Contingencies: Overview, definition, and example
What are contingencies?
Contingencies refer to conditions or events that must occur before certain contractual obligations take effect. These clauses allow parties to outline specific scenarios under which an agreement may proceed, be modified, or be terminated. Contingencies help manage risk by ensuring that key requirements are met before a party is obligated to perform.
For example, in a real estate purchase agreement, a buyer may include a financing contingency, meaning the deal is only valid if the buyer secures a mortgage. Similarly, in a business acquisition, the agreement may be contingent on regulatory approval before the transaction can be completed.
Why are contingencies important?
Contingencies protect parties from unforeseen circumstances that could affect their ability to fulfill contractual obligations. They provide a structured way to handle uncertainties, reducing financial and legal risks.
For businesses, including contingency clauses ensures that critical conditions—such as funding, regulatory approvals, or due diligence—are satisfied before finalizing agreements. Without contingencies, parties may be legally bound to contracts even when key conditions remain unmet.
Understanding contingencies through an example
Imagine a construction company signs a contract to build an office complex. The agreement includes a contingency stating that construction will only begin if the developer secures zoning approvals. If the permits are denied, the contract is void without penalty.
In another scenario, a company looking to merge with another business includes a contingency that the deal is subject to approval by the company’s board of directors. If the board does not approve the merger, the agreement does not move forward.
An example of a contingencies clause
Here’s how a contingencies clause might appear in a contract:
“This Agreement shall be contingent upon the occurrence of the following conditions: (i) regulatory approval from [Authority], (ii) securing financing in the amount of [Dollar Amount], and (iii) satisfactory completion of due diligence by [Date]. If any of these contingencies are not met, either Party may terminate the Agreement without penalty.”
Conclusion
Contingencies help manage risks by ensuring that certain conditions are met before contractual obligations take effect. They are essential in business transactions, real estate deals, and financing agreements where external factors can influence the success of a contract.
By including contingency clauses in contracts, businesses can protect themselves from unforeseen circumstances, ensure proper due diligence, and maintain flexibility in contractual commitments.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.