Contingent Contract: Meaning, Elements and Enforcement

Contingent Contract means the enforceability of that particular contract directly depends upon the happening or non-happening of an event. The pervasive nature of uncertainty affects every business decision and contract. Business uncertainty can have a significant effect on the business due to situations that can’t be foreseen or measured. In such a situation, a Contingent Contract can be extremely helpful for creating value in negotiation by minimizing the degree of uncertainty. In many contracts, parties are required to make forecasts and assumptions about the future; say, Will fuel-oil prices rise or stay at the same level? Will the market rise in the future? Will material arrive on time for further construction, and so on?

Geeky Takeaways:

• The word contingent refers to when an event or situation is contingent; i.e., it depends on some other event or fact.
• These contracts are entered by both parties to minimize the risk associated.
• These contracts are those where the promisor performs his obligation only when certain conditions are met.
• Some examples of Contingent contracts include contracts of insurance, indemnity, and guarantee.

What is a Contingent Contract?

According to the provisions of Section 31 of the Indian Contract Act, 1872 “A contingent contract is a contract to do or not to do something, if some event collateral to such contract does or does not happen.”

Under Contingent Contracts, the enforceability is directly dependent on the occurrence or non-occurrence of an event. Here, the promisor only fulfills his obligations if specific conditions are satisfied, which was earlier agreed upon. Contracts of Indemnity, Guarantee, and Insurance fall under this category. A Contingent Contract is opposite to an Absolute Contract. An Absolute Contract requires the parties to the contract to perform the contractual terms without any conditions; however, in a contingent contract parties are required to fulfill certain obligations in certain circumstances, or on happening or non-happening of any event. An understanding might have been made that under contingent contracts the action is only required by parties when certain events occur. Insurance contracts are one of the major examples of this. Under Insurance contracts, the subscribed individuals will only need their insurance companies to compensate them if the subject matter whatever they have insured is either lost or damaged. Until this happens, the insurance company doesn’t owe any obligation to the subscriber.

For Example, Kashish entered a contract with Nitisha, for the fire insurance of her hotel, which she owns. On payment of a premium of ₹15,000, Nitisha agreed to insure the hotel and agreed on a term that in case, the hotel is burnt due to fire, or any mishap occurs to the hotel due to fire, she shall pay ₹10,00,000 to Kashish. Here, the hotel catching fire is neither a performance promised as a part of the contract nor a consideration. Nitisha’s liability arises only when the collateral event occurs.

Essential Elements of a Contingent Contract

1. Based on Happening or Non-happening of an Event: The performance of a contract depends upon the happening or non-happening of some event or condition that was agreed upon. These events can either be precedent or subsequent.

For example, Ravish agrees to pay Barkha a sum of ₹1,000 if political party ‘X’ wins the general elections in India. Since the event is uncertain and may or may not happen, such a contract is a Contingent Contract.

2. Performance of Contract shall be Conditional: The event for which the contract is made should occur in the future and should be unpredictable. In case, the contract’s performance is dependent on a future occurrence that has surety to occur, it is not termed as a Contingent Contract.

For example, Arnab agrees to pay ₹5,000 to Navika if the sun rises from the east, as this is a sure-shot event; hence, it is not a Contingent Contract.

3. Event should be Collateral to the Contract: The event must not be a part of the contract. The event cannot be the performance promised or a consideration for a promise.

For example, Rekha agreed to construct an office building for Amitabh for ₹2 crores, and Amitabh agreed to make the payment only on the completion of the office building. It is not a Contingent Contract, as the event of construction is directly connected with the contract.

4. Event should not be a mere Will of the Promisor: The event under such contract should be contingent in addition to being the will of the promisor; i.e., the contingency in the contract not be reliant on the promisor in any way. The event must be completely futuristic.

For example, Ross promises Rachel to pay ₹300 if she drinks coffee instead of juice, since this contract is based on the mere will of Rachel, this is not a Contingent Contract.

Enforcement of Contingent Contract

The provisions of rules or conditions that are related to the enforcement of a contingent contract are provided under Section 32 to Section 36 of the Indian Contract Act.

1. Enforcement of Contracts Contingent on an Event Happening: As specified in Section 32 of the Indian Contract Act, 1872. According to this rule, a contingent contract might have been based on the happening of an uncertain future event. In this case, the promisor is liable to do or not do the performance if the event happens. However, the contract cannot be enforced by law until the event takes place. If the happening of the event becomes impossible, then the contingent contract will be treated as a void contract.

For example, Nirmal agreed to pay Bimal ₹5,000 if Bimal could win the annual racing competition, but unfortunately, the event got cancelled. Since the subject matter of the contract; i.e., the annual racing competition can’t take place, the contract becomes void.

2. Enforcement of Contracts Contingent on an Event Not Happening: As specified in Section 33 of the Indian Contract Act, 1872 the rule says that a contingent contract might be based on the non-happening of an uncertain future event. In such cases, the promisor is liable to perform or not to perform something if the event does not happen. However, the contract cannot be enforced by law unless the happening of the event becomes impossible. If the event takes place, then the Contingent Contract will be void.

For example, Tim agrees to pay Jim an amount of ₹5,000 if the plane departs from New York to London, but it doesn’t land in London. Here, the contract becomes enforceable only if the plane does not land in London.

3. Contingent upon the Conduct of a Living Person: As specified in Section 34 of the Indian Contract Act, 1872 this rule states that if a contract is contingent upon how a person is going to act at a future time, then the event will be considered impossible when the person does anything which makes it impossible for the event to happen.

For example, Tim agrees to pay Jim an amount of ₹5,000, if Virat Kohli completes his century with a sixer, but Kohli gets out on a duck, which makes the event impossible of completing the century with a sixer.

4. Contingent on happening of Specified Event within the Fixed Time: According to the rules specified in Section 35 of the Indian Contract Act, 1872 there can be a contingent contract wherein a party promises to do or not do something in case a future uncertain event happens within a fixed time. Such a contract is void if the event does not happen and the fixed time as promised lapses. The contract will also be treated as void if before the time fixed, the happening of the event becomes impossible.

For example, Ajit agreed to pay a sum of ₹1,000 to Yogesh if a footballer can complete 100 goals within a year. In case the footballer fails to score 100 goals in a year, this contract will be void as the fixed time agreed has lapsed.

5. Contingent on Specified Event not happening within Fixed Time: As per the rule specified in Section 35 of the Indian Contract Act, 1872. There can be a contingent contract, which might be based on the non-happening of an uncertain future event within a fixed time. In such a case, the promisor is liable to do or not do something if the event does not happen within the said time. Also, the contract can be enforced by the law if the fixed time has expired and the event has not happened before such expiry of time. In case, it becomes certain that the agreed event will not happen before the time has lapsed, then it can be enforced by law.

For example, Tim agrees to pay Jim an amount of ₹5,000 if the plane departs from New York to London but doesn’t land in London within 24 hours. Here, the contract becomes enforceable only if the plane doesn’t land in London within 24 hours. In case, the plane crashes or gets damaged, the contract is enforced by law since the landing is not possible in London.

6. Contingent on an Impossible Event: As per the rule specified in Section 36 of the Indian Contract Act, 1872, if a contingent contract is based on the happening or non-happening of an event that is impossible, then such a contract will be considered as void. This is regardless of the fact that if the parties to the contract are aware of such impossibility or not.

For example, Alia promises Ranveer that she will pay ₹1,00,000 if Ranveer can bring the Moon down to Earth. Since this is impossible and can’t be performed such a contract is void.

Conclusion

Contingent Contracts are widely used in the business arena as they mitigate the risk and help in surfacing deceptive claims. Contingent Contracts have been defined under Section 31 of the Indian Contract Act, 1872. A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Contracts of Insurance are a well-known example of Contingent Contracts. Under Contingent Contracts, the parties to the contracts promise to perform based on the happening and non-happening of an event. Essential elements of a contingent contract are a must to fulfill the requirements of provisions laid down in the act. Sections 32 to 36 establish the rules which make the enforcement of contingent contracts. To sum up a contingent contract, there should be a certain event that needs to be fulfilled. The terms of contingent contracts are certain and depend upon the occurrence or non-occurrence of a future event.

Contingent Contract- FAQs

What is a Contingent Contract?

According to the provisions of Section 31 of the Indian Contract Act, 1872, a contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Under contingent contracts, the enforceability is directly dependent on the occurrence or non-occurrence of an event.

Are Insurance Contracts also Contingent Contracts?

Yes, Insurance Contracts are also contingent contracts. Under Insurance Contracts, the subscribed individuals will need their insurance companies to compensate them only when the subject matter whatever they have insured is either lost or damaged. Until this happens, the insurance company doesn’t owe any obligation to the subscriber.

What are the essential elements of Contingent Contracts?

Essential elements of a Contingent Contract are as follows:

• Based on the happening or non-happening of an event.
• Performance of the contract shall be conditional.
• The event should be collateral to the contract.
• The event should not be a mere will of the promisor.

What are the Rules of Enforceability of Contingent Contracts?

Rules of enforceability of contingent contracts are as follows:

• Enforcement of contracts contingent on an event happening.
• Enforcement of contracts contingent on an event not happening.
• A contract would cease to be enforceable if it is contingent upon the conduct of a living person when that living person does something to make the ‘event’ or ‘conduct’ impossible to happen.
• Contingent on the happening of specified events within the fixed time.
• Contingent on a specified event not happening within the fixed time.
• Contingent on an impossible event.

What is the difference between Contingent Contracts and Wagering Agreements?

As per section 31 of the Indian Contract Act, a Contingent contract is defined as an agreement where the performance of the contract is dependent on some happening or non-happening of events. Whereas, a Wagering agreement is an agreement between the two parties in which money is payable by the second party to the first at the occurrence of an uncertain event, and the first party will pay the money if that event does not occur.