Contingent contract

A contingency contract is a legally required agreement for contracts that have a prescriptive area of performance inside a designated operational region, such as those for construction, supply, and services that are let by government contracting officers in the practicable area.

Contingent contracts are also referred to as "conditional" contracts since they are made to depend on a contingency. However, in some specific circumstances, a contract may appear to be a "conditional" contract when, in reality, it may just be a general or regular absolute contract where the promisor undertakes to uphold the contract in all circumstances. For instance, even though it appears to be a conditional contract, Ashish's agreement to pay Vishal, a property broker, Rs 500 if Bishal is successful in finding him a two-room apartment for a monthly rate of Rs 3, 000 is not contingent. Because the unknown event (getting an accommodation) alone generates the consideration of the contract and is not a collateral event, it is a general or ordinary absolute contract. It should therefore be evident that in the case of contingent contracts, the uncertain or unpredictable event must be a collateral to such arrangements.

Collateral event:

A "collateral event" is an occurrence that is "neither a performance directly pledged as part of the contract nor the whole remuneration for a promise," according to Pollock and Mulla. Calvina cannot have a contingent contract if he agrees to pay Daya Rs 100 to whitewash his two rooms on the condition that no payment will be made until the work is completed because Daya's performance of the work is not a collateral to the agreement; rather, it is a reciprocal promise or the very thing that is contracted for and is thus an essential component of the agreement.

Similar to this is the contract for the sale of products, where the vendor agrees to deliver the goods after a specific date as long as the buyer pays within three days. Because the buyer's payment is a condition precedent and an essential part of the contract, rather than being collateral to the transaction, it is an absolute contract rather than a contingent one.

In other words, a collateral event is something that happens after the contract is signed but unrelated to the consideration. For instance, Ashis agrees to pay contractor Bishal Rs. 500 000 to build a house, providing that both an architect and an engineer approve of the design.

It is a contingent contract since the house's construction is the consideration for the promise to pay Rs 500 000, and the approval by an architect and engineer is a collateral event that depends on the consideration; the contract will be enforced in the course of this collateral event.

Essentials of contingent contract:

The following two crucial components of a contingent contract are obvious from the abandonment discussion:

• Such a contract depends on a future unknown event happening or not happening in order to be fulfilled.
• Future unforeseen or uncertain events are collateral, or contract-related expenses.

Rules in regard to the performance of contingent contract:

The rules in regard to the performance of contingent contracts, as contained in Sections 32 to 36 of the Contract Act, of India are given below:

• Contracts that are subject to change if a predetermined future event occurs cannot be enforced by the law until after the event has taken place. If the scenario becomes unfeasible, these contracts become void (Sec. 32).
  • Illustrations (to Sec. 32):
  • If Ashish makes it through Calvina, they agree that Ashish will buy Bishal's horse. Until and unless Calvina passes away within Ashish's lifetime, the contract cannot be enforced by the law.
  • If Calvina, to whom the horse has been offered, declined to buy it, Ashish and Bishal make a contract under which Ashish will sell the horse to Bishal at a set sum. Until Calvina explicitly denies purchasing the horse, the transaction cannot be enforced or charged by law.
  • Ashish contracts to pay Bishal a sum of money (as the loan) when Bishal marries Calvina. Calvina dies without being married to Bishal. The contract comes to be void.
• When the occurrence of an unexpected future event becomes impossible, and not before, contingent obligations to do or not to do anything can be imposed (Sec. 33).
  • Illustration (to Sec. 33): If a specific ship does not arrive for my voyage, Ashish promises to reimburse Bishal for a particular amount of money (as an insurance claim) (after charging the premium). The vessel has sank. The agreement may be enforced if the ship capsizes.
• When a person does something that makes it impossible for him to continue acting in a certain way within a specific time frame or in any other way than under other contingencies, the event that is contingent on how that person will act at an unspecified time must be considered to have changed to being impossible (Sec. 34).
  • Illustration ( to Sec. 34): If Bishal marries Calvina, Ashish promises to repay Bishal a certain amount (as the debt). David marries Calvina. The union of Bishal and Calvina must now be seen as being improbable, while it is still possible that David could pass away and Calvina would later wed Bishal. (If Bishal later weds Calvina (the widow of David), the former duty of Ashish to pay the amount won't be reinstated because that came to an end when Calvina married David).
• Contracts that are contingent on doing or not doing something if a certain unpredictable event occurs within a specified amount of time are nullified [Section 35 (1)] if the event has not occurred at the end of the specified amount of time or if it becomes impossible before the specified amount of time.
  • Illustration (to Sec. 35): If a specific ship returns within a year, Ashish swears to pay Bishal a specified amount (as the loan). If the ship returns within a year, the contract may be enforced; but, if the ship is sunk or does not return within the year, the contract is void.
• When the specified time period has passed and the specified unpredictable event has not yet occurred, or before the specified time period has passed, if it becomes clear that the specified unpredictable event will not occur, contingent contracts to not do or do anything may be imposed by law [Section 35 (2)].
  • Illustration (to Sec. 35): If a specific ship does not arrive within a year, Ashish swears to pay Bishal a certain amount of money (as an insurance claim). If the ship does not arrive within a year or is sunk within that year, the contract may be enforced.
• Whether or not the parties were aware of the impossibility of the event at the time the contractual agreement was established, contingent agreements to do or not do something if an impossible event occurs are void (Sec. 36).
  • Illustrations (to Sec. 36): If two straight lines should ring an area, Ashish agrees to loan Bishal Rs. 1,000. The deal is supposedly null and void.
  • In exchange for Bishal marrying Ashish's daughter Calvina, Ashish agrees to lend Bishal Rs. 1,000 (as a loan). When the deal was made, Calvina had already passed away. The contract is allegedly null and void.

Reference:

• acq.osd.mil/dpap/pacc/cc, 2011
• Bragg, S. (2011).accountingtools. Retrieved from www.accountingtools.com: http://www.accountingtools.com/questions-and-answers/what-is-a-contingent-contract.html
• legal-dictionary.thefreedictionary.com/, 2011
• Reuters, T. (2016).findlaw. Retrieved from findlaw.com: http://consumer.findlaw.com/consumer-transactions/what-are-contingent-contracthtml
• Saab, K. (2011).Study Points. Retrieved from http://studypoints.blogspot.com/:http://studypoints.blogspot.com/2011/08/write-note-on-contingent-contract-or-discuss_1659.html
• Shrestha, R. P. (2007).Business Law.Kathmandu: M.K.Books.
• W. (2016).businessdictionary. Retrieved from businessdictionary.com:http://www.businessdictionary.com/definition/contingent-contract.html