Contingent Contracts written by Akshat Tripathi student of NMIMS SCHOOL OF LAW, MUMBAI
Introduction
The term ‘contingent’ suggests that every other thing or reality relies on an event or situation. The ‘contingent contract’ implies that the enforceability of that contract is directly dependent on an occasion occurring or not occurring. In the Indian Contract Act , 1872, the term was used to mean conditional.
A sign of the future is ambiguity. Contingent contracts are all about predicting the probabilities of an uncertainty being probable, determining the effects if the occurrence does not occur, and evaluating the ability to change the implications.
The Contracting Parties can provide that the success of a contractual obligation depends on a contingency, even if the contract is validly established. The parties agreeing to the terms accept that the rights will be upheld and therefore the obligations will be attributed to the event of the contingency of a legal business contract being signed.
Contingent Contracts- Section 31 of the Indian Contract Act defines contingent contract as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. It is a sort of a conditional contract and the condition is of an uncertain nature.
A contract which is subject to a certain or an absolute type of condition cannot be regarded as a contingent contract. When the condition is of uncertain nature, then only the contract can truly be regarded as truly contingent.
Contingent Contracts- Section 31 of the Indian Contract Act defines contingent contract as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
It is a sort of a conditional contract and the condition is of an uncertain nature. A contract which is subject to a certain or an absolute type of condition cannot be regarded as a contingent contract. When the condition is of uncertain nature, then only the contract can truly be regarded as truly contingent.
Contingency To Be Collateral To Contract
The section emphasizes that the contingency contemplated by the contract must be collateral to the contract. It means that a contract has already arisen or a subsisting contract is there, but its performance cannot be demanded unless the contemplated event happens or does not happen.
Such a contract has to be distinguished from a proposal which does not result in a contract unless the condition is first fulfilled. For example- an offer to pay a sum of money on the discovery of a missing dog is not a contract at all. It becomes a contract only when the dog is searched out and then it is no more contingent. While, a contract to pay a sum of money on the loss of a ship is a contingent contract. The contract is already there, but the performance can be demanded only on the loss of the ship.
A contract to buy land which is under dispute made with a party to the dispute and to become operative; if he wins the case is a contingent contract, its performance being wholly dependent upon the result of the litigation.
A contingent contract failed because permission was required (environmental permission) from the authority concerned but was not granted. The necessity of such clearance was clearly anticipated in the contract as a prerequisite to its performance.
The Supreme Court held that; consequent restoration of the parties to the position in which they were before the contract was proper.[1] The court distinguished such failure from impossibility of performance.
The failure of a contingent contract is due to non-happening of an anticipated event. Where as impossibility is due to happening of an unanticipated event. A contract for sale of property was subject to the condition that it would be approved by the seller’s labour. No such approval became available. The contract failed. Earnest money directed to be refunded with 18% interest.[2]
Contingency Depending Upon Will Of A Person
A contract will be no less contingent where the happening or non happening of the contingency depends upon the will of a party. In the case of Secy of State of India v. A.J. Arathoon.[3] The case involved supply of timber to a Government Department.
The timber was to be approved by the superintendent of the factory. He did not approve the timber was to be approved by the superintendent of a factory. He did not approve the timber actually supplied. The supplier sued the government for breach of contract contending that the timber corresponded with its description in the contract and, therefore, it should have been approved.
The fact of approval being collateral to the performance of the contract, its performance could not be demanded till such approval. The Madras High Court adopted this approach of regarding the contract as contingent. The contingency was not fulfilled and hence there was no question of any action for breach.
The position would be different where the goods have already been supplied and the only thing that the contract says is that buyer shall pay when he is in a position to pay. This is not a contingent contract. The liability to pay has already arisen. The making of payment at one’s ease was only a personal concession and it would have been an abuse of this concession to prolong the payment for an unreasonable time.
A contract for the sale of goods prescribing the condition that the goods would be inspected before dispatch was held to be a firm contract. The import of materials pursuant to such a contract was valid.[4]
Contingency To Be Condition Precedent
Generally, the condition which is collateral to the performance of a contract is a condition precedent, that is, it has to be satisfied first and then performance can be demanded. It has to be distinguished from a condition subsequent, namely, a condition which has to be satisfied after the formation of the contract.
Where, for example, a person applied for shares in a company subject to his being appointed as a cashier in the company, it was held that shares could not be allotted to him without first making him a cashier.
On the other hand, where the application for shares was subject to the condition that the applicant would pay nothing until the company paid dividends, the contract was held to be not a contingent contract. A valid contract had arisen already; only the payment under it was deferred to the fulfillment of a condition.
Section 32- Enforcement of contracts contingent on an event happening
Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.
For example,
- A makes a contract with B to buy B’s horse if A survives C. this contract cannot be enforced by law unless and until C dies in A’s lifetime.
- A contract to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.
The section lays down two basic principles. First, a contract to do an act on the happening of a future uncertain condition cannot be enforced unless and until that event happens.[5] Second, if the happening of that event has become impossible, the contract becomes void. The examples appended to the section clarify both the principles.
Section 33- Enforcement of contracts contingent on an event not happening
Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before.
For example, A agrees to pay B a certain sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
Where the performance of a contract depends upon the non happening of that event becomes impossible. When such circumstances come to pass that show that the event can no more happen, then only the performance of the contract can be demanded. The example appended to the section makes the sense of the section clear.
Section 34- When the event on which contract is contingent is to be deemed impossible, if it is the future conduct of a living person.
If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.
For example,
A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible, although it is possible that D might die, and then C may afterwards marry B.
When the event for which the parties are waiting is linked with the future conduct of a person, that is so say, where the contract is enforceable if a certain person is to act in a certain way, the event shall be considered to have become impossible if that person does something which makes it impossible that he should act in that way in any definite time or without further contingencies being fulfilled. For example, in Frost v Knight,[6] the defendant promised to marry the plaintiff on the death of his father. While the father was still alive he married another woman. It was held that it had become impossible that he should marry the plaintiff and she was entitled to sue him for the breach of the contract.
Section 35- When contracts become void, which are contingent on happening of specified event within fixed time-
Contingent contracts to do or not to do anything if a specified uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.
When contracts may be enforced, which are contingent on specified event not happening within fixed time- Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired and such event has not happened, or, before the time fixed has expired, if it becomes certain that such event will not happen.
- For example, A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.
- A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.
Section 36- Agreements contingent on impossible events are void
Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreements at the time when it is made.
For example,
- A agrees to pay B 1000 rupees if B will marry A’s daughter C. C was dead at the time of the agreement. The agreement is void.
Differences between contingent contract and wagering agreement:
- The wagering is an agreement, contingent is a contract.
- The wagering agreement is void from the beginning, the contingent contract is valid from the beginning.
- Whereas it is certain that wagering agreement will not be enforced, the contingent contract is enforced on happening of the precedent condition.
Findings
The advantages that contingent contracts provide are that they encourage the parties to deliver above or above the contractually defined standards. In all kinds of incentive agreements, from sales fees to equity options, that’s the force behind the use of contingent contracts. In order to motivate athletes and artists, sports teams and entertainment companies routinely use contingent contracts. Yet dependent contracts are not only good for inspiring citizens. They can inspire enterprises as well. Contingent contracts motivate outstanding performance by rewarding outstanding results.
Conclusion
Any basic aspects need to be there for a deal to be a contingent deal. These components form a contingent contract and a contract won’t be contingent without them. To do or not to do anything, there must be a legitimate contract. The accomplishment of the deal must be conditional. The event should be collateral for those transactions, and the event should not be at the mercy of the promisor. These are some rules that need to be followed for the enforceability of a contingent contract. For eg, on the occurrence of an occasion, on the event not occurring, and on the event not occurring within a specified time.
References
1. Abhay pandey: Contingent Contracts Under Indian Contracts Act, ipleaders.( 21st September,2018), Available at https://blog.ipleaders.in/contingent-contract/ .
2. Pon Staff : Contingency Contracts In Business Negotiations, Harvard Law School Daily blog. (22nd September, 2020) Available at https://www.pon.harvard.edu/daily/business-negotiations/contingency-contracts-in-business-negotiations-agreeing-to-disagree/ .
3. James Chen : Contingency Clause, Investopedia ( 1st August,2020). Available at https://www.investopedia.com/terms/c/contingency-clause.asp .
4. Contingency Contracts. (12th March 2017), Available at https://www.upcounsel.com/contingency-contracts.
5. Zakiya: Contingency Contracts , Lawordo (19th October, 2019), Available at https://www.lawordo.com/contingent-contracts/ .
6.Avatar Singh, Law of Contracts and specific relief. (13th Edition,2018)
7. The Indian Contract Act 1872
8. The law of Contract-1 By R.K Bangia.
[1] SAIL v. Tycoon Traders, (2015) 5 SCC 767
[2] Nandkishore Lalbhai Mehta v. New Era Fabrics (P) Ltd, (2015) 9 SCC 755
[3] Secy of State of India v. A.J. Arathoon
[4] Collector of Customs v. Rakesh Press, (1997) 10 SCC 457
[5] Rojasara Ramjibhai Dahyabhai v. Jani Narottamdas Lallubhai, AIR 1986 SC 1912.
[6] Frost v. Knight, 1872 LR 7 Exch 111.
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