Contingent Provisions in Agreements

Contingent provisions in contracts operate to alter the obligations and/or benefits of the parties based on some future event or variable. A common example of a contingent provision is a bonus provision in an employment contract that takes effect when the employee reaches a sales milestone. Contingent provisions have many uses, such as motivating performance. As stated above, one of the common ways to motivate performance is through employment bonus payments tied to performance milestones. Performance bonus payments are also seen in construction contracts in the form of early completion bonuses. Contingent provisions can also be used to ensure performance is made on-time, by making payment contingent on completion by deadline (however, be sure that payment is being made *after* completion, and is not being made before with a clawback right if the deadline is not met, as that may be deemed a penalty, which is disfavored by courts). Contingent provisions can also be used to encourage parties to back up their claims of being able to generate value by, for example, tying payment to the amount of value they actually generate as a percentage of the revenue or profits generated. Finally, contingent provisions can also be useful in allowing a party to ensure they are capturing their fair share of an asset, such as an additional payment if a tract of land is used as a subdivision within some period of years. However, contingent provisions can also have their pitfalls. For starters, contingent provisions must be very carefully drafted to remove any ambiguity — most of the issues that arise from contingent provisions are disputes between the parties as to whether the contingent event occurred — such as defining what a “sale” is for a bonus payment based on sales milestones. It is also advisable to use quantifiable or measurable contingent events or milestones, rather than a qualitative measure like “to the buyer’s satisfaction”. Contingent provisions also introduce uncertainties into contracts — parties won’t know the full value or cost of the contract until the occurrence or non-occurrence of the triggering event or milestone. Parties who have additional liabilities as a result of contingent provisions may also run into an issue where they lack the funds to pay the additional liability.

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