Business Law Complete Notes for BBS TU/Contingent Contract

Meaning of Contingent Contract

Contingent simply refers to a situation that is uncertain or accidental. It means when there is a situation in which no certainty about something is associated and something may or may not happen then it is called contingent.   

A contract, the performance of which becomes due only upon happening of condition or contingency is a contingent contract. Thus, a contract between the parties to do or not to do something if an uncertain event happens or does not happen in some or certain future date is called a contingent contract. It is in other words known as a conditional contract.

According to Section 31 of Indian Contract Act, “A contingent contract is a contract to do or not to do something if some events, collateral to such contract does or does not happen.”

The Section 513 of Civil code, 2074 without defining term contingent, subsection (1) states that in case a contract has been concluded to do or not to do any work if any event happens in the future, there shall not be any obligation unless the event happens.   

 From the above discussion, we can say that the contingent contract follows one underlying terms or event or condition or incident, and the performance of which occurs only after the happening or non-happening of an event in a future date, which is uncertain. It must not be certain but be collateral to the contract.

Just like a general contract, a contingent contract also creates the legal relationship between the parties, and the obligations and rights arising out of this relationship. 

But the promisor is not bound to perform his obligations immediately after the formation of the contract. He has to perform his obligations only after happening or non-happening of such an event. The rights can also be enforced on the happening or non-happening of such uncertain events in the future.

For example: M contracts with N to sell his mobile to him, in case he is successful in the public service examination held last month.

Characteristics of Contingent contract

The major features of the contingent contract are given below;

Performance Depending on a Future Event

One of the essential characteristics of contingent contract is that the performance becomes possible only upon the happening and non-happening of some future uncertain event. Thus, its performance is conditional because the promisor can or cannot perform his obligation according to the circumstances.

For Example: A agrees to pay B Rs. 5000 if B will top the exam. In this case, A’s liability to compensate B depends upon the result and rank of B.

Collateral to event

The event on which performance of the contract depends must be related or included or incidental to the contract. In the above example, A is liable to compensate B only when B is passed with the first rank and not by other ranks like second, third, etc. Any events other than the main promise has no role. 

Uncertain Event

The event must be uncertain. If the event is bound or certain to happen then the contract due to be performed in any case that is sure and certain is not a contingent contract. For example, A promises to sell his car for Rs.4000,000 in the coming year if it rains in Baitadi. It is not a contingent contract as it is certain that it rains in Baitadi in the coming year.

Event not depending on the will of the Promisor

The parties have no control over the collateral event and the contingent event should be irrespective of the will of the promisor. For example, A promises to pay Rs. 10,000 to B, if A likes to pay. It is not a contingent contract at the performance of the contract depends on the mere will of A.  

Rules Regarding the Performance of Contingent Contract

Section 513 of Civil Code, 2074, and subsections explained about the process or methods of performance of the contingent contract. On that basis, the rules regarding the performance of the contingent contract are as below:

Contract contingent on the future uncertain event of happening

When a contract is made to do or not to do anything if any event happens in the future, no liability arises from such a contract until the event happens. So, for the enforcement of the contingent contract depends on the happening of an uncertain future event, such an event must happen, otherwise, the contract becomes void and no liability for either party will arise.

For example, Sangit promises to pay Pawan Rs 5,000 if the Khaptad Express reaches Dhangadhi on time. This is a contingent event.

Contracts Contingent on the future Event of not happening

In the case of a contract contingent to do or not to do anything if an uncertain event does not happen in future, liability under the contract shall emerge only when the happening of the collateral event becomes impossible and not before.

Section 33 of the Indian Contract Act, 1872 has made provisions relating to this rule of contingent contract. This rule can be explained as; suppose A agrees to pay a certain sum of money if a certain bus does not return to the stop. This bus returns back. 

The contract becomes void. But if the bus got an accident and destroyed fully and now the bus could not return back. The contract is enforceable. 

Contracts Contingent on an Event happening within a Specific Time

In the case of a contract contingent upon the happening of an event within a specified time becomes void if the event has not happened at the time fixed or at the expiry of the time or if the happening of the event becomes impossible before the fixed time.

Section 35 of the Indian Contract Act, 1872 has made provisions about this rule. For example, A agrees to buys a certain quantity of goods if a certain car comes within one month. 

Now the car has not returned within the agreed time. The contracts become void. Again, if a car has got fire before a fixed time then in such a case the contract becomes void before the time of experiment or time of enforcing the contractual rights and duties.  

Contracts Contingent on an Event not happening within a Specific Time

In the case of a contract concluded to do or not to do any act if any future uncertain event happens within a certain fixed time then the liabilities shall emerge if the said event does not happen within the confirmed time. 

Section 35 of the Indian Contract Act, 1972 has made provisions relating to this rule. For example, M agrees to pay a certain sum of money to N, if a car does not return within two months. 

The car has not returned and the foxed time is expired. The contract becomes enforceable. If the car got any accidents and it was impossible to return back then also contract gets enforceability.   

Contracts Contingent on an Impossible Event

If an agreement to do or not to do something, if an impossible event happens, is void whether the event is known or unknown to the parties at the time of the contract formation. Section 36 of the Indian Contract Act, 1872 has talked about this rule.

Gopal promises to pay Ram Rs 50,000 if the sun rises in the west the next morning. This contract is void because it is impossible to happen the event which is collateral to the contract.

Contingent contracts based 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 and the contract becomes void.

Hari promises to pay Dipak Rs 5,000 if he marries Bidhya. However, Bidhya marries Madan. Bidhy’s act thus renders the event of Dipak marrying her impossible.

Effect of supervening impossibility

If the contingent contract is based on such event which is not impossible at the time of agreement but becomes impossible subsequently because of some supervening impossibility then such contingent contract becomes void but not from the beginning but from the date of existence of such reason rendering the event impossible to happen.

For example: Mathawar promises to gives Rs. 2000 to Krishna if Gautam Buddha will color his house with green color in the future but because of an earthquake the house is destroyed then such agreement will be void.  

Effect of illegality

If the contingent contract is based on an event, which is illegal or unlawful or as against the public policy than the contract is void automatically.

References

Mishra B.P. (2014), Mercantile Law, Kathmandu: Asia Books Distributers

Upreti Shreepraksh. (2018), Business Law, Kathmandu: Samjhana Publication Pvt Ltd