Contingency: Overview, definition, and example
What is a contingency?
A contingency refers to a provision or condition in a contract that specifies a particular action or event that must occur (or not occur) for the agreement to remain valid, or for certain obligations to be fulfilled. It is essentially a "what-if" scenario that outlines what happens if specific conditions arise during the course of a business deal or project. Contingencies are used to manage risks and ensure that parties involved in the agreement are protected from unforeseen circumstances or events.
For example, in a real estate transaction, the buyer might include a contingency in the purchase agreement that allows them to back out of the deal if they are unable to secure financing.
Why is a contingency important?
A contingency is important because it provides a safety net for businesses, ensuring that certain risks are accounted for and that parties are not locked into an agreement under unfavorable conditions. It gives flexibility by allowing businesses to take action or make adjustments if unforeseen events occur. For SMBs, having contingencies in place helps manage risks, minimize potential losses, and protect the business from factors outside its control.
For example, a contingency clause can protect a company from liability or financial loss in case of delays, unexpected costs, or changes in external conditions like market fluctuations or regulatory changes.
Understanding contingency through an example
Imagine your small business is negotiating a contract with a supplier for the purchase of materials. You might include a contingency clause that allows you to cancel the order without penalty if the supplier cannot meet the agreed-upon delivery date. This ensures that if the supplier fails to deliver on time, your business can avoid being penalized or forced to accept subpar performance.
In another example, if your business is planning a major expansion and securing financing, you may include a contingency clause in the loan agreement that allows for adjustments if the interest rates change or if the bank cannot approve the loan by a certain date.
An example of contingency in action
Here’s how a contingency might be referenced in a business agreement:
“This agreement is contingent upon the buyer securing financing for the purchase. If the buyer is unable to secure financing by [date], this agreement shall be null and void, and neither party will have any further obligations under this contract.”
Conclusion
A contingency is a provision that sets specific conditions under which an agreement will proceed or can be canceled. For SMBs, contingencies help mitigate risk, provide flexibility, and ensure that unforeseen circumstances are handled effectively. By including well-thought-out contingencies in contracts, businesses can protect themselves from liabilities and ensure that they can make necessary adjustments when situations change unexpectedly.
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.