Contingency (contract)

Contingent contracts usually occur when both negotiating parties fail to reach an agreement. The contract is characterized as "contingent" because the terms are not final and are based on certain events or conditions occurring. (Malhotra, Bazerman 2008, p. 70). Contingent contracts can be likened unto if-then agreements that state which actions under certain conditions will result in specific outcomes (Templar 2012, p. 122).

A contingency contract can also be viewed as protection against a future change of plans (Malhotra, Bazerman 2008, p. 70). Contingent contracts can also lead to effective agreement when each party has different time preferences. For example, one party may desire immediate payoffs, while the other party may be interested in more long-term payoffs (Thompson 2008, p. 122). Further, contingency contracts can foster an agreement in negotiations involving resolute differences of expectations about the future (Malhotra, Baerman 2008, p. 69).

Contingent contracts can be used in many types of settings such as work, school, home, etc. In regards to work, a common example of contingent contracts comes in the form of job negotiations. It usually involves the opportunity to discuss salary, position, promotion, etc. However, contingent contracts can often include negotiations regarding flextime, job sharing, responsibilities, etc. Although contingent contracts concerning employment packages are more the exception than the norm, these types of negotiations can be very successful, allowing both parties to walk away feeling very satisfied with the newly agreed upon arrangement (Krutzberg, Naquin 2011, p. 86-87).

The following examples are everyday agreements that may occur in the workplace:

The following example illustrates a behavioral contract between a teenager and parents to be used in the home:

In order to be most effective, contingent contracts should possess some of the following characteristics:

A contingency contract can also be viewed as protection against a future change of plans

Necessary is because the contract is built on expected differences from each party. Each party can leverage their differences through bets that lead to both sides winning (Mahlotra, Bazerman 2008, p. 69). However, contingent contracts do not increase integrative value, rather they affect distribution value (Brett 2007, p. 74). Contingency contracts can create value by causing each negotiating party to stop arguing about their different beliefs. Both parties will be better off because they are each confident in their beliefs, ideas or projections (Mahlotra, Bazerman 2008, p. 69).

Contingency contracts can be beneficial for both parties by producing value and motivating performance, however there are some situations in which contingency contracts are not the best solution (Mahlotra, Bazerman 2008, p. 70). Here are some limitations (Mahlotra, Bazerman 2008, p. 71):

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