What is a Contingent Contract? - Examples & Practical Use

A contingent contract is an agreement the performance is contingent upon on the happening or not happening of a certain, non-certain event in the future. It is a potent instrument of risk and uncertainty management (particularly in business, insurance, and real estate) because its validity and enforceability rely upon the occurrence (or lack thereof) of the occurrence of the described event.

Definition of Contingent Contract.

Section 31 of the Indian contract Act, 1872 defines a contingent contract as: A contract to perform or not to perform something, in case of the occurrence or non-occurrence of some event, collateral to the contract. This implies that the obligation to do (or not do) a particular act only comes to existence when the collateral event occurs (or when it does not occur).

Contingent contract example:

A will only pay B 30,000 in case B will have the best finals of the year. In case B fails to perform well in exams, A is not obligated to pay. In this case the contingent event will be topping the exams, which will lead to the acceptance of the contract.

Prerequisites of a Contingent Contract.

Existence of a Contract: It must initially be an existing contract between the parties.

Performance Conditional on Event: The contract has to demand some act to be done or not to be done which is conditional upon an event.

The occurrence must be uncertain when the agreement is made (it can or cannot take place).

Collateral Nature: The event should be collateral i.e. not an immediate element of the consideration of the contract but an extrinsic one.

Also Read :- The Advocates Act 1961

Validity/ Voidness of Contingent Contracts.

In most instances, contingent contracts are said to be valid and enforceable to the extent that all the requirements of a valid contract have been fulfilled and the event cannot be impossible to occur. Betting contracts (bets), however, are not binding, they are invalid under the Act.

A contingent contract is voided in the following conditions:

• In case the event is no longer possible to take place (Section 32).

• If the event fails to occur within the given time (Section 35).

• In case the contract is subject to occurrence of an impossible event (Section 36). 

• If the event becomes impossible as a result of actions of a person (Section 34).

Example:

A insures B that he would pay him provided a ship returns in less than a year, however if the ship sinks, then the contract is void because the event (return) cannot take place.

Section 32 and Section 31 Explained

Section 32: Relates to the enforcement of contracts that would occur under the event occurring. According to it, such contracts cannot be declared until the mentioned uncertain future event has happened. In case the occurrence of the event becomes impossible then the contract is said to be void.

Section 31: Gives definition, where contingent contracts entails the performance or failure to perform of something hinged on an occurrence that is collateral to the contract. The independent uncertainty of the event should not be a mere element in consideration.

Example (Section 32):

A has a contract to purchase the horse of B in case A survives C. The contract is only enforceable on the death of C during the lifetime of A, and the contract becomes invalid in the event C lives longer than A.

Application & Types

Insurance Contracts: Every insurance and indemnity contract is contingent, that is, it is triggered by an accident, a fire, or a death happening.

Business Risk Management: It is applied in the negotiation process when the resultant decisions rely on future standards, deadlines, or the activities of a third party.

Employment Agreements: Performance bonuses, share options and other incentives can be in the form of contingent contracts.

Stock market agreements: Payment contingent on index movements or share performance.

Sports sponsorship: Bonus payable if the team wins a championship.

Normal Contract vs. Contingent Contract.

Normal contracts: They involve the obligation performance without considering any uncertain future event.

Contingent contracts: Become enforceable or operative when a certain uncertain condition has been fulfilled.

This difference results in contingent contracts being more flexible and applicable in situations where risk or uncertainty should be addressed in a systematic manner.

Contingent Contract Section

The Indian Contract Act speaks of Section 31 through 36.

Section 31: Definition: Identifies and establishes a basis: a contractual obligation of some future, collateral happening.

Section 32: Enforcement on Occurrence of Event: Contingent contracts only become enforceable upon the event. In case the event is impossible, then the contract is voided.

Section 33: Interim Enforcement on Non-Happening of Event: Contingent contracts that are not consummated fall into the category of being enforceable against a failure to happen.

Article 34: Live Person Behaviour: When the performance of a contract is held on the basis of the actions that a person will perform and the action performed by that person renders the occurrence impossible then the contract is considered to be void.

Section 35: Fixed Time In case the contingent event has to take place within a given time period, it is enforced in strict connection with the time period.

Section 36: Impossible Events: Contract is contingent upon the condition to impossible events void ab initio- whether the parties knew the impossibility or not.

Enforceability and Limitations.

The contingent contract can only be enforced when the event happens (or fails to happen) based on the stipulations. In the case the event is impossible or is contravening the law, the contract will not be enforced.

Case Law References

N.P.O. vs. Union of India: Restated boundaries of contingent contracts with reference to government tenders of contingency not met.

Pym v. Campbell (1856): It was determined that a contract could not be binding without a definite happening-a typical contingent contract case.

Contingent Contract vs Wagering Agreement.

Students of law tend to interchange contingent contracts with betting or gambling. Although these two are uncertain, there is a basic difference between the two in terms of legality and intention.

Real-life Examples

Risk Management and Business transactions: Contingent contracts enable the effective distribution of risk by a business. 

India's Start-up Ecosystem: A venture capitalists frequently engage in tracheal funding, where each round requires an achievement, like the growth of users or revenue- a trend that has become crucial to innovation and risk reduction.

MNCs and Global Practice: The MNCs often utilize contingent contracts in joining new markets. As an example, cross-border mergers can contain the clause according to which the payments or commitments of acquisition will be conditional upon receiving regulatory approval or the attainment of certain performance targets in India.

Also Read :- How to Apply for a Surviving Member Certificate Online in India

Conclusion:

The contingent contracts play a very important role in dealing with the unpredictable nature of the business and legal relations. Under these contracts governed by Section 31 to 36 of the Indian Contract Act, liability under these contracts only occurs on the occurrence of specific collateral events, hence, giving some form of clarity, flexibility and protection to all parties involved. Regardless of whether one is in business, start-up, or as an individual, it is important to comprehend contingent contracts in order to make sure one does not step into the modern business world and gets into trouble.

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FAQs

Q1: What is meant by contingent contract?

Ans: An agreement enforceable only on the happening or non-happening of a future uncertain event.

Q2: Is a contingent contract valid or void?

Ans: Valid if the event is possible; void if the event is impossible.

Q3: What is Section 32 of the Contract Act?

Ans: It makes a contingent contract enforceable only if the event happens; void if the event becomes impossible.

Q4: What is a contingent contract under Section 31?

Ans: A contract to do or not do something depending on a collateral event.