What is a Contingent Contract?

According to the provisions of Section 31 of the Indian 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.”

Under Contingent Contracts, the enforceability is directly dependent on the occurrence or non-occurrence of an event. Here, the promisor only fulfills his obligations if specific conditions are satisfied, which was earlier agreed upon. Contracts of Indemnity, Guarantee, and Insurance fall under this category. A Contingent Contract is opposite to an Absolute Contract. An Absolute Contract requires the parties to the contract to perform the contractual terms without any conditions; however, in a contingent contract parties are required to fulfill certain obligations in certain circumstances, or on happening or non-happening of any event. An understanding might have been made that under contingent contracts the action is only required by parties when certain events occur. Insurance contracts are one of the major examples of this. Under Insurance contracts, the subscribed individuals will only need their insurance companies to compensate them if the subject matter whatever they have insured is either lost or damaged. Until this happens, the insurance company doesn’t owe any obligation to the subscriber.

For Example, Kashish entered a contract with Nitisha, for the fire insurance of her hotel, which she owns. On payment of a premium of ₹15,000, Nitisha agreed to insure the hotel and agreed on a term that in case, the hotel is burnt due to fire, or any mishap occurs to the hotel due to fire, she shall pay ₹10,00,000 to Kashish. Here, the hotel catching fire is neither a performance promised as a part of the contract nor a consideration. Nitisha’s liability arises only when the collateral event occurs.

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.