What is a Contingent Contract?§
A contingent contract is a type of legal agreement that becomes effective and enforceable only upon the occurrence or non-occurrence of a particular event or condition. These contracts are often used to manage risks and uncertainties in business transactions. The event that triggers the enforceability of the contract is known as a contingency.
Examples of Contingent Contracts§
- Real Estate Purchase Agreement: A contract to buy a house that is contingent on the buyer securing a mortgage loan.
- Employment Contract: An offer of employment that is contingent upon the successful completion of a background check or drug test.
- Merger and Acquisition (M&A) Agreement: A business acquisition agreement that is contingent on the target company meeting specific financial performance metrics.
Frequently Asked Questions (FAQs)§
What are common contingencies in a real estate purchase agreement?§
Common contingencies in real estate purchase agreements include financing contingencies, inspection contingencies, and sale contingencies, which allow the transaction to proceed only if certain conditions are met.
How does a contingent contract differ from a conditional contract?§
A contingent contract and a conditional contract are often used interchangeably, but a conditional contract may include broader terms and conditions that must be met for the contract to be valid, while a contingent contract strictly depends on a specific future event.
Can a contingent contract be enforced if the contingency is unclear?§
No, a contingent contract must have clear and specific contingencies for it to be enforceable. Unclear or ambiguous contingencies can render a contract unenforceable.
Related Terms§
- Earn-Out Agreement: A similar type of agreement often used in mergers and acquisitions, where the seller will receive additional compensation based on the future performance of the business.
- Condition Precedent: A condition or event that must occur before a legal obligation becomes enforceable.
- Option Contract: A contract that gives one party the right, but not the obligation, to perform a transaction under specified terms.
Online References§
- Investopedia: Contingent Contract
- American Bar Association: Contingent Contracts
- LegalZoom: Understanding Contingent Contracts
Suggested Books for Further Studies§
- Contracts: Cases and Commentaries by John P. Dawson, William Burnett Harvey, and Stanley D. Henderson
- Principles of Contract Law by Steven J. Burton
- Business Law: Text and Cases by Kenneth W. Clarkson, Roger LeRoy Miller, and Frank B. Cross
Accounting Basics: “Contingent Contract” Fundamentals Quiz§
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