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NAVIGATING UNCERTAINTIES: THE POWER OF CONTINGENCY CONTRACTS

INTRODUCTION

Contracts were in our system long before anyone recognised what they were called. Simply expressed, trade promises are contracts; nevertheless, particular principles and procedures exist to minimise contract fraud and deceit. The Indian Contract Act, of 1872 is the basic legal framework that examines contracts that are relevant to the basic foundations of the legal system. The Indian Contract Act, of 1872 lays down the legal basis for entering into contracts, maintaining contractual terms and resolving disputes. Section 2(h)[1] of the Indian Contract Act, of 1872 defines a contract as a legally binding agreement. Submission and consent, intent to create legal relationships, due diligence, parties, free consent, fair performance and consideration are the basic characteristics of a contract.

BASICS OF CONTINGENT CONTRACTS

Section 31[2] of the Indian Contracts Act of 1872 defines a contingent contract as a commitment to perform or not do something if an unpredictable future event happens. The presence of ambiguity regarding a future event, as well as the occurrence and non-occurrence of the event, are essential components of a dependent contract. While absolute contracts bind the parties regardless of any future event, contingent contracts are determined by the occurrence or non-occurrence of any specified event. In contrast to absolute contracts, which are unconditional and require that everything be done as agreed, contingent contracts include restrictions on the parties’ rights and obligations.

According to Section 31 of the ICA, contracts that depend on the happening or not happening of any event are referred to as dependent contracts. When the underlying event occurs, Section 32[3] investigates whether contingent contracts are enforceable. The ICA addresses dependent contracts being void if the underlying event becomes impossible, but Section 34[4] expressly defines the effects where a contingent contract is to do or not do something and the event becomes impossible. Sections 35[5] and 36 [6]of the ICA specify contingent contracts in terms of time and the consequences if the claimed event does not occur within the time limit specified or becomes impossible.

ELEMENTS OF CONTINGENT CONTRACTS

These contracts contain the components of offer and acceptance in contingent situations. Every contract must include an offer. When one party proposes to do or not do something depending on the occurrence of an unpredictable event, this is referred to as an offer. Acceptance occurs when the opposite party decides to accept the parameters of the offer that are contingent on the stated occurrence. For instance, A may give B a quantity of money if B’s shipment arrives by a specified date. B accepts the offer, and the contract becomes conditional on the shipment arriving on time.

The contingent contract also includes Event Certainty[7]. The occurrence that must occur before the contract becomes enforceable is referred to as the Conditions precedent. The parties are not obligated by the contract until the condition antecedent is met. When the circumstance arises, it becomes effective. For example, A pledges to give B a bonus if B completes a certain project. The completion of the project is a prerequisite. Condition Subsequent refers to occurrences that, if they occur, will terminate or amend the contract. The contract is valid and enforceable until the succeeding condition arises. If the Condition happens, the parties may be released from their commitments. For example, suppose A agrees to lease a property to B, but the agreement is cancelled if zoning regulations change. The subsequent condition is a change in zoning legislation.

Types Of Contingencies

  1. Specific Event Contingency – The contract is contingent upon the occurrence of a particular event. For example – A agrees to pay B a bonus if B’s product wins a certain industry award
  2. Uncertain Time Contingency – The contract is contingent on an event within a specified time frame. For Example – A agrees to sell a vintage car to B if B graduates from college within the next two years.
  3. Contingency based on Third-Party Actions – The contract terms are subject to third-party choices or actions. For instance, A grants B a land lease in exchange for B obtaining the required government clearances.
  4. Mutual Consent Contingency – The contract is contingent on both parties agreeing to specific terms. For example – A and B agree to enter into a partnership if they both approve the final partnership agreement.

Legal Implications of Contingent Contracts

To be enforceable, contingent contracts must fulfil specific characteristics. Terms and conditions must be explicit, conditions must be legal and not illegal, and the aim and consideration must be legal. Parties have a variety of remedies available to them based on the fulfilment or non-fulfilment of contingencies. Depending on the circumstances, parties may pursue specific performance, damages, restitution, negotiation, modification, and termination.

Crafting of Contingency Contracts

A delicate balance between providing flexibility in the face of uncertainty and ensuring enforcement within the bounds of legal norms must be struck by effective contingency contracts. Legal guidance is usually sought to ensure the terms and conditions are robust and compliant and safeguard the parties concerned. Clarity is paramount as these contracts navigate a delicate balance between flexibility and legal enforceability. The drafting phase demands precision that is not hazy concerning the clarity of the law outlining the conditions that are both possible and not forbidden by the law while adhering to the general principles of contract law.

CONCLUSION

Contingency contracts emerge as beacons of flexibility in an unpredictable society. The skill of designing contingency contracts has become a strategic need as organisations navigate complicated transactions and people enter into big commitments. Knowing the complexity, communicating clearly, and getting legal advice can help parties manage the always-shifting world of contingencies with confidence and foresight. After all, a well-written contingency contract acts as a compass in the face of uncertainty, steering parties towards favourable outcomes.

Author(s) Name: Adarsh Tripathi

Reference(s):

[1]  Indian Contract Act 1872, s 2(h).

[2]  Indian Contract Act 1872, s 31.

[3]  Indian Contract Act 1872, s 32.

[4]  Indian Contract Act 1872, s 34.

[5]  Indian Contract Act 1872, s 35.

[6]  Indian Contract Act 1872, s 36.

[7] Jeetu Kanwar, ‘Contingent Contracts’ (Law Times Journal, 13 June 2019),