DEFINITION of 'Contingency Clause'
A contract provision that requires a specific event or action to take place in order for the contract to be considered valid. If the party that is to fulfill the requirements of the contingency clause is unable to do so, the other party is released from its obligations. A contingency clause can be considered a type of escape clause for those involved in the contract. It allows one party to cancel a deal if certain requirements are not met, though the party benefiting from the clause has to right to waive it.
BREAKING DOWN 'Contingency Clause'
A contingency clause can be inserted into a contract to benefit either party. Courts often require a good faith effort in contracts that contain these clauses. For example, a contingency clause in a real estate transaction may require the buyer to obtain financing before the seller transfers the deed.
Paying close attention to the wording of a contingency clause is an important step in contract review, as a loosely worded clause may provide either party too much latitude in determining whether the terms of a contact are being properly executed. A contingency clause should clearly outline what the condition is, how the condition is to be fulfilled and which party is responsible for fulfilling it. Additionally, the clause should provide a timeframe, and what happens if the condition is not met.