The Elements of Negotiation

ELEMENT 77Contingent Contracts

Contingent contracts in the context of negotiations are agreements that are designed to take effect only when certain conditions or “contingencies” are met. They are a way to deal with uncertainty during a negotiation by specifying in advance how certain future scenarios will be handled. This type of contract is particularly useful when negotiating parties have different predictions about future events or outcomes and want to come to an agreement that acknowledges these uncertainties.

Here are some key aspects of contingent contracts:

• Risk management: Contingent contracts allow parties to manage risks associated with future uncertainties. For instance, a seller and buyer may disagree on the future price of a commodity; a contingent contract can specify a price adjustment mechanism based on market indices.
• Future performance: Contingent contracts stipulate performance or actions that are dependent on future events. For example, a bonus might be paid if the company's earnings exceed a certain threshold by a specified date.
• Disagreement bridging: Contingent contracts can bridge disagreements about uncertain future events by providing a “bet” on the outcome. If one party is confident in a particular outcome, they can agree to conditions that are favorable to the other party if their prediction is incorrect, and vice versa.
• Motivation and goals alignment: Contingent contracts can align incentives and motivate performance. For example, in employment ...