What are Contingent Contracts? Meaning, Rules, and Examples

A contract can be entered into for the performance or non-performance of an action, and in legal terms, contracts can be broadly classified into absolute contracts and contingent contracts. In this blog, we will explore the meaning, essential elements, types, and legal provisions of a contingent contract under the Indian Contract Act, 1872.

What is a Contingent Contract?

A contingent contract is a contract in which the obligation of the promisor depends upon the occurrence or non-occurrence of a future uncertain event. In simpler terms, a contingent contract is enforceable only when a certain condition, which is collateral to the contract, is fulfilled.

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Definition of Contingent Contract under the Indian Contract Act, 1872

As per Section 31 of the Indian Contract Act, 1872:

"If two or more parties enter into a contract to do or not do something if an event which is collateral to the contract does or does not happen, then it is a contingent contract."

This means that the enforcement of a contingent contract depends upon an external event that is uncertain.

Examples of Contingent Contracts

Below we’ve mentioned the examples of contingent contract:

Insurance Contracts: An insurance policy is a classic example of a contingent contract where the insurance company promises to pay compensation only if the insured event occurs.

Indemnity Contracts:  A contract where one party agrees to compensate the other for a possible loss is contingent upon the occurrence of a specific event.

Guarantee Contracts: A contract of guarantee depends on the principal debtor’s default.

Example: A promises to pay B a sum of ₹20,000 if B’s house is damaged by fire. This is a contingent contract because the obligation to pay arises only if the fire occurs.

Essential Elements of a Contingent Contract

Several elements must be present for a contract to be considered a contingent contract:

Dependence on an Uncertain Future Event

The performance of the contract must be based on an event that may or may not happen in the future.

Conditional Performance of the Contract

The contract’s enforceability must be subject to a condition being met.

Example: X agrees to hire Y if Y clears his exam with 85% marks. The contract will be valid only when Y meets the condition.

The Condition Must be a Future Event

A contract will be considered contingent only if the event occurs in the future.

The Event Must be Collateral to the Contract

The event must be independent and not a part of the contract consideration.

Example: X agrees to pay Y ₹10,000 on the delivery of books. This is not a contingent contract because payment is directly linked to the contract itself.

The Event Must Not Depend on the Mere Will of the Promisor

The event must be independent and not solely at the discretion of one party.

Example: X promises to pay Y if Y leaves for Delhi. Since traveling is Y’s decision but not entirely dependent on his will, this qualifies as a contingent contract.

Types of Contingent Contracts

According to the Indian Contract Act, contingent contracts can be classified into different categories:

Contracts Contingent on the Happening of an Event

The contract is enforceable only if a specified uncertain event happens.

Example: A promises to pay B ₹50,000 if B’s ship reaches the port safely. The contract is valid only when the ship arrives.

Contracts Contingent on the Non-Happening of an Event

The contract is enforceable if a specific event does not occur.

Example: A agrees to sell a house to B if C does not return from abroad within a year. If C returns, the contract is void.

Contracts Contingent on an Event Happening Within a Fixed Time

If the event does not occur within a specified period, the contract becomes void.

Example: X promises to buy a car from Y if a consignment reaches him within 10 days. If the consignment does not arrive, the contract is void.

Contracts Contingent on an Event Not Happening Within a Fixed Time

A contract where performance is based on an event not occurring within a given time period.

Example: A agrees to pay B if a ship does not return within six months. If the ship does not return, A is liable.

Contracts Contingent on the Conduct of a Person

If a person’s action makes fulfilling a condition impossible, the contract becomes void.

Example: A promises to marry B if C remains unmarried. If C gets married, the contract is void.

Legal Rules for Contingent Contracts under the Indian Contract Act

Sections 32 to 36 of the Indian Contract Act specify the rules governing contingent contracts:

Contracts Contingent on the Happening of an Event (Section 32)

A contract cannot be enforced until the specified uncertain event occurs. If the event becomes impossible, the contract is void.

Contracts Contingent on the Non-Happening of an Event (Section 33)

If the event occurs, the contract becomes void. If the event does not happen, the contract remains valid.

When a Person’s Act Makes an Event Impossible (Section 34)

If a person takes action that prevents the fulfillment of a condition, the contract is void.

Contracts Contingent on an Event Happening Within a Fixed Time (Section 35)

The contract is void if the event does not happen within the stipulated time.

Contracts Contingent on an Event Not Happening Within a Fixed Time (Section 36)

The contract remains enforceable if the event does not occur within the given time frame.

Difference Between Contingent Contract and Wagering Contract

Below we've mentioned difference between contingent contracts and wagering contracts:

A contingent contract is an essential aspect of contract law, ensuring that obligations arise only when specific conditions are met. Insurance policies, guarantee agreements, and indemnity contracts are common examples of contingent contracts. The Indian Contract Act provides clear legal provisions regarding the enforceability of such contracts, ensuring fairness and certainty in contractual obligations.

Understanding contingent contracts is vital for businesses and individuals to manage risks effectively. These contracts help in securing financial agreements where performance is based on future events, making them a crucial part of contract law.