalized if the buyer secures financing. If the buyer doesn't get the loan, the sale isn't completed.

These types of contracts are useful for managing risk and ensuring that certain conditions are met before obligations are enforced. This can help protect both parties in the contract. If the condition is not fulfilled, neither party has any obligations under the contract.

It's important to clearly define the conditions and events that trigger the contract's enforceability. Vague or ambiguous conditions can lead to disputes and misunderstandings, so precision in drafting is critical.

Example(s)

  • Scenario Description
    The sale of a house. The sale agreement specifies that the contract is only binding if the buyer secures financing from a bank. If the buyer is unable to obtain a loan from the bank, the contract is void and neither party is obligated to go through with the sale.
    A supplier agreement. A contract between a manufacturer and a parts supplier states that the agreement becomes binding only if the manufacturer's end client places an order. If the end client never places an order, the contract between the manufacturer and the supplier is not enforceable.