Contingent Contracts

By Yashu Bansal, Chanakya National Law University, Patna

Editor’s Note: Contingent contracts are contracts that are dependent on the happening or non-happening of an uncertain event. This paper analyses the concept of such contracts. it discusses the nature of a contingent contract and its essentials. It also distinguishes such a contract from agreements subject to contract, wagers and agreements to do impossible acts. The paper also studies the situations when a contingent contract can be enforced and the circumstances when such a contract becomes void.”

Introduction 

A contract is an agreement enforceable by law. [Section 2(h) of The Indian Contract Act, 1872]. For every contract, there should be an agreement that is made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object. The agreement should not be declared void hereby to form a contract. This definition of contracts as per Indian Contract Act, 1872 is based on Sir Pollock’s definition which states that every agreement and promise enforceable at law is a contract. Thus for the formation of a contract, there must be an agreement and something in addition to that, i.e., an agreement, and its enforceability at law. [i]

The word contingent ordinarily means ‘subject to chance’. In the Indian Contract Act, 1872, this word has been used to mean conditional, just the way we use it generally. Uncertainty is the hall-mark of the future. Estimating the chances of an uncertainty becoming certain, calculating the results if the event doesn’t happen and then measuring the potentiality to deal with its consequences are all about contingent contracts. Parties may stipulate that performance of obligations under a contract is dependent on a contingency, even though the contract is validly formed. [ii] The parties agreeing to the conditions agree that the rights will be enforced and the obligations will be due on the happening of the contingency on the contracting of a valid contract.

Section 31 to 36 of The Indian Contract Act, 1872 deal with this type of contract. Section 31 of the Act defines ‘contingent contract’ thus:

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. [iii]

Every contingent contract is thus a contract primarily. Like any other contract, it is also a contract to do or not to do something. It is not, however, an absolute and unconditional one, without any reservations or conditions, which is to be performed under any event. Its performance is dependent on some event’s happening or not happening- the contingency.

This case of Chandulala vs. Commissioner of Income Tax is the best example of a contingent contract. [iv]

On June 23, 1959, a policy called “Children’s Deferred Endowment Assurance” for a sum of Rs. 50,000/- was issued by the Life Insurance Corporation of India. The proposer was Harjivandas Kotecha, the father of the appellant (hereinafter called the ‘assesse’) and the life assured was that of the assesse. The premium payable in respect of the policy was Rs. 1,925/ per annum. That amount was paid as premium out of the taxable income of the assesse. In the course of the assessment for the assessment year 1960-61, the assesse claimed rebate on the insurance premium of Rs. 1,925/ under the provisions of s. 15(1) of the Income-tax Act, 1922 (hereinafter called the ‘Act’). The Income-tax Officer rejected the claim on the ground that under the said policy the life of the minor assesse had not been assured. The Appellate Assistant Commissioner agreed with the Income- tax Officer and held that the claim of the assesse was rightly rejected. The assesse took the matter in further appeal before the appellate Tribunal but the appeal was dismissed. The appellate Tribunal stated a case to the High Court on the following question of law: “Whether rebate under s. 15(1) of the Income- tax Act, 1922 is admissible on the premium payable as per Annexure ‘A’ during the minority of the assesse?”

The High Court of Gujarat answered the reference in favour of the respondent. It held that the contract of insurance with the Life Insurance Corporation was entered into by the father of the assesse and under the terms thereof the contract was to become the assesse’s contract only by his adopting it on attaining majority. The High Court further held that on the true interpretation of the terms of the contract, even if the minor were to be alive on the deferred date it was the’ assessee’s’ father who was entitled to receive the cash option unless the assesse adopted the contract as his own. The High Court, accordingly observed that the real contracting parties were the father of the assesse and the Life Insurance Corporation and it was only under certain contingency on the happening of which the contract was to become the contract of the assesse.

Essential Elements

For a contract to be a contingent contract, certain essential elements have to be there. These elements form a contingent contract and without them, a contract will not be contingent. These are the following essentials:

There Must Be A Valid Contract To Do Or Not To Do Something

Sections 32 and 33 of The Indian Contract Act, 1872 refer to the enforcements of contracts on an event happening and on an event not happening respectively. A contingent contract will be valid only if it is a contract to do or not to do something. For instance, if a person A contracts to pay B, another person, a sum of 10,000 if B’s house is burnt, it is a valid contingent contract. On the other hand, the agreement to pay minimum demand charges, there is no event happening and the consumer has to pay it. This is a reference to the case Northern India Iron and Steel Co. Ltd. vs The State of Haryana and another,[v] in which the Court held that Section 31 of the Act has no applicability in that case since there was no event.

The Performance Of The Contract Must Be Conditional[vi]

The event contemplated should be some future, uncertain event. If the performance of obligation is dependent on a future event which has to occur, the contract will not be a contingent contract. Mere postponement of the time of performance will not make the contract contingent as at some future time. [vii] The event has to be very futuristic and uncertain. Dues and obligations don’t come under the definition of being uncertain. An event becomes uncertain only if its occurrence is not in the hands of any individual and the time is in future. It should be totally unpredictable for anyone.

The Said Event Must Be Collateral To Such Contract

The event on the happening or non-happening of which, the performance of the contract is dependent, must not form a part of the consideration of the contract. For example, X contracts to pay 100000 rupees to Y if Y’s house is destroyed by fire, in consideration of Y paying 400 rupees per month. The consideration for the promise of X to pay 100000 rupees is the payment by Y, monthly of 400 rupees. The obligation to pay 100000 rupees will be enforceable only on the happening of the uncertain event- destruction of Y’s house by fire- which event is independent of the consideration and collateral to the contract. [viii]

 The Event Should Not Be At The Discretion Of The Promisor

The event so considered as for contingency should not at all be dependent on the promisor. It should be totally a futuristic and uncertain event. In the case of Firm of N.P.O. Ballayya vs K.V.Srinivasayya Setty & Sons[ix], a person agreed with his agent to pay him the expenses of costing, taxes and others if he succeeded in litigation. In this, the event was not at all at the discretion of the promisor. He won the case in subject and was thus held liable to pay the agent. The promisor should have no capacity to guide the event which makes the contract a contingent contract.

These are the most essential elements of a contingent contract. A contract when fulfills the above discussed criteria, it can be deemed to be a valid contingent contract. A contingent contract is also a contract; but with some specific requirements and these essential requirements make a contract a contingent contract.

The Contrast

Contingent contracts form a very important part of The Indian Contract Act, 1872. These contracts have certain elements in them which make them different from every other type of contracts.

Contingent Contract And Agreements Subject To Contract

There is a very great difference between these two contracts. An agreement subjected to contract is not a contract at all. In this case, the parties agree not to be bound to contract until and unless a formal contract is executed, which takes place only at the will of the parties. A contract is formed only on the happening of an uncertain event. On the other hand, a contingent contract is something totally different. Contingent contracts suspend the performance till the happening of an uncertain and futuristic event. [x]Agreements subjected to contract negate the very existence of a contract. A contracting with B to pay a sum of 10000 rupees of his house burns down is a contingent contact. On the other hand, A agreeing with B to form a contract once his house burns down is an agreement subject to contract. This is the major difference between a contingent contract and an agreement which is subjected to contract.

 Contingent Contract And Agreements By Way Of Wager

There is a huge difference between wagering and contingent contract. The biggest difference being, a contingent contact is a valid contract but a wagering contract is absolutely void. [xi] A wagering agreement is a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event. [xii] In these, the parties are not interested in the occurrence and non-occurrence of the event. There must be determination of the event as the sole condition of the contract. One party losing and the other party losing on the happening of the event is the major criteria here. On the other hand, in contingent contract, the major factor is the happening or not happening itself and it is not about winning or losing money or its worth. Wagering is looked upon as an existing evil of the society. In the case, Badridas Kothari vs Meghraj Kothari[xiii] the plaintiff’s pleading was that on the 5th January, 1956 he lent and advanced a sum of Rs. 775 for business purpose and the defendant acknowledged the sum in writing agreeing to pay interest at -/4/- annas per cent per month. The plaintiff based his claim on a promissory note or hand-note dated 5th January, 1956. The defense was that the plaintiff and the defendant were speculators in the share market, the plaintiff incurred some losses in the share business on account of the laches of the defendant and therefore the defendant executed the Promissory Note. This defence was based on the allegation that the transaction between the plaintiff and the defendant was fatka or share speculation business and was a wagering contract. The court believed the plaintiff to be true and the payment slip given by the defendant as fraud but the fact that it was in regard to fatkas, the contract was set void. This is a case law in regard to wagering. This distinguishes a contingent contract from an agreement made by way of wager.

Contingent Contract And Agreement To Do Impossible Act

An agreement to do an impossible act, either when the impossibility is inherent or is in the very nature of the agreement, is not a contingent contract. If a man agrees to pay some money to another man if he makes a dead person alive, it is not a contingent contract and the contract is definitely void. A contingent contract presupposes the prospect of either the happening or non-happening of an event and not the impossibility of the happening and non-happening of the event. [xiv] Entering into an agreement whose event has no possibility to occur is as good as not entering into any contract. Contingent contracts are to do or not to do something on the happening or non- happening of a possible event. If a contingent contract is formed for an event which is impossible to occur, the contract becomes void. If A promises to pay B if he he marries his daughter C, the daughter being dead 3 years ago, there is no contract. The event to be performed is not at all possible. Contingent contract can be the promise to pay money if a person wins litigation. A promise to pay money if a person draws two straight lines in an enclosed space is an agreement to do ‘impossible act’ and void. We can thus clearly see how different these two agreements. Possibility of the event is the most important aspect of a contingent contract and the agreement to do impossible acts negates this feature of a contingent contract.

Conditions When A Contingent Contract Can Be Enforced

There are some certain conditions on which an event can be fulfilled. These are some rules which have to be followed for a contingent contract to be enforceable.

On The Happening Of An Event

Section 32 of The Indian Contract Act, 1872 provides that contingent contracts to do or not to do anything of an uncertain future event happen cannot be enforced by law unless and until that event has happened. For instance, if X makes a contract with Y to buy Y’s horse if X survives Y. this contract cannot be enforced by law unless and until Y dies in X’s lifetime. In the case of Bashir Ahmed & others vs Government of Andhra Pradesh[xv], the respondent contracted to purchase a book of medical prescriptions in order to start a company for the manufacture and sale of Unani Medicines. The book was taken into possession after part payment but the purpose of taking the book couldn’t be fulfilled. The appellant filed a suit to recover the balance amount. The defence was that the contingent event of forming a company wasn’t yet fulfilled. The court rejected this contention and held that the contract was not contingent on the event of the formation of the medical company. This case law is a good example as to differentiating the event and making a contract enforceable only after the occurrence of the event. The enforcement of the contract is envisaged when, primarily, the contract is contingent on the happening of an event. If it is not contingent on an event, it is not enforceable.[xvi] Therefore, for any contingent contract to be contingent, the event has to occur before fulfillment of the conditions of the performance of the contract.

 On The Event Not Happening

Section 33 of The Indian Contract Act, 1872 clearly states that :

“ Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of the event becomes impossible, and not before.”

If a person promises to pay another a sum of money if a ship does not return back, he will be obliged to pay only and only after the possibility of the ship returning becomes impossible. In this illustration, if the ship sinks, the possibility of it returning becomes nil. Thus, the contract has to be enforced. The person has to pay money and he cannot wait with the hope of the ship returning. In the case of Frost vs Knight, [xvii] the defendant promised to marry the plaintiff on the death of her father. While the father was still alive, he married another woman and thus, it was held that there was no chance left that the defendant would marry the plaintiff. Thus, she was entitled to sue him. As soon as the man married another woman, it was sure that the event of the marriage of the plaintiff and the defendant would not occur. Thus, the plaintiff had the right to sue him.

On The Event Not Happening Within A Specified Time

Section 35 of the Act states that:

Contingent contracts to do or not to do anything if a specified uncertain event does not happen within a fixed time may be enforced by law when the time fixed has expired, and such event has not happened, or, before the time fixed has expired, and such event has not happened, or, before the time has expired, if it becomes certain that such event will not happen. [xviii] If X promises Y a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.

Situations When A Contingent Becomes Void

The Event Being Impossible

If X contracts to pay Y if Y marries Z and Z dies without being married to Y, the contract becomes void. A contingent contract will become void if the future uncertain event becomes impossible to occur. Section 32 of the act states that:

“If the event becomes impossible, such contracts become void.”

The Doctrine of Frustration or impossibility of performance can be discussed here but in India, principles and theories related to it are not applicable. [xix] In the case of Satyabrata vs Mugneeram,[xx] an integral part of a development scheme of an extensive area of land was started by the defendant company. It entered into a contract with the plaintiff’s predecessor for the sale of a plot of land to the latter accepting a small sum of money as earnest. It undertook to construct roads and drains and the conveyance was to be completed soon after the completion of tile roads on payment of the balance of the price. As a considerable portion of the area comprised in the scheme was requisitioned by the Government for military Purposes in 1941, the company wrote to the defendant that the road construction could not be taken up for an indefinite period and required him to treat the agreement as cancelled and receive back his earnest. It was held that having regard to the nature and terms of the contract, the actual existence of war condition at the time when it was entered into the extent of the work involved in the scheme fixing no time limit in the agreement for the construction of the roads etc., and the fact that the order of requisition was in its very nature of a temporary character, the requisition did not affect the fundamental basis of the contract nor did the performance of the contract become illegal by reason of the requisition, and the contract had not therefore become impossible.

 Non-Happening Of Event Within Fixed Time

Section 35 of The Indian Contract Act, 1872 states that:

Contingent contracts to do or not to do anything is a specified uncertain event happens within a fixed time becomes void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. If a man promises to pay another man some money if a ship does not return within a year, the contract becomes void if the ship is burnt or sinks within that year.

 Agreements Contingent On Impossible Events

Section 36 of the act clearly states that:

Contingent agreements to do or not to do anything if an impossible event happens, are void, whether the impossibility of the event is known to the parties to the agreement at the time when it is made. If X agrees to pay Y 1000 rupees if Y will marry X’s daughter but at the time of the agreement, the daughter was dead. Thus, this contract is void.

 Conduct Of A Living Person[xxi]

Section 34 of The Indian Contract Act states that:

“When event on which contract is contingent to be deemed impossible, if it is the future conduct of a living person.”

If the future event on which on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.[xxii] If X agrees to pay Y a sum of money if Y marries Z. Z marries K. the marriage of Y to Z is considered to be impossible although it may be possible that K may die later, making the marriage of Y to Z possible. If the event is the future conduct of a person living, the event is deemed impossible if that person does anything which makes which makes it impossible. The impossibility is only for the time-being and the prospect of the event becoming possible due to the future conduct of that person in certain future contingencies, is of no avail.

Thus, these are the conditions when a contingent contract can become void and it cannot be enforced.

 Conclusion

A contract is an agreement enforceable by law. For every contract, there should be an agreement which is made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object. The agreement should not be declared void hereby to form a contract. Every contingent contract is a contract primarily. Like any other contract, it is also a contract to do or not to do something. It is not, however, an absolute and unconditional one, without any reservations or conditions, which is to be performed under any event. Its performance is dependent on some event’s happening or not happening- the contingency.

For a contract to be a contingent contract, certain essential elements have to be there. These elements form a contingent contract and without them, a contract will not be contingent. There must be a valid contract to do or not to do something. The performance of the contract must be conditional. The said event must be collateral to such contracts and the event should not be at the discretion of the promisor. These are some rules that have to be followed for a contingent contract to be enforceable. For instance, on the happening of an event, on the event not happening and on the event not happening within a specified time. There are some situations when a contingent contract becomes void. Some of them are: the event being impossible, not happening of event within fixed time, agreements contingent on impossible events and on the conduct of a living person.

 Edited by Kudrat Agrawal

[i] Aggarawal Rohini, Mercantile and Commercial Laws, Taxmann, 2012 Print

[ii] Rao V Kesava, Contract I, Lexisnexis, 2004 Print

[iii] The Indian Contact Act, 1872 Bare Act, Professional Book Publishers, 2014 Print

[iv] Gujarat 1967 AIR 816, 1967 SCR (1) 921

[v] AIR 1976 (P & H) 59

[vi] Contingent Contracts, available at http://icai.org/resource_file/16815Contingent.pdf , 27/03/2014, 09:10 IST

[vii] Rao V Kesava, Contract I, Lexisnexis, 2004 Print

[viii] Rao V Kesava, Contract I, Lexisnexis, 2004 Print

[ix] AIR 1954 SC26

[x] Rao V Kesava, Contract I, Lexisnexis, 2004 Print

[xi] Differences between Contingent and Wagering Contracts, available at http://mercantilelaws.blogspot.in/2012/05/distinguish-between-contingent.html, 28/03/2014, 17:40 IST

[xii] Wagering Contract, available at http://gradestack.com/CA-CPT-Exam-Prep-by-AOC/Difference-Between-Wagering-Agreeme/14455-2914-1207-study-wtw , 28/03/2014, 18:20 IST

[xiii] AIR 1967 Cal 25

[xiv] Rao V Kesava, Contract I, Lexisnexis, 2004 Print

[xv] AIR 1970 SC 1089

[xvi] Kapoor S.K. , Contracts I, Cental Law Agency, 2007 Print

[xvii] (1840) 49 ER 58

[xviii] The Indian Contact Act, 1872 Bare Act, Professional Book Publishers, 2014 Print

[xix] Kapoor S.K. , Contracts I, Cental Law Agency, 2007 Print

[xx] AIR 1954 SC44

[xxi] Rao V Kesava, Contract I, Lexisnexis, 2004 Print

[xxii] The Indian Contact Act, 1872 Bare Act, Professional Book Publishers, 2014 Print

One Reply to “Contingent Contracts”

  1. what is the position if the contigent contract is with regard to the immovable property or where the person is not owner a the time of execution of contigent contract give case law and suggestions

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