Contingent Contracts under Indian Contract Act

Written By :- Amrita Raj Pathak (Amity Law School)

Introduction

When an event or circumstance is contingent, the word contingent means, that is, it depends on some other event or fact.

The word ‘Contingent Contract’ is described in section 31 of the Indian Contract Act, 1872 as follows:

‘A contingent contract is a contract to do anything or not to do anything, whether there is or is not an event collateral to such a contract.’

Contingent contracts, in plain words, are those where the promisor performs his duty only when certain requirements are met. Some examples of contingent contracts include insurance, indemnity and guarantee contracts.

Chandulal Harjivandas v. CIT– In this case, it was held that all contracts of insurance and indemnity are contingent.

Essential elements of the contingent contract

Once the concept of a contingent contract referred to in section 31 of the Act has been examined, the essentials of the term contingent contract are as follows:

A legal contract must be in place to do or abstain from doing anything

Sections 32 and 33 of the Act deal with the compliance of the contingent arrangement with regard to the occurrence or non-occurrence of incidents. And whether it is about fulfilling or not performing a duty would the contract be valid.

  • Contract output must be conditional

A potential occurrence must be the situation on which the contract has been entered into and it should be unknown. If the performance of the contract is based on an occurrence, which is a future event, but sure and certain to occur, then it will not be called a contingent contract.

  • The occurrence in question must be collateral for such a contract

An event on which the occurrence or non-occurrence of an event on which the performance of the contract is contingent does not form part of the contract’s consideration. The event’s occurrence or non-occurrence should be collateral to the contract and should arise separately.

  • The incident should not be at the mercy of the host

The case considered as a contingency should not be reliant on the promisor at all. This is supposed to be an entirely futuristic and unpredictable case.

Enforcement of contingent contract

Provisions related to the enforcement of the contingent contract are given under Section 32 to 36 as follows:

  • Condition #1- compliance of the contract based on the occurrence of an incident

When an unknown future occurrence occurs, the contingent contracts to do or abstain from doing anything. However, once the incident takes place, the contract cannot be enforced by statute. These contracts become invalid if the case becomes impossible. [Section 32]

  • Condition #2- Contract compliance based on an incident not occurring

If the occurrence of that event becomes unlikely, contingent contracts to do or abstain from doing anything if an unknown future event does not occur may be implemented. The contingent contract is invalid if the incident takes place. [Section 33]

  • Condition #3- when an incident depending on the contract is considered unlikely if it is the potential action of a living person.

If a contract depends on how a person is going to behave at a future time, when such a person does something that makes it unlikely for the event to happen, the event is considered impossible. [Section 34]

  • Condition #4- contracts depending on an occurrence that happens during the fixed period

Contingent contracts to do or not to do anything if within a specified time a future unknown occurrence occurs. If the occurrence does not occur and the time expires, such a contract is void. It is also invalid if the occurrence of the event becomes unlikely before the set time. [Section 35(para 1)]

  • Condition #5- contracts depending on an occurrence that does not occur within the fixed period

Contingent agreement to do or not to do anything if an unknown occurrence does not occur within a specified period can be imposed by statute until the fixed time has expired and such event has not occurred or if it becomes clear that such event will not occur before the fixed time has expired.[Section 35(para 2)]

  • Condition #6- Contingent contract of nullity of impossible case

Where an agreement to do or not to do is based on an unlikely occurrence, the agreement shall be invalid whether or not the parties to the agreement are aware of the impossibility of the event at the time it is made. [Section 36]

Conditions for the voiding of a contingent contract

  • Section 32- If the case on which the contract is conditional becomes unlikely, the contract is void.
  • Section 35- If a specified unknown event occurs within a fixed period, the contingent contract to do or not to do anything becomes invalid if such an event has not occurred at the end of the fixed time, or if such an event becomes unlikely before the fixed time.
  • Section 34- Where the future event to which a contract is subject is the manner in which a person acts at an unspecified time, the event shall be deemed to be unlikely if that person does something which makes it impossible for that person to act within a specified time or otherwise than in the event of further contingencies.
  • Section 36- The contingent agreement to do or not to do something in the case that an unlikely event occurs is invalid, whether or not the parties to the agreement are aware of the impossibility of the event at the moment it occurs.

Commercial offers for Contingent Contracts

Insurance is a contract to do anything if there is a potential incident that will be contracted by the parties and the supplier will take responsibility for it. The offeror offers to take the liability of the offeree against the event to do or not to do anything in all insurance such as life insurance, maritime insurance, fire insurance, and other insurance, and for that the offeree agrees to pay a certain sum of money.

The contingent contract can be found both in the guarantee contract and in the warranty contract. If a supplier does not have a partnership with a counterparty, contingent assurances are usually used.

In bargaining, we can use a contingent contract. When negotiating partners fail to reach an agreement, contingent contracts typically occur.

In mergers and acquisitions (M&A) too, we can use the contingent contract. Contingent fees such as earn-outs, selling notes, and buyer stock can be part of the proceeds of the seller, depending on the M&A arrangement. These contingent payments would entail continuing contact between the buyer and the seller after the transaction is finalized. It may also be included in an indemnity contract.

Conclusion

What is referred to in this subject as ‘contingent contract’ is known as ‘conditional contract’ in English law. There is a certain occurrence that needs to be met for a contingent contract. The length of this arrangement is certain and depends on the occurrence or non-occurrence of a possible incident.