Contingent Contracts

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contingent contracts

There are different types of contracts- depending on the validity, performance etc. One such set is absolute and contingent contracts depending upon happening or non-happening of a certain event in the future.  

Contingent Contracts

An absolute contract is a one where the promisor performs the contract without any condition. Contingent contracts, on the other hand, are the ones where the promisor performs his obligation only when certain conditions are met.

The contracts of insurance, indemnity or guarantee one thing in common – they create an obligation on the promisor if an event which is collateral to the contract does or does not happen. For example, in a life insurance contract, the insurer pays a certain amount if the insured dies within the time period of the insurance policy. The insurer is not called into action until the event of the death of the insured happens. This is a contingent contract.

Under Section 31 of the Indian Contract Act, 1872, contingent contracts are defined as follows: “If two or more parties enter into a contract to do or not do something, if an event which is collateral to the contract does or does not happen, then it is a contingent contract.”

Essentials of Contingent Contracts

Depends on happening or non-happening of a certain event:-

The contract is contingent on the happening or the non-happening of a certain event. The said events can be precedent or subsequent to the contract.

The event is collateral to the contract:-

It is important that the event is not a part of the contract. It cannot be the performance promised or a consideration for a promise.

The event should not be a mere will of the promisor:-

The event cannot be a wish of the promisor.

The event should be uncertain:-

If the event is sure to happen, then the contract is due to be performed. This is not a contingent contract. The event should be uncertain.

Enforcement of Contingent Contracts

Sections 32 – 36 of the Indian Contract Act, 1872, list certain rules for the enforcement of a contingent contract.

Rule # 1 – Contracts Contingent on the happening of an Event

A contingent contract might be based on the happening of an uncertain future event. In such cases, the promisor is liable to do or not do something if the event happens. However, the contract cannot be enforced by law unless the event takes place. If the happening of the event becomes impossible, then the contingent contract is void. This rule is specified in Section 32 of the Indian Contract Act, 1872.

Peter promises to pay John Rs 50,000 if he can marry Julia, the prettiest girl in the neighborhood. This is a contingent contract. Unfortunately, Julia dies in a car accident. Since the happening of the event is no longer possible, the contract is void.

Rule # 2 – Contracts Contingent on an Event not happening

A contingent contract might be based on the non-happening of an uncertain future event. In such cases, the promisor is liable to do or not do something if the event does not happen. However, the contract cannot be enforced by law unless happening of the event becomes impossible. If the event takes place, then the contingent contract is void. This rule is specified in Section 33 of the Indian Contract Act, 1872.

Rule # 3 – Contracts contingent on the conduct of a living person who does something to make the event or conduct as impossible of happening

Section 34 of the Indian Contract Act, 1872 states that if a contract is contingent upon how a person will act at a future time, the event is considered impossible when the person does anything which makes it impossible for the event to happen.

Rule # 4 – Contracts Contingent on an Event happening within a Specific Time

There can be a contingent contract wherein a party promises to do or not do something if a future uncertain event happens within a fixed time. Such a contract is void if the event does not happen and the time lapses. It is also void if before the time fixed, the happening of the event becomes impossible. This rule is specified in Section 35 of the Indian Contract Act, 1872.

Rule # 5 – Contracts Contingent on an Event not happening within a Specific Time

Contingent contracts might be based on the non-happening of an uncertain future event within a fixed time. In such cases, the promisor is liable to do or not do something if the event does not happen within the said time. The contract can be enforced by law if the fixed time has expired and the event has not happened before the expiry of the time. Also, if it becomes certain that the event will not happen before the time has expired, then it can be enforced by law. This rule is specified in Section 35 of the Indian Contract Act, 1872.

Rule # 6 – Contracts Contingent on an Impossible Event

If a contingent contract is based on the happening or non-happening of an impossible event, then such a contract is void. This is regardless of the fact if the parties to the contract are aware of the impossibility or not. This rule is specified in Section 36 of the Indian Contract Act, 1872.

Illustrations

Illustration 1

Peter promises to pay John Rs 5,000 if the Rajdhani Express reaches Delhi on time. This is a contingent event.

Illustration 2

Peter enters into a contract with John and promises to deliver 5 television sets to him. John promises to pay him Rs 75,000 upon delivery. This is NOT a contingent contract since John’s obligation depends on the event which is a part of the contract (delivery of TV sets) and not a collateral event.

Illustration 3

Peter enters into a contract with John and promises to deliver 5 television sets to him if Brazil wins the FIFA World Cup provided John pays him Rs 25,000 before the World Cup kicks-off. This is a contingent contract since Peter’s obligation arises only when Brazil wins the Cup which is a collateral event.

Illustration 4

Peter promises to pay John Rs 5,000 if Argentina wins the FIFA World Cup provided he wants to. This is NOT a contingent contract. Actually, this is not a contract at all.

Illustration 5

Peter promises to pay John Rs 50,000 if he leaves Mumbai for Dubai on August 30, 2018. This is a contingent contract. Going to Dubai can be within John’s will but is not merely his will.

Illustration 6

Peter promises to pay John Rs 500 if it rains in Mumbai in the month of July 2018. This is not a contingent contract because in July rains are almost a certainty in Mumbai.

Illustration 7

Peter promises to pay John Rs 50,000 if the ship named Titanic which leaves on a dangerous mission does not return. This is a contingent contract. This contract is enforceable by law if the ship sinks making its return impossible. On the other hand, if the ship returns, then the contract is void.

Illustration 8

Peter promises to pay John Rs 5,000 if he marries Julia. However, Julia marries Oliver. Julia’s act thus renders the event of John marrying her impossible. (A divorce is still possible though but the happening of the event is considered impossible.)

Illustration 9

Peter promises to pay John Rs 5,000 if the ship named Titanic which leaves on a dangerous mission does not return before June 01, 2019. This contract is enforceable by law if the ship does not return within the fixed time. Also, if the ship sinks or is burnt, the contract is enforced by law since the return is not possible.

Illustration 10

Peter promises to pay John Rs 5,000 if the ship named Titanic which leaves on a dangerous mission returns before June 01, 2019. This contract is enforceable by law if the ship returns within the fixed time. On the other hand, if the ship sinks, then the contract is void.

Illustration 11

Peter promises to pay John Rs 50,000 if the sun rises in the west the next morning. This contract is void since the happening of the event is impossible.

Illustration 12

Example: Peter is a private insurer and enters into a contract with John for fire insurance of John’s house. According to the terms, Peter agrees to pay John an amount of Rs 5 lakh if his house is burnt against an annual premium of Rs 5,000. This is a contingent contract. Here, the burning of the house is neither a performance promised as a part of the contract nor a consideration. Peter’s liability arises only when the collateral event occurs.

Illustration 13

You make an offer on a house contingent on the appraisal for the new house being equal to or greater than your offer. If the appraisal is, then the contingency is removed. If the appraisal is lower, then you can do whatever your contingency permits. Often, it’s cancelling the sale. Or it could require the seller to drop the price to the amount of the appraisal.

Illustration 14

You’re accepted to a prestigious school, contingent on you achieving a B average in your senior year. If you get at least a B average, then you’re admitted. If you don’t get a B average, then you don’t get in.

Illustration 15

You apply for a loan. The loan is contingent on you having at least a 700 credit rating. You get the loan if your credit rating is 700 or more. You don’t get the loan if your credit rating is below 700.

Frequently Asked Questions

1. What are characteristics of Contingent contracts?

 A Contingent Contract must have three essential characteristics. There are:

(1)  The performance of the contract depends on he happening or non-happening of a certain event in future. This dependence on a probable future event distinguishes a contingent contract from an ordinary contract.

(2)  This event must be uncertain, that means happening or non-happening of the future event is not certain, i.e., it may or may not happen. If the event is hundred percent sure to happen, and the contract in that case has to be performed any way, such a contract is not called a contingent contract.

(3)  The event must be collateral or incident to the contract.

Therefore, contracts of indemnity, guarantee and insurance are the most common instances of a contingent contract.

2. What are rules regarding Contingent Contracts?

To enforce the performance of a contingent contract the following rules have to be followed:

a. Where the performance of a contingent depends on the happening of an uncertain future event, it cannot be enforced till the event takes place. And if the happening of the event becomes impossible, such contracts become void (sec. 32).

Example- A contracts to sell B a piece of land if he (A) wins the legal case involving that piece of land. A loses the case. The contract becomes void.

b. Where the performance of a contingent contract depends on the non-happening of a future event, the contract can be enforced if the happening becomes impossible (sec. 33).

Example- A agrees to sell his house to B if Y dies. This contract cannot be enforced till Y is alive.

c. If the contract is dependent on the manner in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which makes it impossible that he should so act within any definite time or otherwise than under further contingencies (sec. 34). 

d. Contingent contract to do or not to do anything, if a specified uncertain event happens within a fixed time, becomes void if the event does not happen and the time expires or its happening becomes impossible before the time expires [sec. 35(1)].

e. Contingent contract to do or not to do anything, if a specific event does not happen within a specified time, may be enforced when the time so specified expires and such event does not happen, or before the time so specified it becomes certain that such event will not happen [sec. 35(1)].

f. Contingent agreements to do or not to do any thing, if an impossible event happens, are void, whether or not the fact is known to the parties at the time when it is made (sec. 36).

Edited by Soma Sarkar

Approved & Published – Sakshi Raje

 

 

 

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Jeetu kanwar
I am Jeetu Kanwar from Army Institute of Law, Mohali pursuing BA.LLB. The sphere of I.PR and criminal law attracts me the most. If at all I get any free time, I like reading books mostly of the fiction genre, more specifically, the crime fiction. I am an enthusiastic debater, mooter, reader , writer and a researcher. I like to explore different things. My basic interest lies in working for the downtrodden section of society and working for a good cause. It gives me an immense pleasure in working for the society. I am a patient listener and a observer.