An aleatory contract is a type of contract where the performance and outcomes are uncertain and contingent upon a specific event or trigger.
In these contracts, the parties involved typically take on risk and potential gains based on the occurrence of uncertain events.
Aleatory contracts are often associated with situations involving chance, luck, or unforeseeable circumstances, such as insurance policies and gambling agreements.
Let’s examine them in a little more detail.
- Aleatory contracts are based on the occurrence of uncertain events.
- While most commonly found in the insurance sector, they’re also used in other areas, such as investing and gambling.
- An aleatory contract has to meet certain key conditions to be enforceable.
- Contract management software can help ensure an aleatory contract is valid and meets any compliance requirements.
What does “aleatory” mean?
Aleatory is a word that’s used in many different fields, including music, literature, and law. It comes from the Latin word “alea”, which refers to a type of dice game.
In modern parlance, it also refers to events that occur as a result of chance happenings.
In fact, its literal definition is “depending on the throw of a dice or on chance; random”. The word “aleatory” has been in use in this context since the 17th Century.
What is an “aleatory contract”?
An aleatory contract is one where the agreement is dependent on a particular outcome being uncertain or down to chance.
The obligations and rights of both parties are essentially contingent upon stated and specific events either occurring or not occurring.
These events are usually beyond either party’s control and can encompass everything from natural disasters to death.
As already mentioned, you’ll most often find aleatory contracts in insurance, where many of the events that underpin agreements are uncertain.
Aleatory contract examples: The most common sorts
Although most often existing in insurance, aleatory contracts can be found in various other sectors too. Below are some examples.
If you work in a field that regularly utilizes such contracts, it may be helpful to invest in contract management software to track and monitor their use.
This is the most common industry aleatory contracts are found in.
For example, imagine a consumer approaches an insurance company to take out a policy that will protect their home from fire.
The insurance company will look at the likelihood of the various causes of fires, such as lightning and arson, and then calculate the premium that person will need to pay based on this.
This premium will be higher if the company thinks certain events have a greater-than-normal chance of occurring.
For example, if the consumer’s home is located in an area that’s susceptible to wildfires.
On the other hand, if the chance of that particular property being damaged or destroyed by fire is viewed as low, the premium will be less expensive.
Common types of aleatory contracts within this sector include:
- Homeowner insurance
- Life insurance
- Car insurance
- Health insurance
Pensions and other annuities may not be the first thing you think of when it comes to aleatory contracts, but there is an element of chance involved.
Once your pension payouts commence, the company agrees to pay you a set amount for the rest of your life. However, your total lifespan is unknowable.
If someone doesn’t live for long post-retirement, the total payout from their pension provider may be fairly small.
If they have a long lifespan, however, it could be substantial—and more than the amount paid in during their working life.
While gambling may not involve the use of formal contracts per se, the outcome of laying a bet is based on chance, so it is indeed a type of aleatory contract.
Though it’s common knowledge that the odds are usually stacked in the house’s favor, most bettors remain hopeful that they’ll be the eventual winner.
For example, imagine someone who wants to bet on a certain horse in a race.
The bookmaker knows this runner has performed well in the past and thus offers very short odds to anyone placing a wager.
Similarly to insurance contracts, it’s all about calculating the chance of an event occurring and then reflecting that chance in the premium paid or odds offered.
You might think of investments as just another form of gambling.
After all, if you invest money buying shares in a company, you have no idea if they’ll rise or fall in the future.
While your initial investment may be an informed one, the company’s future performance is largely down to chance.
For example, imagine you invest $10,000 in Company A, as it’s been showing steady improvement in the past few years.
However, it encounters problems at some point, perhaps due to a recalled product. This would affect the share price, and the value of your investment could fall dramatically.
Aleatory contracts: Are they enforceable?
The simple answer is “yes”. As with most other types of contracts, they are legally binding, even the more informal types you find in gambling.
The thing to remember with contracts is that they’re typically enforceable if they have the following six features.
It doesn’t matter the type of contract or the length; if a contract is lacking any one of these, then it will become unenforceable.
- Offer. The foundation of any contract. One party requires something from the other, and an offer is made on this basis.
- Acceptance. This offer may be accepted or negotiated. However, once there’s acceptance of it, and the contract is signed, it’s seen as legally binding.
- Awareness. While signing a contract is generally seen as legally binding, there must also be awareness for it to be enforceable. If there’s evidence of something like fraud or duress, then the wronged party has the right to void it.
- Capacity. Another feature that must be present is “capacity” e.g. both parties must have the legal right to enter into the agreement, not be under the influence of substances, or be a minor.
- Legality. Different types of contracts are subject to different laws and regulations. You need to be sure any contract is in line with state and federal laws and meets the necessary criteria for enforceability.
- Consideration. Contracts aren’t considered binding unless the parties exchange something of value. For an insurance contract, this could be the consumer paying a monthly or annual premium in return for a promised payment should the event that’s insured against occur.
Tips for drafting an aleatory contract
As with any contract, there are certain things you need to think about during drafting.
Start with the features discussed in the previous section, as they’re necessary to ensure the contract is enforceable.
1. Offer and acceptance
As with other types of contract, your aleatory contract must begin with an offer and acceptance.
There also has to be a clear explanation and understanding of each party’s rights and obligations under the terms of the contract, and you should specify a contract effective date.
Of course, it’s about more than just understanding the terms and conditions.
There must also be mutual consent from both parties to the contract’s T&Cs.
In aleatory contracts, consideration is often unequal, but it must still be there.
For example, the consumer might pay $100 per month for homeowner insurance without the insurance company ever having to pay out.
4. Legal purpose
Your aleatory contract should not only meet the requirements of any relevant laws, but you must be certain it’s neither illegal nor against public policy.
If it fails this test, it could be deemed null and void.
Do both signatories meet the competency requirements? You need to ensure the parties have the legal right to sign the contract and are competent too.
If one party is deemed as having been of unsound mind when signing, the contract could be voided.
The sectors that use aleatory contracts are typically regulated.
This may be at the state or federal level. There may even be industry-specific regulations.
When drafting an aleatory contract, be sure it meets all relevant regulatory requirements.
It’s worth emphasizing that failure to comply could result in financial penalties.
Ensure you take all these factors into consideration when drafting your contract.
You’ll also need to think about any ‘extras’ you want/need to add, such as exemption clauses.
How contract management software can help with all types of documents
Contract management can be a complex and time-consuming business.
While you want to be sure your aleatory contracts meet all the necessary conditions and are legally binding, you also want to spend the minimum time possible on drafting them.
Dependable contract management software like PandaDoc can offer users an advantage.
Not only can it save you precious time, but it also ensures that factors such as legal compliance are met.
From insurance agents to brokers to legal professionals, the right software could be one of the most useful tools in your arsenal.
Why not request a demo today and see what PandaDoc can do for you?
Frequently asked questions
Aleatory contracts are entirely dependent on unpredictable outcomes. As all types of insurance are based on chance events, such as lightning hitting your house or being involved in a car accident, all insurance policies meet this criteria.
In a traditional contract, the agreement is usually based on a fixed premise, such as money being exchanged for a product or service. With an aleatory contract, this exchange is based on the likelihood of an uncertain event happening. Thus, there may not be any value—other than peace of mind— given in return for the consumer’s payments.
The main advantage of aleatory contracts is that they offer a form of risk management. If someone has bought a property, for example, they probably want to mitigate against the risk of financial loss by insuring it against damage or destruction.
This risk management can be extended to various scenarios, such as contingent liability business insurance, where an individual’s debts will be covered in the event of their death.