VALIDITY AND ENFORCEABILITY OF CONTINGENT CONTRACTS
Author: U. Sai Sahithi Sri, II year of B.A.,LL.B. from Symbiosis Law School, Hyderabad
Contract is nothing but an agreement between two parties which is enforceable by law. We can understand contracts by defining them into two type’s i.e.… Absolute and contingent contracts. Absolute contract is a contract in which performance will be performed by the Promisor without any condition. Whereas in a contingent contract condition must be fulfilled for the promisor to perform his/ her obligation. So, the word contingent means ‘subject to change’. Therefore, contingent contract depends on the events which have a tendency to change. According to Indian contact act, 1872 contingent contract is clearly defined under section 31 as a “contract to do or not to do something, if some collateral event does or does not happen”.[i]
There are certain elements and conditions which are required to make a contingent contract as a valid contract. Elements and conditions of these contracts can be analyzed clearly by studying case laws like Chandulal Harjivandas v. Commissioner of income tax in which contract of insurance and indemnity were recognized as contingent contracts.[ii] There are some advantages and commercial applications of contingent contracts. Thus the researcher analyzes elements and different conditions of contingent contracts with the help of case laws related to them. Through analyzing them the researcher find outs the advantages and application of contingent contracts in different sectors. This article mainly studies about the relevance of contingent contracts in India.
ESSENTIAL ELEMENTS AND CONDITIONS OF A CONTINGENT CONTRACT
A contract can be called as an contingent contract only when it consist of following essential elements in it-
1) Firstly, the contract must be a valid one to perform or abstain to perform from it.
EX- P makes a contract with Q that P will buy Q’s dog only if P survives X. This contract cannot be enforced until X dies in P’s life time.
2) The event should be collateral to the contract but it must not be the part of the corresponding promises which constitutes the contract. The occurrence or non- occurrence of an event must be collateral to the contract which must subsist separately.
EX- P enters into an agreement with R and promises that he will deliver 2 cars to R in return for which R will be paying Rs.70,000 to P. This contract cannot be deemed as a contingent contract because R’s obligation is based upon the event which is part of a contract and it is not a collateral event with respect to the contract.
3) The event which is mentioned must not be based upon the will of the promisor. In the case of N.P.O Balayya v. K.V. Srinivasayya Setty & Sons, a person promised his agent that if the agent is successful in litigation then he would pay his agent expenses of tax, costing and others etc… In this case the event was not at all based on the discretion of the person; hence he cannot guide the event which means the litigation.[iii] Finally the agent won the case and the person became liable to pay fine to him. In this situation court held that the event cannot be in the hands of the promisor, based up on his discretion because he cannot guide the litigation. Therefore the contract was not a contingent contract. Hence, it can be said that event cannot be based upon the discretion of a promisor. EX- P promises S that he will pay him Rs.1, 00,000 if he leaves Mumbai for Australia on 28th March, 2021. Here in this contract S can decide whether he can leave or not, but not merely his will to choose that place.
Conditions of a contingent contract
On The Happening of an Event
This has been mentioned under “sec 32 of Indian Contract Act, 1872.[iv] In this sort of situations contingent contracts are only enforceable when that particular event takes place and if suppose that event becomes unfeasible to happen then the contract becomes void.” For instance, if P promises Q to pay Rs.1,00,000 if Q marries T and later on, T dies due to an accident then the contract becomes void as Q cannot marry T anymore. Thus, contract becomes void. There are instances where a distinction can be drawn in between the event and a contract which is enforceable only after the occurrence of an event.
One such instance took place in the case of Bashir Ahmed & others v. Government of Andhra Pradesh, where the respondent purchased a book which consists of medical prescriptions to start a company and sell medicines.[v] This book was taken by the respondent only after paying partial amount of it, but could not setup a company by using it. Later on, the appellant sued the respondent claiming the balance amount of the book but the respondent stated that the purpose behind buying the book was not accomplished yet. Finally, court rejected the respondent’s plea stating that the contract was not contingent based upon the formation of a company.
On The Not Happening of an Event
As per “sec 33 of the Indian Contract Act, 1872 , Contingent contracts to do or abstain to do anything if an uncertain future event does not take place, can be enforced when the happening of the event becomes impossible, and not before.”[vi] In this case if suppose the event occurs then the contract becomes invalid. For instance , P promises S to pay some amount to him if his ship does not return back to the port, in this case if ship sinks and does not return back then P is supposed to enforce the contract and if ship return backs to the port then the contract becomes void. In Frost v. Knight case, the plaintiff as promised by the defendant that she will be married by him on the death of her father, but defendant married another women whereas the plaintiff’s father was still alive, hence defendant could not marry the plaintiff.[vii] Therefore, the plaintiff can sue the defendant because there is no possibility that defendant may marry the plaintiff again as he married another women. So, it can be understood that when an event becomes unfeasible to happen then the contract becomes invalid.
Event which is deemed to be impossible based upon the conduct of a person
“As per section 34 of The Indian Contract Act, 1872, Contingent contracts based upon the event which is connected to the future conduct of a person becomes void when that person does something which makes the event impossible.”[viii] For instance, P promises R to pay him Rs.10,000 if he marry S, but S married A due to which R could not marry her and hence contract becomes void.
Event happening within the stipulated period of time
As per “section 35 (para1) of the Indian Contract Act, 1872, If the event happens within the allotted period of time then the contract is enforceable. If suppose time lapses or before the time the happening of the event becomes impossible then the contract becomes void.”[ix] For example, if P promises Q to pay Rs.40,000 if a particular ship returns back to the port before 23rd April then in that case if the ship returns back within the dead line then the contract should be enforced by P. If suppose the ship sinks before it reaches or arrives at the port after the time period then the contract is not supposed to be enforceable.
Event not happening within the stipulated period of time
“As per section 35 (Para 2) of the Indian Contract Act, 1872, if the event does not happens within the fixed period of time then the contract is enforceable.” In this case if the future uncertain event does not occur within a certain period of time or if such event becomes unfeasible to happen even before the time period then the contract is enforceable. For instance, P promises Q to pay Rs.70, 000 if a particular ship does not return back by 21st June, 2021 then if the ship does not return back in that case contract becomes enforceable or if suppose the ship sinks in the sea before the time period itself then also the contract is enforceable because here the event became impossible to happen.
Events which are impossible to happen
"As per sec 36 of The Indian Contract Act, 1872, if suppose a contingent contract is based upon an event which is impossible to happen then the contract becomes void.”[x] In this case it is irrelevant whether the parties knew about the impossibility of event at the time of entering into the contract. For example S promises T to pay Rs.5000 to him if T can bring stars to him. Hence, the agreement is void.
EXAMPLES OF FEW CONTINGENT CONTRACTS
Insurance contracts- Contingent contracts are mostly used in the form of insurance contracts. Insurance companies utilize most of their contracts as contingent contracts. They are mostly related to guarantees, providing insurance and indemnity. For example- P an insurer enters into contract with R for fire insurance of R’s factory. Through this agreement P agrees to pay R an amount of Rs.4 crores if his factory is burnt based on an annual premium of Rs.50,000. There are still other types of insurance policies which come under contingent contracts.
For example home owners insurance policy, under this policy home owners sign under certain conditions which are related to the factors which may cause damage to their house, but when a situation arises where that person’s house gets damaged and the situation falls under the conditions of the agreement then funds may be released to that person. Unless such damage may not occur to that person’s house he/she may not be receiving any kind of funds.[xi] When there is a lack of relationship between supplier and the opposite party then contingent guarantees are used in such type of cases.
In the case of Chandulal Harjivandas v. Commissioner of the Income tax[xii] stands out as a best example for contingent contracts. In this case Life Insurance Corporation of India issued a policy called “Children’s Deferred Endowment Assurance for a sum of Rs.50, 000.” Harjivan das was the proposer and father of the appellant and life assured was that of the appellant (hereinafter referred as assessee). Hence, with the respect of this policy the premium which was payable per year was Rs.1, 925 and this was paid out of the income of the assessee which was taxable. For the assessment year of 1960-1961, the assessee claimed a refund on the premium of Rs.1,925 under the provisions of sec 15 (1) of the Income tax Act, 1922[xiii] which was rejected by the income tax officer stating a reason that under the policy the life of the minor assessee is not assured. Further, assessee took this problem to appellate tribunal where it was dismissed by the tribunal and it was forwarded to high court of Gujarat.
High court of Gujarat held that this contract was entered by the Harjivan das who was the father of appellant with Life Insurance Company and according to the terms of the contract, the contract can only be owned by the assessee attaining after his age of majority. It also stated that unless the assessee adopts contract on his own his father who entered into the contract is authorized to accept the cash option. Finally the court stated that original parties to the contract were Harjivandas and life insurance corporation and it was only under certain contingency on the happening of which the contract was to become the contract of the assessee. Hence in this case insurance contracts were identified as contingent contracts.
Contingent contracts in the field of Real Estate Business
In real estate contracts, contingency is something which makes the contract null and void if a particular event takes place. It can also be used as an escape clause under certain circumstances. This type of field includes mostly contracts which are contingent type, because buyers may issue contingent offers based on a particular event. A buyer may make an offer to a seller for a home that is contingent on the buyer selling their current home. Another contingency in a real estate contract is the condition of the property, and determining that condition usually requires the completion of a professional home inspection and appraisal. The three main clauses in a real estate purchase contract fall under three main categories:
The contingencies exist in a real estate contract to protect the potential buyer from entering into an agreement that doesn't fairly represent the property being purchased.[xiv]
ADVANTAGES AND COMMERCIAL APPLICATIONS OF CONTINGENT CONTRACTS
Advantages of Contingent contracts
Contingent contracts uplift the parties to fulfill above the contractually designated standards. That’s the reason why they are used in areas of arrangements which include compensation, from sales commissions to stock options. In order to inspire athletes and sports persons mostly contingent contracts are used. Contingent contracts are not only used to motivate people personally but also companies by gratifying wonderful outcomes, these sort of contracts inspire marvelous performances. Hence that’s why they are used mostly in above instances.[xv]
Commercial applications of contingent contracts are
In case of insurances we can see the application of contingent contracts. In case of insurance contracts both the parties enter into an agreement for the possibility of happening of a future event where the liability is taken by the offeror. For example in cases of marine, life or fire insurances offeror takes the peril of offeree against the accident to do or abstain from doing something and in return offeree should pay a definite amount of money to offeror.
Contingent contracts are often used in negotiation, this happens when both the negotiating parties are unable to reach an agreement. Contingent contracts are also used in mergers & acquisitions (M&A) depending on which contingent payments like buyer stock, earn- outs may be part of the seller’s proceeds. Once, this is settled, these payments require a constant contact between buyer and seller. Not only this but contingent contracts can also be used in the contract of indemnity, contract of guarantee and contact of warranty as well.
Contingent contract is a contract which is based upon occurrence or non occurrence of a future event. These contracts consist of certain basic elements which are required and without these elements they cannot be contingent. At the same time the contract must be valid to do or to abstain from doing it. The most important thing which this type of contract constitutes is that the event must be collateral to the contract and it must not be at the will of the promisor. All these things make a contingent contract enforceable. There are instances where a contingent contract becomes void, some of them are situations wherein event being unattainable, conduct of a living person and not happening of an event within allotted time etc…………
Contingent contracts are used in the field of insurance, real estate etc…Hence in this way contingent contracts are used in the form of commercial applications. The contracts which are made with a sports person or companies are mostly based upon contingent contracts because this type of contracts motivates the player or that particular company to increase their performance thus resulting into good results. Hence, it can be said that contingent contracts are very useful in nature.
[i] Indian Contract Act, 1872, § 31, No. 9, Acts of Parliament, 1872 (India). [ii] Chandulal Harjivandas v. Commissioner of income tax, AIR 1967 SC 816. [iii] N.P.O. Balayya v. K.V. Srinivasayya Setty & Sons AIR 1954 SC 26. [iv] Indian Contract Act, 1872, § 32, No. 9, Acts of Parliament, 1872 (India). [v] Bashir Ahmed & Others v. Government of Andhra Pradesh AIR 1970 SC 1089 [vi] Indian Contract Act, 1872, § 33, No. 9, Acts of Parliament, 1872 (India). [vii] Frost vs. Knight, (1872) 7Exch 111. [viii] Indian Contract Act, 1872, § 34, No. 9, Acts of Parliament, 1872 (India). [ix] Indian Contract Act, 1872, § 35, No. 9, Acts of Parliament, 1872 (India). [x] Indian Contract Act, 1872, § 36, No. 9, Acts of Parliament, 1872 (India). [xi] Contracts Counsel, https://www.contractscounsel.com (last visited Jan. 27, 2021). [xii] Chandulal Harjivandas v. Commissioner of income tax, AIR 1967 SC 816 [xiii] Income Tax Act, 1922, § 15(1), No. 12, Acts of Parliament, 1922 (India). [xiv] Contracts Counsel, https://www.contractscounsel.com (last visited Jan. 27, 2021). [xv] Lex Forti, https://lexforti.com/legal-news/contingent-contracts/ (last visited Jan. 27, 2021).