This article is written by Abhay Pandey and further updated by Upasana Sarkar. This article deals with contingent contracts under Indian Contract Act, 1872. It deals with the various components and conditions of contingent contracts. It also gives a detailed list of the advantages and disadvantages of using contingent contracts. It also gives a precise definition of wagering and conditional contracts and how they are different from contingent contracts.

Introduction

Contracts can be of various types, as laid down in the Indian Contract Act, 1872. It also states which contracts are enforceable in the court of law and which are not. While reading this Act, we will get to know about different types of contracts, which can be distinguished based on various factors. Two of them are absolute contracts and contingent contracts. A contract is considered contingent only when there is some specified uncertain event that may or may not happen in the future. A contingent contract is dependent on the occurrence or non-occurrence of that event. The condition mentioned in the contract should be collateral to the contract. It must not be part of the consideration specified in it. 

The performance of contingent contracts solely depends upon the completion of such conditions, after which the task is performed by the promisor. But it is not so in the case of an absolute contract. In these contracts, there is no necessity for the presence of any condition for its performance like those of contingent contracts. So, in other words, we can say that a contingent contract acts as a security against future mishaps, as in these types of contracts, the promisor is compelled to do his duty only when the collateral conditions are fulfilled as mentioned in the contract that has been previously consented by the parties.

Meaning and concept of contingent contract under Indian Contract Act

Section 31 of the Indian Contract Act, 1872, defines the term ‘Contingent Contract’. This section expressly states that it is a contract to perform something or not to do something as stated in the contract only when the collateral conditions as mentioned in such contract are fulfilled. In this kind of contract, two important points must be noted. One is that the conditional nature of the contract must be collateral to it. Another one is that it must not form a part of the consideration.

Illustration:- In case a contract is made between A and B, where A contracts to pay B a certain sum of money if B’s house is burnt. It is a condition. The payment of the amount to B by A is contingent on the house being destroyed by fire. If B’s house is not burnt by fire, then no liability occurs on the part of A to pay that amount to B. Since the destruction of B’s house by fire is the collateral condition of the contract, the non-occurrence of such an event prevents B from claiming the amount from A.

Main components of a contingent contract

The main components of a contingent contract are laid down in the Indian Contract Act under Section 31, which are as follows-

A valid contract must exist for either doing something or abstaining from doing something

A contract entered into between the parties is considered valid if they have made the contract by following the provisions of Section 32 and Section 33 of the Indian Contract Act. Section 32 mainly deals with contingent contracts where a future uncertain event needs to occur, and unless and until that event has happened, it will not be enforceable in a court of law. Section 33, on the other hand, says the complete opposite. It mainly deals with such incidents where such an event must not occur, and only when that future event becomes impossible it will be enforceable in the court of law, and not before. Contingent contracts are usually made where parties agree to take risks.

Illustration: If a contract is made between P and Q, where P promises to pay Q a certain sum of money if a certain ship does not return. In case the ship sinks due to a thunderstorm or any other natural calamity, this contingent contract can be enforced.

Performance of the contract must be conditional

The performance of a contract which is conditional in nature must be performed by the promisor as soon as the condition that needs to take place has happened. That condition must be uncertain in nature. If that condition is fulfilled in the future, then the promisor must fulfil the terms of the contract, which are contingent upon the occurrence or non-occurrence of the event.

Illustration: X promises Y to take him on a holiday trip if Y passes the exam with 80% marks. Therefore, X will be liable to take Y on a trip only when Y gets 80% or above in his exam.

Condition must be collateral on a future uncertain event

The condition must be collateral in nature. In other words, the happening or non-happening of the event should be collateral to the contract, that is, it should exist independently, otherwise, it cannot be enforced.

Illustration: X promises Y to deliver him 20 copies upon payment of Rs. 2000. This contract is not a contingent contract since there is no uncertain condition present in that contract. The payment of Rs. 2000 acts as a consideration in this contract. Here, the delivery of the copies depends on the event, which is a consideration and not a collateral condition.

Future events should not be at the discretion or under the control of the promisor

The future event should not depend upon the mere will of the promisor. The event must not be under his control or wish. The contingency should not at all be dependent on the promisor. It should be a totally futuristic and uncertain event. In case such a condition is under the control or will of the promisor, it will not be considered as a contingent contract. 

Illustration 1: M promises to pay N an amount of Rs. 10 lakhs if N goes abroad to study on 1st January, 2025. This is a contingent contract. Going abroad to study is totally a futuristic and uncertain event and is not merely M’s will.  

Illustration 2: X and Y enter into a contract where X promises Y that he will give him Rs. 50,000 in case X does not marry A. In his case, the future event is at the discretion of the promisor. Hence it will not be considered as a contingent contract. 

Key features of a contingent contract 

Some of the important key features of contingent contracts that one needs to know while studying about contingent contracts are as follows-

• Obligations of the contracting parties: It is the duty of the parties to the contract to fulfil it. There must be two parties present, of whom one is the promisor, and another is the promisee. While making the contingent contract, both parties must understand the terms and conditions in the same way, and their objectives must align with each other like other contracts.
• Enforcement of the contract: Before the enforcement of a contingent contract, it must be seen that all the legal requirements are present in it that a valid contract requires. In the absence of those elements of contracts, it will not be possible to frame a contingent contract. Therefore, it is important to understand that the performance of a contingent contract depends on a certain specified event. So the presence of all the elements in the contract is important for enforcing a contingent contract.
• Effect of the contract: As stated above, all contingent contracts are dependent on the occurrence or non-occurrence of some particular event which must be mentioned in the clauses of the contract and must have been agreed to by both parties. Accordingly, the parties will be liable to either fulfil the contract or not to perform it. So in case a specific act or event does not happen or has happened, which is not in accordance with the provisions of the contract, then the parties are not obligated to perform their respective duties.
• Specified event: The event specified in the contract must not be something more important than the contract itself. Its occurrence must be independent in nature and should not depend on anyone’s will or desire.
• Possibility of performance: This is also an important feature of a contingent contract. The agreement made between the parties will cease to be valid in case a particular event is impractical, illegal, or so uncertain that it is impossible to predict its outcome.
• Legality of the contract: Depending on the particular terms and conditions framed, contingent contracts may have different legal consequences. Like those of any other contract, in a contingent contract also, it is the duty of the parties to see that both of them must accept the conditions made between them in the same sense and that they are competent enough to understand those terms as stated in it.

Enforcement of contingent contract

The provisions that deal with the enforcement of contingent contracts are stated under Sections 32, Section 33, Section 34, Section 35 and Section 36, which are as follows- 

Enforcement of contract contingent on the happening of an event

The first condition of the contingent contract is mentioned under Section 32 of the Indian Contract Act, 1872, which deals with the enforcement of contingent contracts based on the happening of a future uncertain event. The enforcement of this contract is dependent on the occurrence of that incident. If it does not take place in accordance with the condition mentioned in the contract or it becomes impossible to occur for some reason, there is no obligation on either of the parties to carry out the contract.

Illustration: X promises to pay Y Rs. 100,000 if he marries Z, who is the most beautiful girl in their locality. This is a contingent contract. But Z dies in an unfortunate car accident a few days after this contract was made. Since the event is no longer possible, the contract becomes void.

Enforcement of contract contingent on an event not happening

The second condition of the contingent contract is mentioned under Section 33 of the Indian Contract Act, 1872, which deals with the enforcement of contingent contracts based on the non-occurrence of a future uncertain event. In this case, since the contingent contract needs to be executed on not happening of some particular event, the promisor is liable to perform his part only when the future event does not take place. If the contrary happens, the promisor cannot be made liable for performing his promise.

Illustration: X promises Y to pay him Rs. 20000 if his farm does not produce 100 kg apples. But the rain was insufficient that year which prevented the production of 100 kg apples. Therefore, X will have to pay as a part of the contingent contract.

When a contract is contingent on the future conduct of a living person

The third condition of the contingent contract is mentioned under Section 34 of the Indian Contract Act, 1872, which deals with the conduct of a living person. This section expressly states that the occurrence of an event that is dependent or under the control of any person’s action would be deemed to have become impossible if such person does any act which makes the performance of such condition postponed for an indefinitely long period of time.

Illustration: X promises Y to gift him a brand new car on the condition that he has to marry Z. In the meantime, Z runs away with A and marries him. So the marriage between Y and A becomes impossible, as Z is now already married to A. Although it is possible that A may die and that Z afterwards marries Y but since the event is postponed for an indefinitely long period of time, it will be deemed as impossible.

Contracts contingent on an event happening within the fixed time

Section 35 (para 1) of the Indian Contract Act, 1872, discusses the enforcement of a contingent contract on the happening of an event within a fixed time. In this kind of contingent contract, the promisor promises to perform his obligations if a future uncertain event takes place within a particular period of time.

Illustration: M promises N to supply certain materials that will come via certain ships before 1st August, 2025. If the promise is fulfilled, N promises to pay M the money. In this case, the contract becomes void if the ship sinks or does not come back within the fixed time.

Contracts contingent on an event not happening within the fixed time

Section 35 (para 2) of the Indian Contract Act, 1872, discusses the enforcement of contingent contracts on the non-happening of an event within a fixed time. In this kind of contingent contract, the promisor promises to perform his obligations if a future uncertain event does not take place within a particular period of time or it becomes impossible.

Illustration: A contract was made between M and N. As per the contract, M promised N to pay a certain amount of money if a certain ship does not return before 1st August, 2025. In case the ship burns before the given time, which also will make it impossible to return, the contract in such a situation can be enforced by law since the return is impossible.

Contract contingent on an impossible event 

Section 36 of the Indian Contract Act, 1872, deals with the sixth condition of the contingent contract. It talks about contingent contracts of impossible events. If two parties enter into a contingent contract where the happening of such a future event is impossible, then such agreement will be considered void, notwithstanding whether they had knowledge about it or not at the time when they entered into the contract.

Situations when a contingent contract becomes void

There are certain situations under which a contingent contract becomes void, which are as follows-

• Firstly, as per Section 32, in case the event on which the contingent contract is dependent becomes impossible to perform, the contract would automatically become void.

• Secondly, as per Section 34, in case the event on which the contingent contract is dependent becomes impossible due to certain actions of a person. It is because the action of the person prevented the occurrence of the event. Therefore, the contract will be considered void in such cases. 
• Thirdly, as per Section 35, in case the event on which the contingent contract is dependent does not occur within a specific time, or in case the uncertain event that ought not to have occurred before the fixed time period takes place, the contract will become impossible, and it will be considered void.

Illustration: A contract is made between two parties, where Subh is the promisor, and Rony is the promisee. Here, Subh promises to sponsor a trip for Rony, if he can make a talk show with his favourite actor within a year. So the time duration is within that year. The contract becomes void when his favourite actor dies within the year.

• Fourthly, as per Section 36, in case an agreement is made contingent on the happening of an impossible event, then such agreement is void, whether the impossibility of the event is known or not to the parties at the time when the agreement was made.

Illustration: Rohini enters into a contract with Payel, where Rohini promises Payel to pay Rs. 5000 if the Sun rises in the west instead of the east. This agreement entered into by them is a void one because such an incident can never take place. 

When are contingent contracts used

Contingent contracts are mostly helpful for people who are involved in businesses. The provisions of contingent contracts help them to manage risks and uncertainties present in the course of business operations. It is also useful in those situations where negotiation between parties results in a deadlock. In those situations, they enter into a contingent contract which will be beneficial for both of the parties and protect them from future happenings. Certain situations when a contingent contract is used as it seems beneficial are as follows-

• Insurance: Insurance agreements are one of the most important contingent contracts as they cover various incidents that occur in the day-to-day lives of the people. Insurance is a way by which a party tries to secure its assets in case of some unknown mishap. If any uncertain future event occurs, liability will be taken by the insurer. It is the duty of the insurer to compensate the other party who has entered into the agreement for monetary security and protection during some specific mishap like a car accident, property damage, and others. Insurance that is mostly helpful for people includes Health Insurance, car insurance, property insurance, and others.
• Contracts of employment: Contracts made between the employer and employee for the purpose of employment are known as employment contracts. There might be some contingent clauses in that agreement relating to the performance of an employee. It includes giving incentives like bonuses or stock options contingent upon completing a specific target set previously by the employer or for staying with the company for a specified period of time.
• Real estate transactions: Real estate transactions mean agreements made for the purchase of real estate. A Purchase and Sale Agreement (PSA) is very beneficial for a business for establishing the terms and conditions of a transaction that will take place between the buyer and seller. It may contain certain contingent provisions relating to financing, successful inspection, and upon the fulfilment of which the contingent contract will be executed.
• Mergers and acquisitions: In the case of mergers and acquisitions also, the parties normally try to enter into contingent contracts, where payment is made on the basis of particular targets or benchmarks as has been previously set by the parties as per the clauses of the contract. As soon as the target is achieved, it is the duty of both buyer and seller to come in contact with one another to clear all the payments.
• Contracts of construction: Contingent contracts are also used for construction purposes, where payment depends on the completion of a particular project, construction of certain buildings, or certain other conditions. Generally, the wages of the workers are paid upon the completion of certain construction as specified in the contract.
• Event planning and partnership agreements: In the case of event planning, there are certain contingency clauses like the inclusion of a specific number of guests must be present, the venue must be selected from their catalogue, and many others. Similarly, a contingent agreement is also made between the partners of a firm or a company to share the assets and profits after the end of a financial year.
• Contracts dealing with research and development: The research and development sector uses various types of contingent clauses in its agreements for tying payments for project goals. Thus, contingent contracts are useful in this area also.
• Contracts of indemnity, warranty and guarantee: These contracts also use contingency clauses. Contracts of warranty and guarantee are mostly used when a supplier does not have a relationship with a counterparty. In the case of Chandulal Harjivandas vs. CIT (1966), it was held by the Supreme Court that all contracts of insurance and indemnity are contingent contracts.

How is a contingent contract different from a wagering agreement

A wagering agreement is such an agreement where one party promises to pay a fixed amount of money to another party on the happening of an uncertain future event, and the other party will pay the same to the first party in case the event does not happen. In such circumstances, no party knows the actual outcome of the agreement. Either of the parties can win, and the other party will lose the game. These agreements are those agreements that are not enforceable in a court of law as they have been declared void.

A wagering agreement is absolutely void under Section 30 of the Indian Contract Act, 1872, unlike contingent contracts, which are considered to be valid by law. For instance, in a cricket match, if a challenge takes place between two parties, where X, one party, challenges Y, another party, that he is sure that team A will win the match. On hearing that if Y accepts this challenge and states that if team A wins the cricket match, he will pay X an amount of Rs. 1000, and if not, X will pay him Rs. 1000. If X accepts Y’s proposal, then such agreement will be termed as wagering agreement. 

The differences between contingent contracts and wagering agreements are as follows-

Factors	Contingent contracts	Wagering agreements
Definition	A proper definition of a contingent contract is given in Section 31.	Though Section 30 deals with wagering contracts, no proper definition of wager is present under that Section.
Nature	All contingent contracts are not always wagering in nature. It may or may not be wagering agreements.	All the wagering agreements are considered to be contingent in nature.
Reciprocal promise	Contingent contracts entered into may or may not have reciprocal promises.	Wagering agreements are those agreements where there are always reciprocal promises.
Validity of an agreement	Unlike wagering agreements, contingent contracts are enforceable in a court of law, and so they are valid contracts.	Wagering agreements are considered to be void agreements under the Indian Contract Act.
Key element of the agreement	The condition that a future uncertain event will occur is collateral to the main purpose of the contract.	For wagering agreements, future events are not collateral but an essential factor or key element of an agreement.
Interest of the parties	Interest of the parties in the subject matter of the contract is an important factor. The real interest of the parties is on the happening or non-happening of an event.	The real interest of the parties is on winning or losing the bet amount and not on the happening or non-happening of an event.
Game of a chance	The contingent contracts are not a game of chance.	The wagering agreements, on the other hand, are a game of chance.
Mutuality of loss and gain	When the parties enter into a contingent contract, it is made on the basis of the doctrine of mutuality of loss and gain.	In a wagering agreement, either of the parties can gain, and the other will lose. So it is a game of losing and gaining.

How is a conditional contract different from a contingent contract

Contingent contracts and conditional contracts, though, seem similar, but they have slightly different characteristics. Conditional contracts are those contracts whose performance is conditional upon the fulfilment of a specific event. Conditional contracts may include following types of conditions-

• Precedent condition: There are various contracts where there is a certain condition present that either or both parties have to fulfil before further proceeding with the contract. That condition is known as a precedent condition.
• Subsequent condition: There are various contracts where the contract terminates automatically due to the occurrence or non-occurrence of certain events as mentioned in the contract. Such a type of condition is known as the subsequent condition.
• Concurrent condition: Concurrent condition means that in the contract, there is a certain condition present that both parties have to fulfil simultaneously with the performance of the contract, as it is binding on them.

In the case of conditional contracts, conditions that need to be fulfilled are certain, i.e., bound to happen, which is not the case with contingent contracts, as such conditions may or may not happen. The mere addition of certain conditions in the contract does not make it a contingent contract, the condition stipulated must fulfil the essentials of a contingent contract. Hence, it can be said that all contingent contracts are conditional contracts, but not vice versa. 

Advantages of using contingent contracts 

The advantages of using a contingent contract are as follows-

• Balancing the interest of all the parties: Opinions of different parties to a contract might vary later. So at that time, it might cause problems in the contractual relationships between the parties. Hence contingent contracts help parties to align their interests.
• Minimising the risk: It also acts as an important advantage of contingent contracts. Therefore, contingent contracts help them to minimise their risk.
• Flexibility: Contingent contracts also provide flexibility to the parties entering into a contract. Since it helps avoid the termination of contracts or disputes resulting from unanticipated events, it is considered more flexible than other kinds of contracts.
• Scope of negotiation: In the case of absolute contracts, there is no scope for renegotiation. But if the parties enter into a contingent contract stating certain conditions, it often helps them to revise by making necessary adjustments or sub-agreements.
• Avoiding litigation: The occurrence of uncertain events often leads to various disputes among the parties that ultimately lead to litigation. Contingent contracts reduce the probability of conflicts by describing precisely what needs to be done in case of such uncertain events.
• Cost-effectiveness: These contingent contracts are also useful for organising or arranging a business as they involve less upfront investment than conventional contracts. So it is a cost-effective method. 

Disadvantages of contingent contracts

The disadvantages of using a contingent contract are as follows-

• Complex in nature: One of the disadvantages of contingent contract is that it is complicated in nature.
• Risk of non-performance: There is also a risk of non-performance in a contingent contract as there is an uncertainty in the occurrence or non-occurrence of an event. Therefore, there are chances of breach of a contract.
• Lack of information: It is essential for both parties to have the same information, otherwise, one party will be in an advantageous position than the other. So the party having valuable information has a greater chance of winning. This lack of information about other parties might lead to an imbalance of power and can cause loss to those parties.
• Poor measurement criteria: Poor measurement criteria of occurrence or non-occurrence can create a problem in the completion of a contingent contract.

Important judicial pronouncements

Frost vs. Knight (1872)

In this case, the defendant promised to marry the plaintiff on the death of his father. While the father of the plaintiff was still alive, he married another woman. Therefore, by marrying another woman, the defendant clearly portrayed his intention not to fulfil his promise. It was held by the English Court that it had become impossible that he should marry the plaintiff and so she was entitled to sue him for the breach of contract.

Harbaksh Singh Gill And Ors. vs. Ram Rattan And Anr. (1988)

In this case, respondent no. 2 agreed to sell his half of the property to respondent no.1 and also pay an amount at a rate of 3% per year if the litigation suit for the division of property is not settled in 1 year. The execution of the sale deed took place a month after the partition of the property and the separation of the vendor’s share in it. Respondent No. 2 consented to sign the agreement of sale along with respondent no. 1. But when the application of the plaintiff for partition was dismissed, respondent no. 2 refused to finalise the deal and demanded his earnest money back. The appellants refuted the plaintiff’s claim and argued that specific performance against them could not be required because they bought the property. 

The Punjab and Haryana High Court observed that it was not the vendor’s fault as he tried to seperate the share but failed to do it. The court refused to consider it a contingent contract stating that when the performance of the contract is not dependent on the happening of some collateral event, it is an absolute contract. So it must be performed unconditionally. It was held by the court that the vendee could only file an injunction suit restricting the sale of that vendor’s property to somebody else in future.

Nemi Chand and Ors. vs. Harak Chand and Ors. (1965)

In the case of Nemi Chand and Ors. vs. Harak Chand and Ors. (1965), it was observed by the Rajasthan High Court that Section 32 of the Indian Contract Act, 1872 (ICA) states that a contingent contract to do or not do anything depends on the happening of an uncertain future event, and till then, the contract cannot be enforced. 

The Rajasthan High Court heard the contention of both parties and observed that it is the responsibility of the party to try the matter and file a plea, not only on the question of law but also on the question of fact. They cannot say that it is the court’s responsibility to try such a case suo moto. 

It was also declared that the impugned contract was a contingent contract by the High Court of Rajasthan. It was stated by the court that a contingent contract to do or not do something is dependent on the occurrence of an undetermined future event. The court also stated that if the party does not want to try the matter, then it is not the responsibility of the courts to consider the case suo moto.

Nandkishore Lalbhai vs. New Era Fabrics Pvt.Ltd.& Ors. (2015)

In this case, a contract for the sale of land was executed. The contract was made for selling that land to a factory on the condition that it would be done only if the labour unions agreed to the sale and the change of land use was approved by the competent authority. Both parties consented to the contingent agreement that was made between them to sell the land afterwards. 

The Supreme Court, while dealing with this case, found that later when they decided to sell it, none of the conditions were satisfied that were mentioned in the contract. It was because neither the labour union nor the competent authority gave their assent to the sale of the land. Thus, the contract was not enforceable against the seller.

Conclusion

Contingent contracts are used mainly where risks are involved or with some future goals. It is not like absolute contracts. Contingent contracts require the fulfilment of conditions before their performance. Its performance also depends on the occurrence or non-occurrence of a future event. So most of the time, these contracts are unable to be performed as occurrence or non-occurrence of an event does not happen within the estimated time frame as thought by the parties. However, contingent contracts are very helpful for various business agreements and legal contexts. Contingent contracts are useful in insurance contracts, contracts of indemnity or guarantee, or for negotiations. Generally, contingent contracts are not used while making normal contracts.

Frequently Asked Questions (FAQs)

What are the universal constraints present in contingent contracts?

Some of the universal constraints present in the contingent contracts are as follows-

• It must be mutually consented to by the competent parties in good faith on reasonable grounds.
• There must be proper clarity and specificity in a contingent contract.
• The condition must be something that must have the possibility to occur or else the contract will lose its validity.

What are the essential components of a contingent contract?

The various essential components of a contingent contract are as follows-

• The performance of the contract is based on conditions.
• The conditions must be collateral in nature.
• Based on the occurrence or non-occurrence of an event.
• The occurrence or non-occurrence of the future event should not be dependent on the desire of the promisor.

Whether insurance contracts are contingent contracts or not?

Insurance contracts are also contingent contracts as the individuals who have taken subscription under their insurance policy will have to compensate them only when the subject matter, whatever they have insured, is either lost or damaged.

References

• https://www.scconline.com/blog/post/2019/04/08/bom-hc-not-unlawful-for-an-advocate-to-enter-into-a-contingent-contract-while-appearing-in-capacity-of-a-counsel-in-arbitration-proceedings/
• http://student.manupatra.com/Academic/Abk/Law-of-Contract-and-Specific-Relief/Chapter8B.htm

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