What is a Contingency Agreement?

A contingency agreement is a type of contract that provides for specific actions to take place if that a particular event or chain of events should come to pass. The provisions found in this type of agreement effectively serve as a backup plan when a covered event takes place and the usual and typical process normally followed by the parties involved is no longer feasible. Businesses often use this approach as a means of preparing for the possibility of certain events that could threaten the continued operation of the business, sometimes by utilizing a series of vendors that agree to provide certain goods or services should the usual providers be unable to fulfill their obligations.

The idea behind a contingency agreement is to prepare for one or more possible events that could have an adverse effect if no such plan were put in place. For example, a conference call provider that handles all service delivery to customers out of a single call center may enter into an agreement of this type with a similar provider as a means of making sure service to customers is not interrupted in the event the call center is disabled due to some type of natural disaster. The terms of the contingency agreement would go on to outline the process whereby the transfer of client data would take place, including the rerouting of conference numbers from the teleconference bridges of the affected company to the secondary provider. Often, the terms of the agreement would also address processes for transferring those numbers back once the original call center was up and running again.

A contingency agreement may be used in a number of applications. For example, a consumer who wishes to build a new home may contract with an architect to come up with a design. Payment for the architect’s efforts may be contingent on the consumer obtaining a loan to finance the actual construction. Should the loan not be approved, the architect is not compensated and maintains control of the plans, and it free to use them in another project at a later date.

It is not unusual for companies to establish a contingency agreement with a secondary provider of some raw material that is essential to the continuing operation of the manufacturing process. Here, the terms will often specify that if the primary supplier is unable to fill a pending order, the secondary supplier will assume control of that order and deliver the necessary materials before the deadline noted on the order. This approach makes it possible to avoid costly delays in production that adversely affect the bottom line of the company, and could possibly damage relations between the company and its customer base.