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.

RELATED TERMS
  1. Acceleration Covenant

    A clause included in certain debt securities and swap agreements ...
  2. Alienation Clause

    A clause in a mortgage contract that requires full payment of ...
  3. After-Acquired Clause

    A provision included in legal contracts ensuring that subsequent ...
  4. Extender Clause

    In real estate, a provision of an exclusive listing agreement ...
  5. Release Clause

    A release clause is a mortgage term that refers to a provision ...
  6. Hedge Clause

    A provision included in published financial reports that indemnifies ...
Related Articles
  1. Investing

    Contingency Clauses In Home Purchases Contracts

    Real estate contracts often contain contingency clauses, which are conditions or actions that must be met for a contract to be binding.
  2. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  3. Personal Finance

    Why Your Will Needs a 'Titanic Clause'

    If you don't have a Titanic clause in your will and disaster strikes, there's no guarantee that your intended beneficiaries will inherit your assets.
  4. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  5. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  6. Investing

    Home Sale Contingencies: What Buyers And Sellers Need to Know

    Home sale contingencies protect buyers who want to sell one home before purchasing another. Find out what buyers and sellers need to know about these contractual conditions.
  7. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  8. Investing

    Housing Deals That Fall Through

    Find why buyers back out and what you can do if you're left holding the bag.
  9. Investing

    What You Should Know About Home Sale Contingencies

    A home sale contingency protects buyers who want to sell one home before purchasing another.
RELATED FAQS
  1. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
  2. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  3. What kinds of derivatives are types of contingent claims?

    Read about contingent claim derivatives, such as options contracts, whereby the payout of the transaction is dependent on ... Read Answer >>
  4. How are contingent liabilities reflected on a balance sheet

    Find out how to identify, treat and report contingent liabilities on the balance sheet. See how the U.S. GAAP requires contingent ... Read Answer >>
  5. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
  6. What types of future events are taking into account for contingent liability?

    Understand the concept of contingent liabilities, and learn about some of the most common types of contingent liabilities ... Read Answer >>
Hot Definitions
  1. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  4. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  6. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
Trading Center