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Indian Contract Act 1872: Part II

Contingent Contracts

Contracts are of different types. Since people can get into various kinds of agreement for performance or non-performance of certain acts. One way of understanding contracts is by dividing them into two types: Absolute and Contingent. Let us take a detailed look at contingent contracts.

Contingent Contracts

An absolute contract is 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.

If you look at the contracts of insurance, indemnity or guarantee, they have 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 under certain conditions. 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.”

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.

Contract Act: Contingent Contracts

Essentials of Contingent Contracts

1] 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. These said events can be precedent or subsequent, this will not matter. Say for example Peter promises to pay John Rs 5,000 if the Rajdhani Express reaches Delhi on time. This is a contingent event.

2] 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.

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.

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.

3] The event should not be a mere will of the promisor

The event cannot be a wish of the promisor. Say for example 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.

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.

4] 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.

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.

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.

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.

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 a contingent upon how a person will act at a future time, then the event is considered impossible when the person does anything which makes it impossible for the event to happen.

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.)

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.

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.

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.

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.

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.

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.

Solved Question on contingent contracts

Q: What are the differences between Contingent Contracts and Wagering Contracts?

Ans:

Factors Contingent Contracts Wagering Contract
Meaning It is a contract to do or not to do something with reference to a collateral event happening or not happening. It is a promise to give money or money’s worth with reference to an uncertain event happening or not happening.
Reciprocal promises It may not contain reciprocal promises. It consists of reciprocal promises.
Uncertain event The event is collateral. The uncertain event is the core factor
Nature of contract Contingent contract may not be wagering in nature. A wagering agreement is essentially contingent in nature.
Interest of parties Contracting parties has interest in the subject matter in a contingent contract. The contracting parties have no interest in the subject matter.
Mutuality of loss and gain Contingent contract is not based on the doctrine of mutuality of loss and gain. A wagering contract is a game, losing and gaining alone matters.
Effect of contract Contingent contract is valid. A wagering agreement is void.

 

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Pratham Sethi
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Pratham Sethi

K and A had entered into a contract where K was to supply 50,000 phones to A within 2 months from the date of signing of contract. K was to procure the phones from China and deliver the same to A. The rate of the phone was Rs. 5000/- a piece (inclusive of all taxes and duties). At the time of the execution of the contract, the duty was at 5% (five percent). Immediately after the execution of the Agreement, India had increased the duties to 1000% (one thousand percent). Therefore, K was finding it difficult to sell the phones… Read more »

Amber
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Amber

section 20 of the contract act 1872 says that if there is a mistake of fact and both the parties did not know the fact occurred after assigning the contract then it can’t be enforceable by law and the money or any reward will be return to the party who accepted that offer(section 65,72 of contract act).

Sushil Kumar Singhal
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Sushil Kumar Singhal

At the time of execution of contract Taxes and duties were different than while implementing the contract. which was not foreseeable hence K and A if agree than contract can be implemented otherwise K can rescind the contract.

RANABEER HALDER
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RANABEER HALDER

K CAN CLAIM RELIEF UNDER DOCTRINE OF FRUSTRATION

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