What is Contingent contract? Types of contingent contracts

What is Contingent contract and Types of contingent contracts

We use Contingent contracts in our daily life. it is defined in section 31 to section 36 of the Indian contract act. Here, the enforceability of the contract is directly propositional to the happening or non-happing of an uncertain. We are going to discuss the meaning of the contingent contract, its types and essential elements with the help of examples.

Meaning of contingent contract

To understand the real meaning of the contingent contract, we will divide the contingent contract into two words, “contingent” and “contract”. The contingent is the opposite meaning of absolute and here Absolute is, in which we are fully sure or there is no condition is made to make the contract and the contract is which fulfils the essentials of a valid contract. It means that the contingent contract’s performance depends upon the happening or non-happening of an uncertain event (which is not fixed).

Contingent contract meaning in Hindiसमाश्रित संविदा

Contingent contract example

For example, if I made a promise to you to pay you $1000 as consideration after one month, it means this is an absolute contract because I did not make any situation.

But, if an industrialist took the loan of $500000 from the RBI and I am the surety of that. Now, I made the promise to the bank that if the industrialist will not repay the loan, then I will be liable to pay that loan.

Here, my performance of the contract is depending on the situation that the industrialist will pay or will not pay the loan to the bank. My liability to pay that loan will come into existence when the industrialist will be fail to pay the loan on time. That is why this is the contract is called a contingent contract.

Essential elements of the contingent contract

Every contract has its essentials which a contract should fulfil. Here are the essentials of contingent contract:

  • Dependent upon the  happening or non-happening of some event

A contract will be considered contingent if it will depend upon the happening or non-happening of a certain event.

For example, A enters into a contract with B that he will pay him $500 if his horse completes the race at a specific time.

  • Event is collateral to the contract made

The event must not be part of the contract. It must be collateral to the contract.

For example, A makes a contract with B that he will pay him $100 if he delivers the books to his house. Here, the $100 is the consideration that is part of the contract so it is not a contingent contract because A’s obligation depends on the event which is part of the event and not collateral to the contract.

  • Performance of the contract must be conditional

The condition of the contingent contract must depend upon the future and uncertain events. If the performance depends upon the future event but the event is sure to happen, the contract is not contingent.

For example, Mohit made the promise to Rahul to pay him $200 on 28 February. Here 28 February is a future event but it is sure. But if, Mohit promises to pay the same money on 28 February if India won the world cup. It is a contingent contract.

  • The event should not be under the control of the promisor

The event on which the performance is dependent should not be controllable by the promisor. If the promisor is making the promise so that promisee should do the work according to him, is not come under contingent. In the case of N.P.O Ballaya v. K.V.S Setty and Sons, the court held that where a client promises his advocate that if he wins in his case (in which he is the party), he will pay all his taxes and cost. Here, he has no capacity to guide the litigation so it is a contingent contract.

Features of Contingent Contract

  • The performance of a contract depends on whether a future uncertain event take happens or not.
  • It cannot be enforced if the event does not take place.
  • If the event becomes impossible, the contract will become a void contract.
  • A contract that is made upon the non-happening of an event will become come into force if the event becomes impossible.

Types of contingent contracts

Some of the most common types of contracts are used by insurance companies are contingent contracts. For example, a Life Insurance Company pays the money if the person dies in specific conditions which are mentioned in the contract made between the company and policyholder. These contracts come under the types of contingent contracts. We can also use the term Enforcement of contingent contract because these types of contingent contracts are only enforced when they meet their requirements. So let’s discuss the most common types of contingent contract.

Contract depends upon the occurrence of an uncertain event

These types of contingent contracts become valid contracts only if an uncertain event occurs. If the event does not occur, there will be no performance of the contract.

For example, A makes the contract with B that he will give half of his goods to B if his goods which are coming in the ship of C reach safely. Here safety of goods is a condition. A will not be liable to give his goods to B if the ship is not able to reach safely.

Nandkishore Lalbagh vs New Era Fabrics Pvt.Ltd.& Ors

In this case, there was a contract for the sale of land with a factory. It was to be performed if the Labour union agreed to that sale. But the Labour union did not agree to this and the contract become void.

Contract depends upon the non-happening of an uncertain event

The contract can also depend upon the non-happening of the event. If the event occurs, it becomes void, but if the event does not occur, the promisor will be liable to perform his promise. For example, A promises B to give his good to B if the ship coming with his goods does not reach safely. Now, if the ship sinks in the water, he has to give his goods. But, if the ship comes safely, he is not liable and the contract becomes invalid or void.

On the conduct of a living person

Section 34 of the Indian contract act clearly says that if the contract is contingent upon the future act of the person and that person doing the actions which makes the contract impossible, the contract will become void. For example, A makes a contract with B that he will pay him $5000 if he marries C. But C marries with F. Now B cannot marry with C. The contract becomes void.

Contract depends upon the occurrence of an uncertain event within a specified time

In this type of contingent contract, the contract will depend upon the occurrence of an uncertain event but within the specified time period. For example, A makes the contract with B that he will give half of his goods to B if his goods which are coming in the ship of C reached safely within one week. Here, the safety of goods is condition and one week is the time period. A will not be liable to give his goods to B if the ship is not able to reach safely within the given time.

Contract depends upon the non-happening of an uncertain event within a specified time

The contract can also depend upon the non-happening of the event within the given time. If the event occurs, it becomes void, but if the event does not occur within the given time, the promisor will be liable to perform his promise. For example, A promises B to give his good to B if the ship coming with his goods does not reach safely within one week. Now, if the ship sinks in the water and fails to reach within one week, he has to give his goods. But, if the ship comes safely before the expiry of one week, he is not liable and the contract becomes invalid or void.

Contract upon an impossible event

If the performance of the contingent contract depends upon the impossible event, the contract is void ab initio. It means you cannot make a contract where the event is impossible. For example, A makes the contract with B to buy his horse if his horse will win the next race. But the horse died last night. This is a void contract.

Contingent contracts under Indian contract Act
Contingent contracts under the Indian Contract Act

Advantages of Contingent Contracts

  • It makes the trust between the parties.
  • The parties can fix the negotiation before the performance of the contract.
  • It helps to reduce the risk of parties.
  • The performance of the contract can be cancelled on the happening or non-happening or uncertain event.
  • The other party enjoys the benefit if the contract comes into favour.
  • It can limit our losses that could happen if the contract fails to fulfil the conditions.

Conditions when contingent contracts become void

  • If the event on which the happening on the contract is contingent becomes impossible, the contract becomes void.

Example- A contract with B to buy his goods if the Ships comes safely to the port. But the ship sinks into the water. The contract is void.

  • When the contract is contingent on the non-happening of an uncertain event but the event occurs. The contract is void.

Example- A contract with B to buy his goods if the Ships sinks into the water. But the ship comes safely to the port. The contract is void.

  • The contract is based on the conduct of a living person but the person did the reverse of the expectations.

Example- A contract with B that he will pay him $5000 if he marries with C but C marries with D the contract is void.

  • The contract is based on the happening of an uncertain event at a given time but the event becomes impossible.

Example- A contract with B to buy his goods if the Ships comes safely to the port within one week. But the ship sinks into the water before one week. The contract is void.

  • The contract is based on the non-happening of an uncertain event at a given time but the event becomes impossible.

Example- A contract with B to buy his goods if the Ships did not come safely to the port within one week. But the ship comes within one week. The contract is void.

Difference between contingent contract and wagering agreement

Wagering Agreement Contingent contract
It is absolutely void It is a valid contract
Not enforceable by law Enforceable by law
The future uncertain event is the key element of the wagering element. The future uncertain event is collateral to the main purpose of contact.
Wager literally means “bet” where two parties have two different opinions. It is related to the happening or non-happening of future events.
The parties are not interested in the occurrence of events except for winning or losing. The parties have a real interest in the occurrence or non-occurrence of the event.
The future event is the sole determining factor in the wager agreements. The future event is only collateral in the contract.

Frequently asked Questions

What is contingent contract?

According to section 31 of the Indian contract act 1872, a contingent contract is a form of contract to do or not do something defined while making the contract, if some event, contract to such created contract, does or does not happen.

In simple words, this is a type of contract where the promisor perform his obligation only when certain conditions defined in the contract are met.

For example, A contract to pay C $500 if C’s house is burnt. It is a contingent contract because the burning of the house is a condition. He will not liable to pay if the house is safe.

Is life insurance a contingent contract?

Yes, in a life insurance policy, the company pays a specific amount of money if the insured person dies under the conditions mentioned in the insurance document. The insurer is not liable to pay the money if the insured person is alive.

Are contingent contracts valid?

As long as the contract is fulfilling the essentials of the contingent contracts, the contract is valid.

A contingent contract is valid or void?

The validation or non-validation of the contingent contract depends upon the happening or non-happening of the uncertain event. But, if the contract is based on a condition that is impossible to fulfil, The contract is void ab initio.

How long does a contingency contract last?

Normally, the contingent contract lasts between 30 to 60 days. But if the time is specified in the contract, it can last up to that time.

How are contingent contracts enforced?

The enforcement of the contingent contract totally depends upon the happening and non-happening of an uncertain event.

Conclusion

A contingent contract is used in our daily life to make our risk least. The contingent contracts depend upon the happening or non-happening of an uncertain event that needs to be fulfilled. If the condition is reversed from the expectations, the contract becomes void. The contingent contract builds trust between the parties. The many types of contingent contracts are being used by Insurance companies so that they can earn profit and also, help the people with the happening or non-happening of an uncertain event. Life insurance policies and contracts of Indemnity are examples of contingent contracts.


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