A contract may be unconditional or absolute on the one hand and conditional or contingent on the other. The absolute or unconditional contract is one without any reservations or conditions and is to be performed under any event. On the other hand, conditional or contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening or not happening of some future uncertain event. The event must be collateral to the contract. The condition may be precedent or subsequent. For example, goods are sent on approval, the contract is a contingent contract depending on the act of the buyer to accept or reject the goods.
According to the section 31 of the contract Act 1872, “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.”
A Contingent contract contains a condition promise. A promise is “absolute” or “unconditional” when the promise undertakes to perform it in any event. A promise is “conditional” when performance is due only if an even, collateral to the contract, dose or does not happen. “Collateral” means “subordinate but from same source, connected but aside from main line.”
The performance of such a contract depends on contingency and such contingency is uncertain. The test of determining whether the contract is contingent or not, is uncertainty. If contingency is certain it is not a contingent contract.
There are three essential characteristics of a contingent contract:
- Its performance depends upon the happening or non-happening in future of some event. It is this dependence on a future event which distinguishes a contingent contract from other contracts.
- The event must be uncertain. If the event is bound to happen, and the contract has got to be performed in any case it is not a contingent contract.
- The event must be collateral, i.e. incidental to the contract.
A contract to indemnify B upto Rs 20,000, in consideration of B paying Rs 1,000 annual premium, if B’s factory is burnt. This is a contingent contract.
Any ordinary contract can be changed into a contingent contract, if its performance is made dependent upon the happening or non-happening of an uncertain event, collateral to such contract. For example, the following are contingent contracts:
- A contracts to sell B 10 bales of cotton for Rs 20,000, if the ship by which they are coming returns safely.
- A promises to give a loan of Rs 1,000 to B, if he is elected the president of a particular association.
- A promises to pay Rs 50,000 to B if a certain ship does not return, of course after charging usual premium. (It is a contract of insurance.)
- C advances a loan of Rs 10,000 to D and M promises to C that if D does not repay the loan, M will do so. (It is a contract of guarantee.)
Contracts of insurance, indemnity and guarantee are the commonest instances of a contingent contract.
As the performance of a contract is made dependent upon a contingency, contingent contracts are also known as ‘conditional’ contracts. But in certain cases a contract may look like a ‘conditional’ contract, whereas in fact it may be simply an ordinary absolute contract where the promisor undertakes to perform the contract in all events. For example, where A promises to pay Rs.500 to B, a property broker, if B manages to get a two rooms accommodation for him at a rental of Rs. 2,500 per months, it is not a contingent contract, though on the face of it, it appears like a conditional contract. It is an ordinary absolute contract because the uncertain event (namely, managing to get an accommodation) itself forms the consideration of the contract and is not a collateral event. Hence it must be clearly understood that in the case of contingent contracts the uncertain events must be collateral to such contracts.
Rules Regarding Contingent Contracts
- Contingent contracts dependent on the happening of an uncertain future event cannot be enforced until the event has happened. If the event becomes impossible, such contracts become void (Sec. 32). For example: A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.
- Where a contingent contract is to be performed if a particular event does not happen, its performance can be enforced when the happening of that event becomes impossible (Sec. 33). For example: A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
- If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies (Sec. 34). For example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and that C may afterwards marry B.
- Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if the event does not happen or its happening becomes impossible before the expiry of that time. For example: 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.
- Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether or not the fact is known to the parties (Sec. 36). For example: A agrees to pay B Rs.1,000 if B will marry A’s daughter, C. C was dead at the time of the agreement. The agreement is void.