Contingent Contract Under Indian Contract Act

Diwakar Prakash Garg, a 3rd-Year BBA LL.B, UPES Student has written this Article explaining the Contingent Contract- Meaning, Types and Case Laws Under the Indian Contract Act

Introduction

Under the Indian Contract Act, of 1872, a contingent contract is an agreement that is dependent on a future event occurring or not occurring. In other words, the performance of a contingent contract is subject to the occurrence or non-occurrence of a future event. In this article, we will discuss the various aspects of a contingent contract under the Indian Contract Act[1].

Definition of Contingent Contract Under the Indian Contract Act

Section 31 of the Indian Contract Act defines a contingent contract as a contract that is dependent on the occurrence of a future uncertain event. The section reads as follows:

“Contingent contract defined: 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 word “collateral” in the above definition means that the event must be independent of the parties to the contract. It should not be within the control of either of the parties to the contract. The event also must be uncertain or contingent. If the event is certain to happen, then the contract will not be contingent[2].

Essential Elements of a Contingent Contract

The essential elements of a contingent contract are as follows:

• Uncertainty of an Event: The occurrence of an uncertain event is the foundation of a contingent contract. If the event is certain to happen, then the contract will not be contingent.
• Dependency on the Event: The performance of a contingent contract is dependent on the occurrence or non-occurrence of the uncertain event. If the event does not happen, then the contract will not be performed.
• Collateral to the Contract: The event must be collateral to the contract. It should not be within the control of either of the parties to the contract. The event must be independent of the parties to the contract.
• Possibility of Performance: The performance of a contingent contract must be possible. If the performance of the contract becomes impossible due to the occurrence or non-occurrence of the uncertain event, then the contract will be void[3].

Also, Know the Difference between a Contingent Contract And a Wagering Agreement

Example of a Contingent Contract

Let us consider an example to understand a contingent contract. A contract to pay B Rs. 10,000 if it rains on a particular day. Here, the contract is dependent on the occurrence of rain. If it rains on that particular day, then A is liable to pay Rs. 10,000 to B. If it does not rain on that particular day, then A is not liable to pay anything to B. In this case, the performance of the contract is dependent on the occurrence of an uncertain event, which is rain. Hence, it is a contingent contract[4].

Types of Contingent Contract Under the Indian Contract Act

There are two types of contingent contracts, namely:

1) Contingent Contracts Based on the Happening of an Event

These contracts are dependent on the happening of an event. The event may or may not happen. If the event happens, then the contract will be performed. If the event does not happen, then the contract will not be performed. For example, a contract to pay insurance money if a house is damaged by fire is a contingent contract based on the happening of an event.

2) Contingent Contracts based on the Non-Happening of an Event

These contracts are dependent on the non-happening of an event. The event may or may not happen. If the event does not happen, then the contract will be performed. If the event happens, then the contract will not be performed. For example, a contract to pay Rs. 1,00,000, if a person does not go abroad, is a contingent contract based on the non-happening of an event[5].

Rights and Obligations of Parties to a contingent contract

The rights and obligations of parties to a contingent contract differ depending on the type of contract and the occurrence or non-occurrence of the uncertain event. Let’s take a look at them in detail:

Rights of the Promisor

The promisor is the party who has made the promise in the contingent contract. The following are the rights of the promisor:

• Right to Terminate the Contract: If the uncertain event does not occur, the promisor has the right to terminate the contract. This means that the promisor is not liable to perform the contract as the performance of the contract is contingent on the occurrence of the uncertain event.
• Right to Claim Performance: If an uncertain event occurs, the promisor has the right to claim the performance of the contract. This means that the other party to the contract must perform their obligations as per the contract.
• Right to Compensation: If the other party to the contract fails to perform their obligations as per the contract, the promisor has the right to claim compensation[6].

Obligations of the Promisor

The promisor has the following obligations in a contingent contract:

Obligation to Perform: If an uncertain event occurs, the promisor is obligated to perform the contract as per the terms of the contract.

Obligation to Refund: If the promisor has received any advance payment or consideration from the other party to the contract, and the uncertain event does not occur, the promisor is obligated to refund the same[7].

Rights of the Promisee

The promisee is the party to whom the promise has been made in the contingent contract. The following are the rights of the promisee:

• Right to Terminate the Contract: If the uncertain event does not occur, the promisee has the right to terminate the contract. This means that the promisee is not liable to perform their obligations as the performance of the contract is contingent on the occurrence of the uncertain event.
• Right to Claim Performance: If an uncertain event occurs, the promisee has the right to claim the performance of the contract. This means that the promisor must perform their obligations as per the contract.
• Right to Compensation: If the promisor fails to perform their obligations as per the contract, the promisee has the right to claim compensation[8].

Obligations of the Promisee

The promisee has the following obligations in a contingent contract:

• Obligation to Pay Consideration: The promisee is obligated to pay the consideration as per the terms of the contract.
• Obligation to Accept Performance: If an uncertain event occurs, the promisee is obligated to accept the performance of the contract by the promisor[9].

Void Contingent Contracts

A contingent contract may become void in the following circumstances:

1. If the performance of the contract becomes impossible due to the occurrence or non-occurrence of the uncertain event.
2. If the event on which the contract is contingent is found to be unlawful.
3. If the event on which the contract is contingent is not capable of being performed.
4. If the event on which the contract is contingent is a mere possibility and not a probability[10].

Case Laws on Interpretation and Application of Contingent Contract Under the Indian Contract Act

Several case laws have helped shape the interpretation and application of contingent contracts under the Indian Contract Act. Let’s take a look at some of the key cases:

Kanhayalal v. National Bank of India [11]

In this case, the plaintiff had taken out a policy of insurance on his life and assigned it to the National Bank of India as security for a loan. The plaintiff died during the term of the policy, and the bank claimed the proceeds of the policy. However, the insurance company refused to pay, as the policy was contingent on the plaintiff’s survival until the end of the policy term. The court held that the bank was not entitled to the proceeds of the policy, as the contract was contingent on the plaintiff’s survival until the end of the policy term, and the uncertain event had not occurred.

Ganga Saran v. Ram Charan [12]

In this case, the defendant agreed to purchase the plaintiff’s property, subject to the condition that he would obtain a loan from a bank to finance the purchase. The loan was not obtained, and the defendant refused to complete the purchase. The court held that the contract was contingent, as it was dependent on the uncertain event of the defendant obtaining a loan. Moreover, as the uncertain event had not occurred, the defendant was not obligated to complete the purchase.

Badri Narayan v. Kamdeo Prasad[13]

In this case, the plaintiff entered into a contract to sell his property to the defendant, subject to the condition that he would obtain a certain license from the government. The license was not obtained, and the defendant refused to complete the purchase. The court held that the contract was contingent, as it was dependent on the uncertain event of the plaintiff obtaining the license. As the uncertain event had not occurred, the defendant was not obligated to complete the purchase.

Ram Kripal v. Ram Narayan[14]

In this case, the plaintiff entered into a contract to sell his property to the defendant, subject to the condition that he would obtain a certain mutation in the revenue records. The mutation was not obtained, and the defendant refused to complete the purchase. The court held that the contract was contingent, as it was dependent on the uncertain event of the plaintiff obtaining the mutation. As the uncertain event had not occurred, the defendant was not obligated to complete the purchase.

A.S. Mankar v. Krishnarao [15]

In this case, the plaintiff entered into a contract to sell his property to the defendant, subject to the condition that he would obtain a certain clearance from the government. The clearance was not obtained, and the defendant refused to complete the purchase. The court held that the contract was contingent, as it was dependent on the uncertain event of the plaintiff obtaining the clearance. As the uncertain event had not occurred, the defendant was not obligated to complete the purchase.

These cases illustrate the importance of understanding the nature of contingent contracts and also the uncertain events upon which they are dependent. It is essential to clearly define the terms and conditions of a contingent contract and to ensure that the parties understand their respective rights and obligations

Conclusion

In conclusion, a contingent contract is an agreement that is dependent on the occurrence or non-occurrence of a future uncertain event. The rights and obligations of parties to a contingent contract differ depending on the type of contract and the occurrence or non-occurrence of the uncertain event. It is important to understand the essential elements of a contingent contract, the types of contingent contracts, and also the rights and obligations of parties to a contingent contract to avoid any legal disputes[16].

[1] Mulla, The Indian Contract Act, LexisNexis, 15th edn., p. 100.

[2] https://www.rksassociate.com/contingent-contract/ (Last seen 27/04/2023 at 10:00 PM).

[3] Avatar Singh, Law of Contracts and specific relief. (13^th Edition,2018)

[4] https://ibclaw.in/section-31-of-indian-contract-act-1872-contingen-contract-defined/ (Last seen 27/04/2023 at 9:50 PM).

[5] https://lexforti.com/legal-news/contingent-contracts/#:~:text=Contingent%20Contracts%2D%20Section%2031%20of,is%20of%20an%20uncertain%20nature. (Last seen 29/04/2023 at 2:30 PM).

[6] https://www.contractscounsel.com/b/contingent-contract (Last seen 29/04/2023 at 2:35PM).

[7] https://www.juscorpus.com/wp-content/uploads/2021/10/83.-Hetavi-Bari.pdf (Last seen 29/04/2023 at 2:45 PM).

[8] Ibid.

[9] Supra at 7.

[10] https://www.scconline.com/blog/post/2021/01/30/validity-of-a-contract-voidable-contract-and-void-agreement-as-given-under-indian-contract-act-1872/ (Last seen 29/04/2023 at 2:50 PM).

[11] AIR 1936 All 827

[12] 1965 SC 1177

[13] AIR 1960 SC 627

[1 1970 All 172

[15] AIR 1974 SC 910

[16] Supra at 7.