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The word ‘contingent’ means when an event or situation is depends on some other event or fact. The ‘contingent contract’ means enforceability of that contract is directly depends upon happening or not happening of an occasion. The word was used to mean conditional in the Indian Contract Act, 1872. Uncertainty is the indication of the future.
Estimating the probabilities of an uncertainty becoming certain, calculating the results if the event doesn’t happen then measuring the potentiality to affect its consequences are all about contingent contracts. Parties may stipulate that performance of obligations under a contract depends on a contingency, even though the contract is validly formed. The parties agreeing to the conditions agree that the rights are going to be enforced and therefore the obligations are going to be due on the happening of the contingency on the contracting of a valid contract.
What is a Contingent Contract?
Section 31 of the Indian Contract Act, 1872 describes the term ‘Contingent Contract’ as:
‘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’.
In simple words, contingent contracts are those where the promisor perform his obligation only when certain conditions are met. The contracts of insurance, indemnity, and guarantee are some samples of contingent contracts.
Illustration: M is a private insurer and enters into a contract with N for insurance of M’s house. According to the terms, M agrees to pay N an amount of Rs 1 lakh if his home is burnt against an annual premium of Rs 8,000. This is often contingent contract.
Characteristics of Contingent contracts
A Contingent Contract must have three essential characteristics. These are:
- The performance of the contract depends on the happening or non-happening of a particular event in future. This dependence on a probable future event distinguishes a contingent contract from a standard contract.
- This event must be uncertain, meaning happening or non-happening of the future event isn’t certain, i.e., it might or might not happen.
- The event must be collateral or incident to the contract.
Relevant legal provisions
- Section 32: Where the performance of a contingent depends on the happening of an uncertain future event, it can’t be enforced till the event takes place. And if the event’s happening becomes impossible, those contracts become void.
Example- M contracts to sell N, a bit of land if he wins the legal case involving that piece of land. M loses the case. The contract becomes void.
- Section 33: Where the success of a contingent contract depends on a potential occurrence not occurring, the contract is also enforced if it is difficult to do so.
Example- X agrees to sell his house to Y if M dies. This contract cann’t be enforced till M is alive.
- Section 34: If the contract depends on the way in which an individual will act at an unspecified time, the event shall be considered to become impossible when such person does anything that makes it impossible for him to act in such a way in any definite time or otherwise than in the context of further contingencies.
Example- A promises to pay B Rs 5,000 if he marries M. However, M marries N. M’s act thus renders the event of B marrying her impossible.
- Section 35: Contingent contract to do or not do anything, if a specified uncertain event occurs within a hard and fast time, becomes void if the event does not occur and the time expires or its occurrence becomes impossible before the time expires.
Example- A promises to pay B Rs 10,000 if the ship named ‘Shark’ which leaves on a dangerous mission returns before July 01, 2020. This contract is legally enforceable if the ship returns within the prescribed time. But if the ship sinks, then the contract is void.
- Section 35(1): Contingent contract to do or not to do anything, if a selected event doesn’t happen within a specified time, could also be enforced when the time so specified expires and such event doesn’t happen, or before the time so specified it becomes certain that such event will not happen.
Example- A promises to pay B Rs 5,000 if the ship named ‘Shark’ which leaves on a dangerous mission does not return before July 01, 2020. This contract is enforceable by law unless the ship returns within the agreed period. Also, if the ship sinks or is burnt, the contract is enforced by law since the return isn’t possible.
- Section 36: Where a contingent contract is dependent on the occurrence or non-occurrence of an impossible event, such a contract shall be void. This is often no matter the very fact if the parties to the contract are conscious of the impossibility or not.
Example- X promises to pay Y Rs 10,000 if the sun rises in the west the subsequent morning. This contract is void, because it is impractical for the event to happen.
In this case all insurance and indemnity contracts would be held to be contingent.
The contract stipulated that the entire interest in the property of the vendor’s and reversionary’ property would be transferred, therefore, one single indivisible contract, subject to the Court’s sanction. Therefore it had been in contemplation of parties that transfer of entire interest was conditional upon sanction of the Court been granted, hence, the requirement of vendor to transfer his own title was also subject to the Court’s sanction, unless the agreement varied.
It was held that the contract was a contingent one and because the contingency failed, there was no contract which could be made the idea for a decree for performance.
The benefits offered by contingent contracts are that they motivate parties to perform at or above contractually specified levels. That’s the drive behind the utilization of contingent contracts in all sorts of compensation arrangements, from sales commissions to stock options. Sports teams and entertainment companies routinely use contingent contracts to motivate athletes and artists. But contingent contracts are useful not only for motivating individuals. They can also motivate companies. By rewarding outstanding results, contingent contracts motivate outstanding performance.
For a contract to be a contingent contract, certain essential elements need to be there. These elements form a contingent contract and without them, a contract won’t be contingent. There must be a legitimate contract to do or not to do something. The performance of the contract must be conditional. The said event should be collateral to such contracts and the event should not be at the promisor’s discretion. These are some rules that need to be followed for a contingent contract to be enforceable. For instance, on the happening of an occasion, on the event not happening and on the event not happening within a specified time.
Author: Deeksha Shrivastava from Fairfield Institute of Management and Technology, Guru Gobind Singh Indraprastha University.
Editor: Silky Mittal, Junior Editor, Lexlife India.