This article is written by Ronika Tater, from the University of Petroleum and Energy Studies, School of Law. In this article, she discusses the essential ingredients of a valid contract and the term contingency contract with the support of relevant provisions of law and cases.
Table of Contents
Introduction
In order to understand the concept of contingency contract, it is pertinent to understand the term ‘contract’ and its role in the formulation of trade, business, transactions and commercial relations. The term ‘contract’ is defined in Section 2(h) of the Indian Contract Act, 1872 ( hereinafter referred to as the ‘Act’) and its essential ingredient is an agreement and the agreement should be enforceable by law. The law of contract envisages the enforcement of a voluntarily created civil obligation. Though, some agreements satisfy the requirements of a contract such as a proposal, acceptance, consideration, etc., they are not enforceable by law.
Essentials of a valid contract
According to Salmond, a contract is an agreement formed to define the obligation between two parties through which rights are acquired by one party or forbearance on the part of others.
Agreement
An agreement is the first and vital essence of a contract. Section 2 (e) of the Act defines ‘agreement’ as every promise and every set of promises, forming the consideration for each other. The two essential ingredients of an agreement are as below-mentioned:
Offer and acceptance
An agreement comes into existence when two or more parties agree upon the same thing in the same sense. The case of Carlill v. Carbolic Smoke Ball Co., (1893), declared that a contract is an agreement enforceable by law by a result of a proposal and acceptance of the proposal when two minds come together.
Consent
The contract should be formed with the consent of two or more parties i.e., consensus ad idem and devoid of coercion, undue influence, fraud, misrepresentation, or mistake.
Competency of parties
Competent parties mean the legal ability of the parties to enter into a valid contract. Section 11 defines the qualification that every person should satisfy. These are as follows:
- Age of majority
- Sound mind
- Not disqualified from contracting under any provisions of law
Lawful consideration and object
The consideration and object of the agreement should be lawful and quid pro quo. Section 23 states that the consideration or object of an agreement is lawful unless it is not contrary to the provisions of any law, or defeats the fundamental principle of ‘Ex turpi causa non oritur action’ which means that no right of action arises out of the immortal cause of consideration.
Not expressly declared to be void
Every enforceable agreement should be lawful even if the law shall not declare it to be either illegal or immoral. Such an agreement is expressly and impliedly prohibited by law.
Other essentials of a valid contract
The essentials of a valid contract are not expressly mentioned under any provision of the Indian Contract Act. For instance, if two parties have an intention to create a legal relationship on fulfilment of legal formalities, then there exists a certainty of meaning and the possibility of performance. However, it is impliedly applied before entering into a valid contract.
What do we understand by the term contingent contract
The formation of a contract is the first stage and the next stage is the fulfilment of the object by the parties. Once the object is fulfilled, the liability of either party comes to an end. After that, the contract is said to be discharged in various ways such as by performance, the impossibility of performance, agreement, or breach. A contingent contract is a part of the performance. Section 31 describes ‘contingent contract’ as a contract to do or not to do something or if some event collateral to such a contract does or does not happen. It is a kind of contract which is subject to an uncertain nature or does not have an absolute type of condition. Even though the contract is a valid one, the parties may agree that the rights are going to be enforceable on the happening of an event. Thus, the performance of the obligations under a contract depends on a contingency.
For instance, a contract to pay a sum of money on the expiry of a certain time period of three years or the death of a person is not a contingent contract; these events are of a certain nature. However, a contract to pay a sum of money on the destruction of a building by fire is a contingent contract as the condition of uncertain nature. It also points out an essential element that all contracts of insurance, guarantee, and indemnity are contingent contracts as it depends on a future event. In N. Peddanna Ogeti Balayya v. Seinivasayya Setti Sons, (1954), declared that a contract of life insurance is also a contingent contract.
Features of contingent contract
Some of the features of the contingent contract are as below-mentioned:
Contingency to be collateral to contract
Collateral to a contract means that the existence of the contract subsists but its performance remains in the event of happening or not happening. For instance, a contract to pay a sum of money can only arise on the loss of the ship. This states that the contract is already there and it is not arising on the loss but the performance can be demanded on the loss of the ship. In the case where the contract is established to buy land, which is a subject matter if an ongoing dispute becomes operative only after the seller wins the case. The contract in the instant case is contingent and its performance wholly depends upon the judgment of the case. Similarly, in Tirthnand Singh v. Sk Zer Mohammad, (2001), the subject matter was a contract to sell agricultural land which was a subject matter of an ongoing consolidation proceeding that was held to be the contingent contract. As nobody could predict to whom the land would subsist and hence it was not enforceable.
Contingency depending upon the will of a person
A contract will not be contingent where the happening or non-happening of the contingency depends upon the will of a party. In the case of, Secy of State for India v. A.J. Arathon, (1869), the facts involved supplying timber to a Government Department. The timber was to be approved by the superintendent of the factory. Consequently, which he didn’t approve of. The supplier brought forward a case against the Government for the breach of contract. The Madras High Court held the contract to be a contingent contract and the fact of approval being collateral and its performance could only be demanded after the approval. As the contingency of the contract was not fulfilled, there was no breach of contract.
Contingency to be condition precedent
It means that the condition which is collateral to the performance of a contract is a contingent precedent and not a subsequent condition that needs to be satisfied after the formation of the contract. In the case of Ramzan v. Smt Hussaini, (1990), the Supreme Court held that a contract stating that on redemption of the mortgaged house by the plaintiff thereby the defendant would execute a sale deed of the house is a contingent contract. Thus, where a valid contract is liable to be defeated on the happening of a subsequent event, it is not a contingent contract.
Enforceability nature of a contingent contract
- Section 32 of the Act lays down two basic principles. First, a contract to do an act on the happening of the uncertain future conditions can only be enforced once the event takes place or as contemplated by the contract. Second, if the happening of the event becomes impossible then the contract is void. In the case of, Jethalal C. Thakkar v. R.N. Kapur, (1956), an option to buy shares of a bank if the bank is converted into a financial corporation is a contingent contract. As it is to be performed on the happening of an uncertain future event.
- Section 33 of the Act states that the enforcement of the contract depends upon the non-happening of the event. Under such circumstances when the event can no longer happen then only the performance can be demanded.
- Section 34 of the Act states that when the event of the contract is contingent and is deemed impossible based on human conduct in the future. In the case of Frost v. Knight, (1872), a contract was formed stating that the defendant must marry the plaintiff after the death of the father. However, the defendant during the lifetime of the father married another woman. Hence, the future conduct of the defendant made the contract to be performed impossible thereby leading to breach of contract.
- Section 35 of the Act states that when a contract is contingent, it becomes void or impossible on the happening of an event within the specified time or at the expiration of the time fixed or before the time fixed. Moreover, such a contingent contract may be enforceable on the non-happening of an event within the specified time. For instance, A promises B to pay a sum of money if the dispatched ship does not return within three years. The contract may be enforceable if the ship does not return on the time fixed or is burnt or lost within the time fixed.
- Section 36 of the Act states that when a contingent agreement to do or not to do anything on an impossible event is void. While making the contract, the event did not exist. For instance, A agreed to pay a certain sum of money to B, if B married A’s daughter C. However, during the time of the agreement C died. The agreement is void.
What do we understand by the term wagering agreement
Section 30 of the Indian Contract Act, 1872 provides that all wagering agreements are void and no suit can be brought forward before the court. The term ‘wager’ means a promise to give money upon the determination or establishment of an uncertain event. The case of Jethmal Madanlal Jokotia v. Nevatia & Co., (1962), defines a wagering contract as a contract between two parties professing to hold opposite views on an uncertain future event. The main point is that either the party has to win or lose depending on the issue of the event. If either of the parties wins with no chances to lose then it is not a wagering contract. Thus, there is no real consideration for the establishment of a contract by either party. Moreover, certain prizes in horse racing are an exception under the wagering contract.
Difference between a wagering agreement and a contingent contract
- A wagering contract is void, however, a contingent contract is a valid contract under the Indian Contract Act.
- In a wagering agreement, the sole determining factor of the agreement is the issue of an uncertain event whereas in a contingent contract the future uncertain event is merely collateral.
- In a wagering agreement, the parties do not have a real interest in the happening of the event except for the issue of win or lose whereas in a contingent contract the parties have a real interest in the happening or non-happening of the event.
- All wager contracts are contingent contracts while all contingent contracts are not by way of the wager.
Conclusion
A contract is a contingent contract if it includes that there is a legitimate contract to do or not to do something, the performance of the contract should be conditional, the event should be collateral, and the event should not be at the parties’ discretion. If it satisfies all the essential elements then it is enforceable as a contingent contract. Moreover, contingent contracts provide various benefits not only to the individual but also to the companies by rewarding outstanding results and performance for instance, in the case of contracts for insurance, sales commission, negotiations, media & entertainment, etc.
References
- https://www.upcounsel.com/contingency-contracts.
- The Indian Contract Act, 1872.
- https://www.pon.harvard.edu/daily/dealmaking-daily/contingent-contract/.
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