What is an aleatory contract?

An aleatory contract is a particular type of agreement. Both parties know precisely what they will give and get in a standard contract. However, in an aleatory contract, what people give or get depends on something uncertain that will happen in the future.

Usually, this uncertain event is a matter of chance, like a coin flip or the weather. The word “aleatory” comes from the Latin word for dice games. So you can think of an aleatory contract as a bit like gambling. Both sides agree to do something, but what happens depends on chance.

Critical features of aleatory contracts

There are a few essential things that make an aleatory contract different from a regular one:

1. Uncertainty: With an aleatory contract, no one knows for sure what the outcome will be when the contract is signed. It depends on some future chance event.
2. Risk: Because of this uncertainty, aleatory contracts involve risk. Depending on what happens, one or both sides could end up better or worse. They are taking a gamble.
3. No one is at fault: Since what happens depends on chance, no one is to blame if things don’t work out as hoped. As long as both sides follow the agreement, there is no breach of contract.

Common types of aleatory contracts

Aleatory contracts show up in a few common areas of life and business:

Insurance policies

When you buy insurance, you make an aleatory contract with the insurance company. You agree to pay them money (your premium). They agree to pay you cash if some specific lousy event happens, like your house burning down or your car getting wrecked.

No one knows for sure if these bad things will happen. You hope they don’t. The insurance company bets that they won’t happen to most people or that the premiums they collect will more than cover the claims they have to pay out. It all depends on chance and risk.

Gambling agreements

Bets and wagers are clear examples of aleatory contracts. You’ve made an aleatory contract if you and a friend bet $20 on a basketball game. You both agree to risk $20. What you get in return depends entirely on the uncertain outcome of the game.

Bigger gambling setups, like casinos and lotteries, involve aleatory contracts, too. Everyone who buys a lottery ticket is essentially signing an agreement to pay money for the chance to win a prize. What they win, if anything, is uncertain until the drawing happens.

Life annuities

A life annuity is when you agree to pay someone money regularly for as long as they live. It’s often used to provide a retirement income.

This is an aleatory contract because the total amount that will be paid out is uncertain. It depends on how long the person lives, which is a matter of chance. The person receiving the annuity bears the “risk” of living long and getting more money. The person paying the annuity takes the opposite risk.

Benefits and drawbacks

Aleatory contracts can be valuable tools, but they have both benefits and downsides to consider.

Potential benefits

• They let you prepare for uncertain events. Insurance is a way to protect yourself financially from things you can’t control, like natural disasters.
• They let you leverage risk. An aleatory contract essentially enables you to pay a known cost for the chance of a more significant gain if you’re comfortable with the risk. This is the appeal of things like lottery tickets.
• They can provide financial security. Annuities and similar aleatory contracts can give people a predictable income stream for an unpredictable period, like a long retirement.

Potential drawbacks

• There’s always risk involved. With any aleatory contract, you could lose the money you put in. You have to be comfortable with the odds and the potential loss.
• Costs can be high. Because of the risks involved, insurance policies and annuities often have high premiums or payouts. You may pay a lot for the chance of a more significant benefit.
• Terms can be complex. The uncertain nature of aleatory contracts means they often have very detailed terms spelling out exactly what events will trigger a payout and for how much. These can sometimes be confusing or limiting.

A few other details

A couple of final points to know about aleatory contracts:

• They are only valid if the chance event is genuinely uncertain. If one side has secret knowledge that removes the uncertainty, the contract doesn’t count as aleatory. This would be cheating.
• Aleatory contracts cannot be voided in most cases because the outcomes are unequal or unfair. As long as the uncertain event was indeed a matter of chance, both sides are considered to have accepted the risk knowingly. One person getting lucky doesn’t make the agreement invalid.