What is a Contingent Contract?
A contract can be entered into by parties for the performance or non-performance of an action or an event. There are primarily two types of contracts: Absolute Contracts and Contingent Contracts. Let us explain contingent contracts in detail.
Contingent Contract Meaning
In a contingent contract, the performance of the promisor is dependent on the fulfillment of certain conditions. These contracts create an obligation on the promisor only if the conditions collateral to the contract are met.
Let Us Define Contingent Contract as Per Section 31 of the Indian Contract Act, 1872
According to the Indian Contract Act, “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.”
Insurance contracts, indemnity contracts, and guarantee contracts are some examples of contingent contracts.
Contingent Contract Example: A promises to pay B a sum of 20 thousand rupees if there is damage to his house from fire. The payment of the amount is contingent on the house being destroyed by fire. If there is no fire, B cannot claim the amount from A who is not liable to pay since the fire that was the collateral condition, did not happen.
What Constitutes Contingent Contracts?
There are certain essential elements of a contingent contract as stated under section 31 of the Contract Act.
Depends on the Occurrence or Non-Occurrence of an Event
A contingent contract will be deemed valid only if an event occurs or does not occur and it is collateral to the contract.
Contract Performance Must be Conditional
The meaning of a contingent contract is that the conditions collateral to the contract must be certain to happen in the future. The presence of a condition is essential for a contract to be contingent. Section 32 and Section 33 of the Contract Act state that the enforcement of a contingent contract is subject to the collateral conditions being fulfilled.
Example: X agrees to employ Z as an employee if he clears the exams with 85 percent marks or more. X is liable to give the job to Z only when he meets the condition specified of clearing the exams with the required percentage.
The Condition of the Contract must be a Future Event
A contract will be considered a contingent contract only if the event specified is a future event that may or may not happen.
The Condition Specified must be Collateral to the Contract
A contingent contract is based on the occurrence or non-occurrence of an event. This event must be collateral to the contract and not a part of the consideration mentioned in the contract. The contingency must be an independent event.
Example: X enters into a contract with Y to pay him 10000 rupees on the delivery of some books. This is not a contingent contract since X has an obligation to pay for an event that is part of the contract and not collateral to it.
Example: X enters into a contract with Y to pay him 10000 rupees if the books are delivered to him by Friday. In this case, delivery by Friday is collateral to the contract and not a part of the consideration. Hence this is a contingent contract.
The Event must not Depend on the Mere will of the Promisor
The event must not be influenced only by the will or wish of the promisor.
Example: X promises to pay a certain sum to Y if Y leaves for Delhi on 1st June. Going to Delhi is Y’s will but is not an event completely dependent on his will.
Solved Question on a Contingent Contract
Q1. In What Ways a Contingent Contract is Different from a Wagering Contract?
Ans: A contingent contract is different from a wagering contract in the following ways.
A wagering agreement is a void agreement but a contingent contract is a valid contract.
In the wagering contract, the occurrence or non-occurrence of an event or action forms the premise of the contract but in a contingent contract, the contingency or the condition is merely collateral.
The parties of a wagering contract do not have any interest in the event/ condition specified in the contract other than it resulting in the winning or losing of an amount. In a contingent contract, the parties have an active interest in the occurrence or non-occurrence of an event.
All wagering contracts are contingent contracts but not all contingent contracts include a wager.
Q2. What are the Conditions for the Enforcement of a Contingent Contract?
Ans: There are certain essential conditions for the performance of a contingent contract. These are also different types of contingent contracts.
The contract is contingent on the happening of an event- The contract is not enforceable if the event does not happen.
The contract is contingent on the non-happening of an event- In case of a contingent contract based on the non-occurrence of an uncertain future event, the promisor is liable for his performance if the event does not happen. In case the specified event takes place, the contract becomes void.
The contract is contingent on the conduct of a person whose action makes fulfilling of the condition impossible.
Example: A promises to pay ten thousand rupees to B if he marries C. In case C marries D, then the event of B marrying C is rendered impossible. A divorce between C and D or the death of D is possible later and only, in such a case, the contract will become valid. Otherwise, the contract becomes void.
The contract is contingent on the happening of the event within a fixed time.
The contract is contingent on the non-happening of the event within a fixed time.
Rules for the Contingent Contract
In the Indian Contract Act, sections 32 to 36 define some rules for the enforcement of contingent contracts between parties. These rules are mentioned below.
Contracts contingent on the occurrence of an event
A contingent contract is usually based on the occurrence of some uncertain events. In these cases, the promisor is liable to do or not do something when that event occurs. However, the law cannot enforce the contract until the occurrence of the event. If the occurrence of the event becomes impossible due to any reason, then the contingent contract becomes void.
Contracts contingent when the event does not occur
A contingent contract can also be based on a non-happening event. In this case, the promisor will do or not do something when the event does not occur. Contrary to the above rule, the contingent contract becomes void when the event takes place.
When a living person does something to make the occurrence of the event impossible
As per section 32 of the Indian Contract Act, if the contract is contingent depending on the actions of a person, then the occurrence of the event becomes impossible when that person does something to make the event impossible to happen.
Contracts Contingent when the event occurs within a Specific Time
In some contingent contracts, a party promises to do or not do something on the occurrence of an uncertain event within a specific time period. The contract becomes void when the event does not occur or the time period is over.
FAQs on What Are Contingent Contracts?
1. What is a contingent contract as defined in the Indian Contract Act, 1872?
According to 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. The performance of the contract is dependent on the happening or non-happening of a future, uncertain event. A common example is an insurance contract.
2. What are some real-world examples of contingent contracts?
Real-world examples of contingent contracts help illustrate the concept clearly:
- Insurance Contracts: A person pays a premium, and the insurance company agrees to pay a certain sum only if an event, like a fire or accident, occurs. The company's liability is contingent on the fire.
- Contracts of Guarantee: A promises a lender that they will pay B's debt if B fails to pay. A's liability to pay is contingent upon B's default.
- Indemnity Contracts: One party promises to save the other from loss caused by the conduct of the promisor or any other person. The obligation arises only when the loss actually occurs.
3. What are the essential elements of a valid contingent contract?
For a contract to be considered contingent, it must satisfy the following essential conditions:
- Conditional Performance: The performance of the contract must depend on the happening or non-happening of a specific event.
- Future and Uncertain Event: The event must be something that will happen in the future and its occurrence must be uncertain.
- Collateral Event: The event must be collateral, meaning it is incidental to the contract and not the primary consideration. For example, agreeing to pay for goods on delivery is not a contingent contract, as delivery is the core consideration.
- Independent Event: The event should not be the mere will or discretion of the promisor.
4. How does a contingent contract differ from a wagering agreement?
While both involve uncertain events, a contingent contract and a wagering agreement are fundamentally different:
- Validity: A contingent contract is a valid and enforceable contract. A wagering agreement is void and unenforceable by law.
- Interest of Parties: In a contingent contract, parties have a genuine interest in the subject matter (e.g., protecting a house from fire). In a wagering agreement, the parties' only interest is winning or losing money based on the event's outcome.
- Nature of Event: In a contingent contract, the event is collateral to the main purpose of the contract. In a wagering agreement, the uncertain event is the sole determining factor of the agreement.
5. What is the key difference between a contingent contract and a quasi-contract?
The main difference lies in their formation and basis. A contingent contract is a true contract where parties willingly agree that performance depends on a future event. In contrast, a quasi-contract is not a contract at all; it is an obligation imposed by law to prevent one person from being unjustly enriched at another's expense, even without any formal agreement.
6. Under what circumstances can a contingent contract become void?
As per Sections 32 to 36 of the Indian Contract Act, a contingent contract can become void in several situations:
- When the performance depends on an event happening, and that event becomes impossible.
- When the performance depends on an event not happening, and that event happens.
- When the event is linked to the future conduct of a person, and that person does something that makes the event's occurrence impossible.
- When the event must happen within a fixed time, and the time expires without the event occurring, or it becomes impossible before the time expires.
7. Why is it important for the uncertain event in a contingent contract to be 'collateral'?
The 'collateral' nature of the event is crucial because it distinguishes a contingent contract from a standard, absolute contract. If the event were the core promise or consideration itself (e.g., A promises to pay B ₹500 for delivering goods), it's simply a reciprocal promise. For a contract to be contingent, the condition must be an external factor that triggers the performance, not the performance itself. For instance, A promising to pay B ₹10,000 for his car if B wins a specific race is a contingent contract, as winning the race is an event collateral to the sale of the car.
