In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University, writes about the concept of contingent contract. The post discusses the essentials of a contingent contract and also discusses the difference between a contingent contract and some other type of contracts. The post highlights when a contingent contract can be enforced and when it’ll be void.

According to section 2 (h)[1] of the Indian Contracts Act, 1872, a contract is an agreement in which two individuals enter and it is enforceable by law. In a contract, the party should give their free consent, should be competent to contract and the object and the consideration should be lawful. To form a contract, the agreement shouldn’t be declared as void. Thus, to form a valid contract, there should be two things- an agreement and its enforceability at law.

In regular course, the phrase contingent means “subject to chance.” In the Indian Contract Act also, the word means conditional. Future events are always uncertain. In the case of a contingent contract, the chances of happening of this uncertain event is ascertained and calculated and also the potentiality to deal with the event if they come to fore at all. The contracting parties may require that some obligation will be performed depending on the contingent event. The parties may agree that any right will be due, or any liability will be imposed on the happening of the contingency. Section 31 to 36 of the Act governs contingent contracts. Section 31 of the Act defines contingent contract as a contract between parties to do or not do something if some event which is collateral to the contract happen or does not happen. So, a contingent contract is also primarily a contract. But it is not an absolute or unconditional one. A contingent contract is dependent of the happening or non-happening of the event.

Essentials of a Contingent Contract

A contract to do or abstaining from doing something

Section 32 and section 33 of the Act talks about enforcement of the contract on the happening of the event or the non-happening of the event respectively. The contract will be valid only if it is about performing or not performing an obligation. For instance, if X and Y enter into a contract that if X’s house is burnt, then Y will pay him Rs. 10,000 it’ll be a valid contingent contract.

Performance of the Contract must be Conditional[2]

The condition for which the contract has been entered into must be a future event, and it should be uncertain. If the performance of the contract is dependent on an event, which is although a future event, but certain and sure to happen, then it’ll not be considered as a contingent contract. Just the postponement of the happening of the event wouldn’t make it a contingent event. The event should be totally unpredictable for an individual and the happening or non-happening of the event shouldn’t be in the hands of the individual.

Event must be Collateral to the Contract

The event on whose happening or non-happening of the event on which the performance of the contract is dependent shouldn’t be a part of the consideration of the contract. The happening or non-happening of the event should be collateral to the contract and should exist independently. For instance, P enters into a contract with Q that P will pay him Rs. 5, 000 if Q’s car meets an agreement, but only if Q pays Rs 100 to P every month. In this case the obligation to pay Rs. 5000 will arise only when the car meets an agreement. This event is independent of the contract and is collateral to it.

Event shouldn’t be at the discretion of the Promisor

The event on whose happening or non-happening, the contract can be enforced should not depend on the promisor. In the judicial pronouncement of N.P.O Ballaya v. K.V.S Setty and Sons[3] it was held by the Court that where a person promised his lawyer that in case he wins the litigation, he’ll pay the lawyer his expenses related to tax and cost, the event would not be in the hands of the promisor and wouldn’t be at his discretion, because he cannot guide the litigation. To make a contract a contingent contract, the promisor should not have any power to control the events.

Difference between Contingent contract and other Contracts

• Contingent Contract and Wager

There is a major difference between contingent contract and wagering contracts. A contingent contract is valid; a wagering contract is void.[4] In a wagering contract, money or its equivalent is given if the uncertain event is ascertained or determined correctly by the opposite party. The interest of the parties’does not lie in happening or non-happening of the event, but they are solely interested in determining the end result. For instance, A and B enter into a contract that A will pay B if there is a flood and B’s crops gets spoilt and is valid. In another instance, P and Q enter into a contract where P will pay money to Q is he correctly ascertains whether the flood will come or not. This is a wagering contract is void. In the first instance, the parties are interested in happening or non-happening of the event. But in the second instance, they are interested only in determining the happening or non-happening of the event and not interested in the event as a whole.

• Agreement Subject to Contract and Contingent Contract

There is a difference between agreement subject to contract and contingent contract, as agreement subjected to contract is not a contract at all. In an agreement subject to contract, the parties are not bound by the contract until and unless a formal contract is executed between the parties, and such contract is formed by the willingness of the parties. A contract comes into existence only when an uncertain event happens. But in the case of a contingent event, the performance of the obligation is suspended until the happening or non-happening of the event. For instance, if X and Y agree that they’ll enter into a contract if Y’s house burnt down in a fire, this will be considered as an agreement subject to contract.

• Impossible Act and Contingent Contract

If the parties get into an agreement to do an impossible act, it’ll not be a contingent event. For instance, if A enters into an agreement with B that he’ll pay B Rs. 10,000 if B brings back C to life, it is not a contingent contract and is void. In the case of a contingent contract, the main issue is that happening or non-happening of an uncertain event is presupposed, and not the happening or non-happening of an impossible event. “Possibility” of an event is very crucial in a contingent contract, but this element is absent in the case of impossible acts.

Enforcement of Contingent Contracts

There are certain situations where the contingent contract can be enforced.

1. On happening of the event – Section 32 states that if parties enter into a contingent contract, the contract can be enforced only on the happening of the event. Therefore, under this section, the contract is contingent on the happening of an event. The event has to occur before the obligation is discharged.
2. On Non-happening of an event – Section 33 of the Act states that when parties enter into a contingent contract, subject to non-happening of an event, the contract can be enforced only when the happening of the event becomes an impossibility, and the contract can’t be enforced before that. For instance, if A and B enter into a contract that A will pay B a certain amount if a ship does not come back, then B can enforce the contract only when the returning back of the ship becomes an impossibility, like the ship sinks. There is no hope of the event now taking place.
3. The event not happening within a fixed time – In the case of a contingent contract where it is agreed that if an event does not happen within a fixed time specified, then the contract can be enforced after the fixed time has elapsed, and the event has not happened. For instance, A and B enters into a contract that A will pay B a certain sum if a shipment doesn’t reach within a month. The contract can be enforced by B if the shipment doesn’t arrive within a month.

When Contingent Contract is Void

1. If happening of the event becomes impossible – Section 32 also states that if happening of an event becomes impossible, the contract also becomes void.
2. Conduct of a living person – Section 34 of the Indian contract states that when an event on which contract is contingent, the contract is to be deemed impossible if it is the future conduct of a living person.[5]In simpler words, if the event which is collateral to the contract is the future conduct of a living person and the person does any act which makes the happening of the event impossibility, then its void. In such as case the contingent contract cannot be enforced.

Concluding Remarks

For a contract to be a contingent, there are certain conditions which need to be fulfilled, because it is very evident that a contingent contract isn’t an unconditional an unqualified contract. The event should be collateral to the contract, and should not be under the control of any of the contracting parties.

Footnotes:

[1]https://indiankanoon.org/doc/1890444/

[2]http://icai.org/resource_file/16815Contingent.pdf

[3]AIR 1954 SC26

[4]http://mercantilelaws.blogspot.in/2012/05/distinguish-between-contingent.html

[5]http://comtax.up.nic.in/Miscellaneous%20Act/the-indian-contract-act-1872.pdf