What is a Contingency Contract?

The term contingency is used to describe an action that is possible but not certain. Likewise, a contingency contract is an agreement that involves one action taking place if certain specified circumstances exist or conditions are met. These types of contracts are used in a wide range of situations, including real estate transactions or agreements for legal services. One of the major benefits of this type of agreement is that it reserves certain entitlements without unconditionally binding a person to a decision.

A common type of contingency contract is one that is established for legal services. These are often used in civil affairs in which the client has the potential to be awarded money. An attorney may then agree to legally represent the client for a specified percentage of the potential award. In these instances, the attorney is paid only if the case is won. If the client does not receive money, the attorney shares in the loss by also forfeiting any entitlement to legal fees.

A contingency contract can have a number of clauses included that contain conditional agreements. For example, two parties may sign an agreement for the sale of a vehicle. The potential buyer may obligate himself to purchase the truck if no mechanical problems are found. The contract may go further, however, and the potential buyer may further obligate himself by agreeing to still purchase the truck despite the discovery of problems if they are repaired within 48 hours at the expense of the seller. In this agreement, it becomes clear how a single agreement can be based on two or more contingencies.

This example also spotlights one of the major benefits of a contingency contract, which is the fact that it reserves certain entitlements while reducing some of the risks. When considering the contract for the truck, the potential buyer must make the purchase if conditions are met and the seller must make the sale. The buyer is thereby protected from being forced to purchase a vehicle in poor condition and from having the seller exchange the vehicle with another individual. The seller is protected from having the potential buyer change her mind for unspecified reasons.

More than the consent of the two parties signing a contingency contract may be required for an agreement to be binding in some cases. Third parties may be involved in ensuring that the terms of a contingency contract are fair. In some instances, the conditions contained in certain types of agreements are regulated by law.