Table of Contents

The law relating to contingent contracts is contained in Sections 31 to 36 of the Indian Contract Act, 1872.

Section 31 [Definition]

A contingent contract is a contract to do or not to do something if some event, collateral to such contract, does or does not happen. In simple words, a contingent contract is a contract whose performance depends upon the happening or non-happening of an uncertain future event, which is collateral to the contract.

Example:

A agrees to pay B ₹10,000 if B’s house is burnt.

This is a contingent contract because:

  • A’s obligation to pay ₹10,000 depends upon the burning of B’s house;
  • the burning of the house is an uncertain future event; and
  • the burning of the house is collateral to the contract.

Essential Features of a Contingent Contract

A contract must possess the following characteristics to be a contingent contract:

1. There must be a valid contract

A contingent contract is first and foremost a contract. Therefore, the ordinary requirements of a valid contract must be satisfied.

2. Performance must depend upon an uncertain event

The performance of the contract must depend upon the happening or non-happening of an event which is uncertain.

For example, A agrees to pay B ₹50,000 if B’s shop is destroyed by fire. Whether the shop will be destroyed by fire is uncertain. Therefore, the obligation depends upon an uncertain event.

3. The event must be collateral to the contract

This is the most important characteristic. The event upon which the contract depends must be collateral, i.e. incidental or external to the actual performance of the contract.

Accordingly, the event should not itself be:

  • the performance directly promised under the contract; or
  • the whole of the consideration for the promise.

Example:

A agrees to pay B ₹50,000 if B’s building, constructed by B, is approved by an architect. The construction of the building is part of the contractual performance. But the architect’s approval is an independent event collateral to the contract. Therefore, the agreement relating to payment upon approval is contingent.

Meaning of “Collateral Event”

The expression “collateral” is central to Section 31. A collateral event is an event which is independent of the performance of the contract and upon which the contractual obligation is made dependent.

  • Example (Not a contingent contract): A promises to pay B ₹10,000 for painting his house, with payment to be made after B completes the painting. B’s completion of the painting is not a collateral event. It is the very performance promised by B. Therefore, this is an ordinary contract, not a contingent contract.
  • Example (Contingent contract): A promises to pay B ₹50,000, provided B’s construction work is approved by an architect. The construction is the contractual performance, while approval by the architect is an independent event. Hence, it is a contingent contract.

Thus, if the event is part of the performance of the contract, it is not collateral and the contract is not contingent.

Contingent Contract vs. Contract with Performance Postponed

A distinction must be made between:

  • a contract where there is already a present obligation, but its performance is postponed; and
  • a contingent contract where the obligation itself depends upon the occurrence or non-occurrence of a collateral uncertain event.

Example

A agrees to sell goods to B, and delivery is to take place when the goods arrive from the manufacturer’s factory. The mere fact that delivery is to take place in the future does not make the contract contingent. The parties have already undertaken their obligations. The time of performance is merely postponed. Therefore, postponement of performance does not result it to be contingent contract.

Contingent Contract and Wagering Agreement

A wagering agreement under Section 30 also involves an uncertain event. However, a contingent contract and a wagering agreement are not the same.

Basis

Contingent Contract

Wagering Agreement

Nature

A valid contract subject to a contingency.

An agreement based on a wager.

Event

Event is collateral to the contract.

Event is the very basis of the wager.

Purpose

Generally, serves a genuine business, commercial or other lawful purpose.

Essentially involves winning or losing depending upon an uncertain event.

Interest in Event

Parties generally have a genuine interest in the underlying transaction.

Parties' interest is ordinarily confined to winning or losing.

Legal Position

Governed by Sections 31–36.

Wagering agreements are declared void by Section 30.

Example

Insurance payable on occurrence of an insured event.

A agrees to pay B ₹10,000 if a particular team wins a match.

A contingent contract is not necessarily a wager merely because its performance depends upon an uncertain event. The crucial question is why and how the event is connected with the contract.

Insurance and Contingent Contracts

Insurance contracts are commonly given as examples of contracts dependent upon an uncertain future event. For example, in property insurance, the insurer’s liability may arise upon the occurrence of the insured event, such as accidental damage.

However, it is better not to state that “all insurance contracts are contingent contracts”. The classification depends upon the particular contractual arrangement and the nature of the obligation.

Where a contractual obligation is made dependent upon an uncertain event collateral to the contract, the arrangement falls within the concept of a contingent contract.

Enforcement of Contingent Contracts

Sections 32 to 36 lay down the rules governing when different types of contingent contracts can be enforced.

  • Section 32: Event happens
  • Section 33: Event does not happen
  • Section 34: Conduct of a living person
  • Section 35: Event within a fixed time
  • Section 36: Impossible event

Section 32 [Contract Contingent on an Event Happening]

Where a contract is contingent upon an uncertain future event happening, it cannot be enforced until that event happens. If the event becomes impossible, the contract becomes void.

Thus, there are two possibilities:

  • Event happens – Contract becomes enforceable.
  • Event becomes impossible – Contract becomes void.

Examples:

  • A agrees to buy B’s horse if A survives C. The contract cannot be enforced unless and until C dies during A’s lifetime; A’s survival of C is the uncertain event upon which the contract depends.
  • A agrees to sell a horse to B if C, to whom the horse has first been offered, refuses to buy it. The contract cannot be enforced until C refuses to buy the horse.
  • A agrees to pay B money when B marries C. C dies without marrying B. The event, B marrying C, has become impossible. Therefore, the contract becomes void.

Section 33 [Contract Contingent on an Event Not Happening]

Where a contract is contingent upon an uncertain future event not happening, it can be enforced when the happening of that event becomes impossible, and not before. This is the reverse situation from Section 32.

Example

A agrees to pay B ₹50,000 if a particular ship does not return. The ship is sunk. Since the ship can no longer return, its return has become impossible. Therefore, the contract can now be enforced.

Section 34 ]Future Conduct of a Living Person]

Section 34 deals with a contingency depending upon how a particular living person will act in the future. The event is considered to have become impossible when that person does something which makes it impossible for him or her to act in the required manner within the relevant time or without further contingencies.

Illustration

A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B and C must now be considered impossible, even though it is theoretically possible that D may subsequently die and C may then marry B. Therefore, the contingency is treated as impossible when C marries D.

Thus, the law does not require us to wait indefinitely for a remote possibility to materialise.

An act of a living person which makes the contemplated event impossible is sufficient to treat the contingency as impossible.

Section 35 [Contingent Contracts Connected with a Fixed Time]

Section 35 deals with two different situations.

A. Event must happen within a fixed time

Where the contract depends upon an uncertain event happening within a specified time, the contract becomes void:

  • when the fixed time expires without the event happening; or
  • when, before the expiry of that time, the event becomes impossible.

Example

A promises to pay B ₹50,000 if a particular ship returns within one year.

  • If the ship returns within one year - contract may be enforced.
  • If one year expires and the ship has not returned - contract becomes void.
  • If the ship is burnt before the year expires - the event has become impossible, so the contract becomes void immediately.

B. Event must not happen within a fixed time

The second part of Section 35 deals with the opposite situation.

Where the contract depends upon an uncertain event not happening within a specified time, the contract may be enforced:

  • when the specified time expires and the event has not happened; or
  • before the expiry of the time, when it becomes certain that the event will not happen.

Example

A promises to pay B a sum of money if a particular ship does not return within one year.

The contract can be enforced:

  • when one year expires and the ship has not returned; or
  • before one year expires, if the ship is destroyed and therefore its return becomes impossible.

Section 36 [Agreement Contingent on an Impossible Event]

Section 36 provides that an agreement contingent upon an impossible event is void, whether or not the parties knew of the impossibility at the time of making the agreement.

Examples:

  • A agrees to pay B ₹1,000 if two straight lines enclose a space. This is impossible. Therefore, the agreement is void.
  • A agrees to pay B ₹1,000 if B marries A’s daughter C. C was already dead when the agreement was made. The event is impossible. Therefore, the agreement is void.

The parties’ knowledge of the impossibility is immaterial under Section 36.

Conclusion

A contingent contract is a valid contract whose performance depends upon the happening or non-happening of an uncertain event collateral to the contract. Sections 31 to 36 of the Indian Contract Act, 1872 lay down a complete scheme governing such contracts, specifying when they become enforceable and when they become void. The essential feature is that the contractual obligation is dependent upon a collateral contingency. Thus, the law balances the parties’ freedom to make conditional arrangements with the requirement that such arrangements be enforced only when the prescribed statutory conditions are satisfied.