Essential Elements of a Contingent Contract

1. Based on Happening or Non-happening of an Event: The performance of a contract depends upon the happening or non-happening of some event or condition that was agreed upon. These events can either be precedent or subsequent.

For example, Ravish agrees to pay Barkha a sum of ₹1,000 if political party ‘X’ wins the general elections in India. Since the event is uncertain and may or may not happen, such a contract is a Contingent Contract.

2. Performance of Contract shall be Conditional: The event for which the contract is made should occur in the future and should be unpredictable. In case, the contract’s performance is dependent on a future occurrence that has surety to occur, it is not termed as a Contingent Contract.

For example, Arnab agrees to pay ₹5,000 to Navika if the sun rises from the east, as this is a sure-shot event; hence, it is not a Contingent Contract.

3. Event should be Collateral to the Contract: The event must not be a part of the contract. The event cannot be the performance promised or a consideration for a promise.

For example, Rekha agreed to construct an office building for Amitabh for ₹2 crores, and Amitabh agreed to make the payment only on the completion of the office building. It is not a Contingent Contract, as the event of construction is directly connected with the contract.

4. Event should not be a mere Will of the Promisor: The event under such contract should be contingent in addition to being the will of the promisor; i.e., the contingency in the contract not be reliant on the promisor in any way. The event must be completely futuristic.

For example, Ross promises Rachel to pay ₹300 if she drinks coffee instead of juice, since this contract is based on the mere will of Rachel, this is not a Contingent Contract.

Contingent Contract means the enforceability of that particular contract directly depends upon the happening or non-happening of an event. The pervasive nature of uncertainty affects every business decision and contract. Business uncertainty can have a significant effect on the business due to situations that can’t be foreseen or measured. In such a situation, a Contingent Contract can be extremely helpful for creating value in negotiation by minimizing the degree of uncertainty. In many contracts, parties are required to make forecasts and assumptions about the future; say, Will fuel-oil prices rise or stay at the same level? Will the market rise in the future? Will material arrive on time for further construction, and so on?

Geeky Takeaways:

• The word contingent refers to when an event or situation is contingent; i.e., it depends on some other event or fact.
• These contracts are entered by both parties to minimize the risk associated.
• These contracts are those where the promisor performs his obligation only when certain conditions are met.
• Some examples of Contingent contracts include contracts of insurance, indemnity, and guarantee.