Legal Definitions - aleatory contract

An aleatory contract is a type of agreement where the performance or value of the contract depends on the occurrence of an uncertain future event. The outcome is not guaranteed, and one party's obligation to perform is triggered only if this uncertain event happens. Both parties accept the risk that the event may or may not occur, and the timing of its occurrence is also unknown.

Here are some examples to illustrate this concept:

• Automobile Insurance Policy: When a driver purchases an automobile insurance policy, they enter into an aleatory contract. The driver pays regular premiums to the insurance company. However, the insurance company's primary obligation to pay a large sum (e.g., for repairs or medical bills) only arises if an uncertain event occurs, such as a car accident, theft, or damage from a natural disaster. If no such event happens, the company never has to pay out a claim, but the driver still benefits from the peace of mind and protection.

• Life Annuity: A person might purchase a life annuity from a financial institution, agreeing to pay a lump sum or a series of payments in exchange for regular income payments for the rest of their life. This is an aleatory contract because the total amount the financial institution will ultimately pay out is entirely dependent on the uncertain event of how long the annuitant lives. If the annuitant lives for many years, the institution may pay out far more than it received; if they pass away soon after purchasing the annuity, the institution pays out less.

• Gambling or Lottery Ticket: When someone buys a lottery ticket, they are engaging in an aleatory contract. The buyer pays a small, certain amount for the ticket. In return, the lottery organization promises a potentially much larger prize, but only if the uncertain event of the ticket matching the winning numbers occurs. The vast majority of ticket buyers will not win, meaning the organization's obligation to pay a prize for those tickets never materializes, while the organization keeps the initial payment.