October 24, 2021

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Different dimensions of contingent contracts

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This article is written by Yamini Jain, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.com.

Table of Contents

A contract is the cornerstone of a binding legal relationship between two individuals or parties. The Indian Contract Act, 1872 (hereinafter the “Act”) defines a “Contract” as an agreement enforceable by law. Depending upon the nature of the contract, it can be broadly categorised into an absolute or a conditional contract. In an absolute contract, every clause or condition is independent of one another and the breach of one does not affect the enforceability of the others. On the contrary, in a conditional contract, the stipulated clauses are dependent and are subject to the happening or non-happening of the other clauses. Thus, in such contracts, the performance of a promise is subject to the fulfilment of the conditions. 

A contingent contract is a prototype of a conditional contract. Section 31 of the Act further solidifies its conditional nature by defining it as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. An instance where X promises to compensate Z in case his car’s airbag doesn’t blow up in an accident would amount to a contingent contract. 

Some of the prime examples of a contingent contract are contracts of insurance (as was held in Chandulal Harjivandas v CIT), guarantee, warranty and indemnity. Further, contingent clauses are a common norm in contracts pertaining to mergers & acquisitions wherein contingent payments may be part of the seller’s proceeds. Negotiations wherein no consensus is reached also often rely on contingent clauses. Home sale contingencies are frequently incorporated into real estate contracts for the benefit of the buyer who intends to sell one home before purchasing another. Through this article, the author seeks to explore the various dimensions of contingent contracts.

The definition of a contingent contract provided by Section 31 of the Act sufficiently identifies its essential features which are as follows:

Conditional 

A contingent contract must be conditional and thus should be dependent on the happening or non-happening of an uncertain event. Section 32 and 33 of the Act lays down the principle of a contract contingent upon the happening or non-happening of an event. The factor which brings about a prominent difference between them both is that of “impossibility” which makes the former void and the latter valid.

Collateral to the contract

The event, subject to which the contract is contingent mustn’t be a part of the contract or a performance promised for consideration. For instance, if A and B enter into a contract for the delivery of goods in the near future and A gives consideration of a certain amount to B for the delivery of goods, then it does not amount to a contingent contract since A’s obligation arises out of the event which is not collateral, but a part of the contract.

Uncertain 

Uncertainty is an essential part of a conditional contract. Thus, a contract must be contingent upon an uncertain event such as fire or any other natural calamity etc. since there is a possibility that it might not occur. For instance, a promise contingent upon the death of another person is certain and thus not valid. While a contingent contract envisages a future event, it might be for an event that has already occurred but the parties are unaware of.

Discretion of the promisor

An event cannot be solely the demand or will or wish of the promisor. A notable judgement in this regard is that of N.P.O Ballaya v. K.V.S Setty and Sons, wherein as stated by the court, if a person asserts that as long as his attorney wins the case, he will be responsible for all expenses related to his duties, the event would not fall under his control, mainly due to the fact that the person does not have the capacity to control the litigation proceeding. Hence, such a contract shall be considered to be a contingent contract.

Some of the major key points that must be taken into consideration while drafting a contingent contract are as follows: 

Essentials

In order to draft a legally enforceable contingent contract/clause, it is pertinent to ensure that the contingency depends on the happening or non-happening of an uncertain event, are collateral to the contract and the performance must not be at the will of the performer. Further, it must be ensured that the clause is not contingent upon an impossible event or on the conduct of a living person as it may leave the clause void.

Specificity

The details of the performance, as well as the conditions precedent to the performance, must be drawn up in detail. All the factual and conditional representations must be expressly drafted so as to not leave any scope for ambiguity or multiple interpretations. 

Estimation of Risk

Monetary or any other risk involved in the subsequent stipulated happening/unhappening of an uncertain event to a certain event must be taken into consideration. 

Arbitration/Alternative dispute resolution

In case there are contentious contingency conditions, as are often observed in the case of non-consensus negotiation, the arbitration clause must be in place to cover such a dispute so as to save the time and monetary expenses of the parties involved.

Illustration

Let’s suppose, A plans on investing in company B subject to the condition that it raises/generates a certain amount of profit by a certain date. Thus, while the contract stipulates the date by which the profit is to be raised, it fails to reflect the date by which the same as to be notified to A. Now, B notifies the same to A after a substantial amount of time has passed and subsequently, A refuses to invest citing that the time period of the contingent contract has collapsed and hence he shouldn’t be held liable to invest in the Company. On A’s refusal, B filed a case upon him wherein A contended that the time period has been of the essence since the commencement of the Contract. B retaliated contending that such a stipulation had never been a part of the contract. In such a scenario, the Court has no option but to trace all the communication and other evidence in order to ascertain the truth. In case the Contract envisages an arbitration clause with respect to the dispute then the process might increase its pace.

This is a prime example highlighting the necessity of being specific and detailed along with having a steadfast arbitration clause in place.

The enforceability of a contingent contract, mandated under Section 32 to 35 of the Indian Contract Act, is dependent on the happening or non-happening of an event within or without a stipulated time period as explained below:

Occurrence of an uncertain event

Section 32 establishes a dual principle, firstly that such a contract cannot be enforced by law unless the event has happened. Rojasara Ramjibhai Dahyabhai v Jani Narottamdas Lallubhai, [(1986) 3 SCC 300] wherein it was held that specific performance can only be demanded in light of the fulfilment of the precedent condition. Secondly that in case the event that was to happen becomes impossible then the contract shall stand void. It is only on the happening of the event that the contract unravels into an absolute contract as was concluded in Bashir Ahmad v Govt of A.P. [ AIR 1970 SC 1089].

Non-occurrence of an uncertain event

Contrary to the above-discussed provision, herein, the contract shall be performed only when it can be ascertained that the happening of the event has become impossible. As illustrated in Sec 33, if X agrees to pay Y sum of money if a certain ship does not return and if the ship sinks then the contract can be enforced after its stinking. 

Occurrence of an uncertain event within a specified timeframe

Under this provision, a contract is enforceable only when the event happens within a set-out time frame. In case the event does not happen or becomes impossible, or if the time period has been extinguished then such a contract shall not be enforceable. As illustrated in Sec 35, if A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year. 

Non-occurrence of an uncertain event within a specified timeframe

In the case of non-happening of an uncertain event within a stipulated time period, the contract shall be enforced by law when either the time period has expired before the happening of the event or if before expiration, it becomes certain that such event will not happen. For example, if A were to pay B a sum of Rs. 1,00,00,000 in case B’s ship doesn’t return before 10 September 2021 and before the end of the given time frame, the ship sinks then the contract shall be enforceable upon A.

Aside from the non-fulfilment of the essentials, a contract may be void in case it is contingent upon: 

An impossible event

As per Section 36, Irrespective of whether the parties are aware or not, if the performance of a contract is reliant upon an impossible event, such a contract would be void ab initio. For instance, if A intends to buy a car from B and they subsequently enter into a contract contingent upon A selling his current car. Before the two parties entered into the contract, it was not known to either party that B’s car got demolished in an accident while being transported, rendering the sale of the car impossible. Such a contract shall be void ab initio.  

Conduct of a living person

Section 34 mandates that the occurrence of an event that is contingent on the conduct of another person is deemed impossible once the other person does something to hinder it or which he renders impossible. For instance, if A promises to sell his land to B within 15 days but instead sells it to C within the same time frame then the original event of selling it to B is rendered impossible. 

Contingent contract is a type of conditional contract which turns absolute only on the fulfilment of the condition precedent. Contingent contracts are integral for transactions and are often incorporated for the benefit or protection of the parties. In order to understand the concept of contingent contracts, it is imperative to know about its essentials, how to draft them and the circumstances wherein it might be enforceable or void. Contingent contract is bound by the essentials stipulated under the Act which includes, the happening or non-happening of an uncertain event which must be collateral to the contract and should not be at the discretion of the promisor. It is integral to avoid ambiguity and subsequent multiple interpretations of the same clause which is why it must entail all the relevant and specific details of the event. Lastly, the enforceability of such a contract depends upon its occurrence or non-occurrence within or without a specified time period. Thus, a contingent contract although is not an absolute or unconditional contract, it is similar in the way that it is the contract of doing or abstaining from doing something.


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