Contingency Clause
A provision making a contract's obligations conditional on the occurrence of a specific future event - if the event does not occur, one or both parties may withdraw without penalty.
While straightforward in theory, many businesses fail to actively track obligations tied to this concept - often resulting in missed deadlines, unintended renewals, penalties, or loss of contractual rights.
US Law · For business owners and foundersWhat is a Contingency Clause?
A contingency clause is a contractual provision that makes one or both parties' obligations dependent on the occurrence (or non-occurrence) of a specified future event. If the contingency is not satisfied, the protected party has the right to walk away from the contract without liability - the obligation simply does not arise. Contingency clauses are a form of condition precedent and are most common in real estate contracts, M&A agreements, and financing transactions.
Common contingency clauses include: (1) Financing contingency - buyer's obligation is contingent on obtaining mortgage or financing approval; (2) Inspection contingency - buyer may withdraw if a property inspection reveals unsatisfactory conditions; (3) Sale contingency - buyer's obligation is contingent on selling their existing property; (4) Regulatory/HSR contingency - M&A deal is contingent on antitrust clearance; and (5) Due diligence contingency - acquisition is contingent on satisfactory completion of due diligence.
When a party controls whether a contingency is satisfied, courts impose a good faith duty to use reasonable efforts to satisfy (or not frustrate) the condition. A buyer who applies for financing half-heartedly and then invokes the financing contingency to escape the deal may be found to have acted in bad faith - forfeiting their deposit or facing breach of contract liability.
In practice, many teams rely on a contract expiry tracking system to stay on top of dates and obligations tied to clauses like this.
Key Elements
Defined Condition
The contingency must be clearly defined - what event must occur, by what date, and according to what standard (satisfactory, approved, obtained, etc.).Time Limit
Contingency clauses must specify a deadline by which the condition must be satisfied. An open-ended contingency creates uncertainty and can prevent a contract from ever closing.Notice of Failure
The contract should specify whether written notice is required to invoke a contingency failure and walk away - and the deadline for providing such notice.Deposit/Earnest Money Treatment
The contract should specify what happens to the buyer's deposit if they invoke a contingency - typically refunded in full. If they fail to invoke properly, the deposit may be forfeited.Real-World Example
A home buyer enters a purchase agreement with a 21-day financing contingency. The buyer applies for a mortgage but is denied. Within the 21-day window, the buyer provides written notice to the seller invoking the financing contingency.
The buyer properly invoked the financing contingency within the specified period. The buyer may withdraw from the purchase agreement without breach and is entitled to a full refund of their earnest money deposit. The seller cannot retain the deposit or claim breach of contract.
This is why many businesses adopt automated deadline tracking to ensure no critical dates are missed before they pass.
Sample Clause Language
Financing Contingency ClauseWatch Out For
Good Faith Duty to Pursue Contingencies
You cannot invoke a contingency failure as a pretextual excuse to escape a deal you simply no longer want. Courts require good faith efforts to satisfy contingencies you control, or will penalize bad faith.Missed Deadlines Waive the Contingency
Failure to timely invoke a failed contingency waives your right to withdraw. Calendar all contingency deadlines carefully - missing the window can lock you into a deal you wanted to exit.Subject-To Clauses Must Be Specific
Vague contingencies ("subject to satisfactory review") invite disputes. Define exactly what "satisfactory" means and who determines it - an objective standard is more enforceable than pure subjective satisfaction.Don't let contingency clause deadlines catch you off guard
Key dates tied to contingency clauses - renewal windows, expiry cutoffs, notice periods - can easily slip through the cracks when tracked manually. Missing them triggers automatic extensions, penalties, or lost rights. ExpiryEdge tracks every critical deadline and sends automated reminders before they're due - so nothing slips.
Instead of relying on spreadsheets or manual follow-ups, a centralized renewal reminder system ensures every deadline is visible, tracked, and actioned automatically.
How to Use This in Your Favor
Include Contingencies for Any Significant Assumption
Any material assumption underlying the deal (financing, regulatory approval, due diligence, third-party consents) should be an express contingency - not an implied understanding.Specify What Happens to Deposits Upon Contingency Failure
Always address deposit/earnest money treatment upon contingency failure in the contract. Ambiguity leads to disputes at the worst possible time.Related Terms
Frequently Asked Questions
Can I waive a contingency that benefits me?
Yes - a contingency placed in the contract for your benefit can be unilaterally waived by you. If you waive it, you must proceed with the transaction even if the condition is not satisfied.
What is the difference between a contingency and a condition precedent?
These terms are closely related and often used interchangeably. A condition precedent is the broader legal concept - an event that must occur before an obligation arises. A contingency clause is the contractual implementation of a condition precedent, typically with specific notice and deadline requirements.
Can both parties have contingencies in the same contract?
Yes - each party can have different contingencies that protect their interests. In an M&A deal, the buyer may have regulatory and due diligence contingencies, while the seller may have board approval and financing contingencies.