Freedom of Contract and its Exceptions
The law of contract does not govern the terms of every contract, but only the legality and validity of the contract itself. The terms of the contract are created and governed by the parties to the contract. In other words, the parties to the contract have the freedom to define the terms of the contract. This, however, does not come without exceptions. There are some exceptions to the freedom of contract given to the parties. The exceptions are placed in a way such that the absence of any essentials to a valid contract becomes an exception to the freedom of contract. Contingent Contracts are a type of contract and they are legal in India, but with exceptions which are discussed in future parts.
Part III of the Indian Contract Act, 1872 deals with Contingent Contracts. Contingent Contracts are defined under Section 31, of the Act. It says that, “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”. This means that this type of a contract depends on the happening or not happening of some future event, which is uncertain. Here, the term collateral event implies that the happening or not happening of the event in question should not be related to the object or consideration of the contract. It should exist independently and not depend on or be a part of the terms of the contract. For example, if A agrees to pay B a sum of money if a ship returns within a year, then there is a collateral event and the contract is contingent. But say B were to deliver a consignment to A by sea, and A agrees to pay B for delivering the goods within a year, then the contract is an absolute contract and not a contingent contract. This is because the condition or future event involves one of the parties and it is not independent. It is not a collateral event but a part of the contract itself.
Enforceable and Void Contingent Contracts
There are 6 sections, viz. 31 through 36, under Part III of the Act. Sections 32 to 36 speak about various conditions under which a contract is enforceable or void.
A contract contingent on an event’s happening
When a contract is made in such a way that the enforceability of the contract depends on the happening of a certain event, then the contract can only be enforced if and when the said event takes place. For example, if X agrees to buy Y lunch if it rains, then X is liable to buy Y lunch only if it rains. Therefore, until it rains, Y cannot enforce the contract against X.
A contract contingent on an event’s not happening
When a contract is made in such a way that the enforceability of the contract depends in a certain event not happening, then the contract can only be enforced if the possibility of the event occurring becomes impossible, but not before. For example, if X agrees to fund Y’s business on the event of Y’s funds not reaching him. If the car which was bringing Y his funds met with an accident and caught fire, causing all the money to be burnt, then it is impossible for Y to receive those funds. In such a case, Y can enforce the deal made with X and X will be liable to fund Y’s business.
A contract contingent on the future conduct of a living person
If a contract depends on an act or conduct of a living person, when the performance of the said act becomes impossible due to some act of the party, the contract becomes impossible to enforce, and thus void. For Example, say P promises to buys house for Q if she marries R. But Q marries S. In such a case, though it is possible for Q to marry R after divorcing S or on the death of S, it is to be considered that the event of Q marrying R is rendered impossible. Therefore, due to impossibility of the event occurring, the contract becomes void.
A contract contingent on an event’s happening within a fixed time
Say a contract is made in such a way that the enforceability of a contract depends on the happening of an event within a specified period of time. If the event takes place within the said time, then the contract may be enforced, and not after. Also, if the event is deemed to be impossible to occur, then the contract becomes impossible and thus void. For example, say A promises to buy a gift for B if A wins the lottery within that day’s announcements. If, by the end of the day, A wins the lottery, then B can enforce the contract and not if she wins it the following day. Also, if there was only one more winner to be announced and Z wins the lottery, then it becomes impossible for A to win the lottery. Thus the contract becomes void since it is impossible.
A contract contingent on an event’s not happening within a fixed time
If a contract is made in such a way that its enforceability depends on the not happening of a certain event within a fixed period of time, then the contract is enforceable at the lapse of the said period of time. Also, if it becomes certain that it is impossible for the event to take place within the specified period of time then the contract may be enforced. In the above example, say B agrees to buy a gift for A if she does not win the lottery during that day’s announcements. A can enforce the contract if she does not win the lottery on that day or if her lottery ticket burns even before the end of the announcements and it becomes impossible for her to win the lottery by the end of the day.
An agreement based on the happening of an impossible event
If a contract is made on the premise of the happening of a certain event which is impossible, such a contract is void irrespective of whether the parties believe it to be possible or not. For example, say A agrees to buy a chocolate for B if the sun rises in the west and sets in the east and both A and B believe that it to be possible. Such an agreement is void since it is impossible for the event to occur, irrespective of what the parties believe.
Contingent Contract and Wagering Contract
A wagering agreement is often confused with a contingent contract but they are significantly different. For one, being party to a wagering agreement is illegal in India except in case of horse racing, whereas it is perfectly legal to be party to a contingent contract. This is specified under Section 30 of the Indian Contract Act, 1872. Similarly, the interest of the parties in a contingent contract includes the happening or not happening of the uncertain future event. But in case of a wagering agreement, the only interest of the parties is to gain from the agreement and not the happening or not happening of the event that the contract is contingent upon. Another distinction between them is that in a contingent contract one party promises to do something based on the happening or not happening of a certain event. In case of a wagering contract, if one party promises to do or not do something on the happening of a certain event, then the other party promises to do or not do something if the said event does not happen. There is an either-or relationship here and one of the parties will be liable to perform the contract irrespective of the result. In simple words, it is the act of betting, where one person always wins. Finally the uncertain future event is collateral to the contract in case of a contingent contract. But in case of a wagering agreement, the performance of the contract depends completely on the happening or not happening of the uncertain future event.
Contingent Contracts are legal in India, however its enforceability and validity of the contract is variable from situation to situation. Such a contract is often misunderstood to be the same as a wagering agreement, but it is very much distinct.
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