Contingent Contract: An event based contract
Author: Mudit Saxena, Galgotias University
What is a Contingent Contract?
A contract in which the promisor performs the promise only when a certain event takes place is called a contingent contract. The validity of the contract entirely depends upon the happening of the event. It is defined under Section 31 of the Indian Contract Act, 1872 as:
“contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.”
Some of the examples of Contingent Contracts are:
- Contract of Insurance (commercial application of contingent contract)
- Contract of Indemnity
- Contract of Guarantee (commercial application of contingent contract)
Note: “The contract of insurance and indemnity are contingent contract” was recognized by the case of Chandulal Harjivandas v. Commissioner of Income Tax
Illustration: X is an insurer who enters into a contract with T for fire insurance of T’s factory. X agrees to pay T an amount of Rs. 4 crores if his factory is burnt against an annual premium of Rs 50,000. This is a contingent contract.
Here, the burning of the factory is neither a performance promised as a part of the contract nor a consideration. X’s liability arises only when the collateral event occurs.
Essentials of Contingent Contract
- Happening or not happening of an event: The contract is entirely dependent upon whether the event takes place or not. The event can be predicted and does not involve an impossible event.
- The happening is insurance to the contract: The happening of the event cannot be a consideration for a promise. Eg: W enters into a contract with R and promises to deliver 5 bikes to him if India wins the Cricket World Cup provided R pays him Rs 75,000 before the World Cup starts. It will constitute a contingent contract since W’s obligation arises only when India wins the World Cup which is a collateral event.
Note: The happening of the event cannot be the will of the promisor.
- The happening of the event cannot be certain: The happening of the event should random and cannot be certain to happen. If there is the certainty of the event then it will not constitute a contingent contract.
Rules and Regulations for the enforcement of a contingent contract
Section 32 to 36 lay down certain rules which are to be followed in order to enforce a contingent contract. The rules and regulations are as follows:
- Section 32 states that the contract can only be enforced if the happening of the event (which is not certain) takes place. If happening of the event is impossible then the contract will become void.
- Section 33 states that a contingent contract can be enforced if the happening of the event (which is not certain) cannot take place. If the happening of the event takes place then the contract becomes void.
- Section 34 states that a contingent contract becomes void if the event (which is not certain) based upon the future conduct of a person, as the person’s action may make the happening of the event impossible.
- Section 35 states that a contingent contract can be enforced if happening of the event (which is not certain) does take place within a specific time period. The contract can be enforced on the expiration of the proposed time duration and the happening of the event does not take place.
- Section 36 states that all the contingent contracts will be void if they are based upon the happening of an impossible event and even if the parties to the contract are aware of this fact.
Difference between Contingent Contract and Wagering Contract
|Basis||Contingent Contract||Wagering Contract|
|Definition||It is a contract based upon happening and not happening of an uncertain event with a promise to act according to the contract.||It is a contract based upon happening or not happening of an uncertain event with a promise to provide money or money’s worth.|
|Promise involved||Reciprocal promises are not involved.||Reciprocal promises are involved.|
|Event (which is not certain)||Event is assurance.||The event is the key ingredient.|
|Nature||It cannot be a wagering contract.||It is a contingent contract by nature.|
|Validity||It is a valid contract.||It is an invalid contract.|
|Profit and loss||Profit and loss is mutual.||Profit and loss is not mutual.|
|Interest||Parties have interest in the contract.||No interest of the parties.|