Unit 6: Contingent and Quasi Contracts Chapter Notes | Business Laws for CA Foundation PDF Download

Contingent Contracts

• A contingent contract is a type of contract where the obligations of the parties involved depend on the occurrence or non-occurrence of a specific event. In this unit, we will explore the key features, essentials, and rules governing the enforcement of contingent contracts as per the Contract Act.
• Additionally, the Contract Act recognizes situations where an obligation is created without a formal contract. These situations, known as quasi-contracts, arise from certain relationships that do not meet the strict criteria of a contract, such as offer, acceptance, and consensus ad idem. In such cases, the law imposes an obligation on one party and confers a right on the other. We will also examine these instances of quasi-contracts.
• To clarify the concept further, let's differentiate between absolute and contingent contracts. An absolute contract is one where the promisor commits to fulfilling the contract regardless of any conditions. In contrast, a contingent contract is based on the happening or non-happening of a specific event.

Now, let's delve deeper into the specifics of contingent contracts, their essentials, and the rules governing their enforcement.

Key Features of Contingent Contracts:

• Definition: A contingent contract is defined as a contract to do or not do something, depending on whether a specific event occurs or does not occur.
• Collateral Event: A collateral event is an event that is not directly related to the performance promised in the contract or the entire consideration for a promise. It is an event that triggers the obligations under the contract.

Examples of Contingent Contracts:

• Example 1: Insurance Claim A agrees to pay B ₹ 10,00,000 if B's house burns down. This contract is contingent because A's obligation to pay arises only if the specific event of the house burning occurs.
• Example 2: Conditional Sale A makes a contract with B to buy his house for ₹ 50,00,000, but only if A secures a bank loan for that amount. This contract is contingent on A obtaining the bank loan.
• Example 3: Performance-Based Payment A agrees to pay B ₹ 10,00,000 if B's house burns down. This contract is contingent because A's liability arises only upon the occurrence of the specific event. The burning of B's house is not a promised performance or consideration in the contract.
• Example 4: Conditional Gift A agrees to transfer his property to B if B's wife C dies. This contract is contingent because the transfer of property can only occur upon the death of C.

Essentials of a Contingent Contract

• The performance of a contingent contract depends on the happening or non-happening of some event or condition, which may be either precedent or subsequent.
  For example, if 'A' promises to pay 'B' ₹ 50,000 if it rains on the first of the next month, it illustrates a contingent contract.
• The event in a contingent contract is referred to as collateral to the contract. It is not part of the contract and should not be a performance promised or a consideration for a promise.
  For instance, if A agrees to deliver 100 bags of wheat and B agrees to pay afterwards, it is a conditional contract, not contingent. Similarly, if A promises to pay B ₹ 1,00,000 if he marries C, it is not a contingent contract because the marriage is a future event within A's control.
• The contingent event should not be merely the 'will' of the promisor. It should be contingent in addition to being the will of the promisor. For example, if A promises to pay B ₹ 100,000 if he chooses, it is not a contingent contract. However, if the event is within the promisor's will but not merely his will, it may be a contingent contract.
• The event must be uncertain. If the event is certain or bound to happen, the contract is due to be performed, and it is not a contingent contract. For instance, if 'A' agrees to sell his agricultural land to 'B' after obtaining permission from the collector, and the permission is generally granted on fulfilling certain formalities, it may not be a contingent contract because the grant of permission by the collector is almost certain.

Rules Relating to Enforcement

• According to Section 32 of the Indian Contract Act, a contingent contract that involves doing or not doing something based on the occurrence of an uncertain future event cannot be enforced by law until that event happens. If the event becomes impossible, the contract becomes void.
  Example: If A agrees to pay B a sum of money when B marries C, and C dies without marrying B, the contract becomes void.

Enforcement of Contracts Contingent on an Event Not Happening:

• Section 33 of the Indian Contract Act states that a contingent contract made to do or not do something if an uncertain future event does not happen can only be enforced when the happening of that event becomes impossible, and not before.
  Example: If P agrees to pay Q a sum of money if a particular ship does not return, the contract becomes enforceable only if the ship sinks and cannot return.

In the scenario where A agrees to pay B a sum of money if a certain ship does not return, the contract is void if the ship does return.

Contingent on the Conduct of a Living Person:
A contract becomes unenforceable if it relies on the actions of a living person and that person does something that makes the required event or conduct impossible. Section 34 of the Indian Contract Act states that if a contract is contingent on how a person will act at an unspecified time, the event is considered impossible if the person takes an action that prevents them from acting within a definite time or under different contingencies.

Examples:

• In a scenario where 'A' agrees to pay 'B' a sum of money if 'B' marries 'C', the contract becomes impossible if 'C' marries 'D'. Although 'B' could potentially marry 'C' in the future if 'C' divorces 'D', the initial condition is not met.
• In the case of Frost v. Knight, the defendant's promise to marry the plaintiff upon the death of his father became impossible when he married another woman while his father was still alive. The promise was contingent on the father's death, which did not occur, leading to a breach of contract.

Contingent on the Happening of a Specified Event within a Fixed Time:
Section 35 of the Indian Contract Act states that contingent contracts become void if a specified uncertain event does not happen within a fixed time. This applies if the event has not occurred by the end of the specified time, or if the event becomes impossible before the fixed time.

Example:

• A promises to pay B a sum of money if a certain ship returns within a year. The contract is valid if the ship returns within the year, but becomes void if the ship is destroyed before its return.

Contingent on a Specified Event not Happening within a Fixed Time:
Contingent contracts that depend on a specified uncertain event not occurring within a fixed time can be enforced if the event does not happen within the specified timeframe. This applies if the time has expired and the event has not occurred, or if it becomes certain before the expiration of the time that the event will not happen.
Example:

• A agrees to pay B a sum of money if a certain ship does not return within a year. The contract can be enforced if the ship does not return within the year, or if the ship is destroyed within the year.

Contingent on an Impossible Event (Section 36):
Contingent agreements that depend on the occurrence of an impossible event are void, regardless of whether the parties to the agreement are aware of the impossibility at the time of making the agreement.
Examples:

• A agrees to pay B ₹ 1,00,000 if the sun rises in the west the next morning. This agreement is void because the event is impossible.
• X agrees to pay Y ₹ 1,00,000 if two straight lines enclose a space. This agreement is also void because the event is impossible.

Difference Between Contingent Contract and Wagering Contract

Quasi Contracts

• A valid contract must have certain essential elements such as offer and acceptance, capacity to contract, consideration, and free consent. However, there are situations where the law implies a promise, creating obligations for one party and rights for another, even in the absence of these elements. In such cases, the court recognizes the existence of a relationship resembling a contract and enforces it as if it were a contract. This is why these a
• A valid contract must have certain essential elements such as offer and acceptance, capacity to contract, consideration, and free consent. However, there are situations where the law implies a promise, creating obligations for one party and rights for another, even in the absence of these elements. In such cases, the court recognizes the existence of a relationship resembling a contract and enforces it as if it were a contract. This is why these agreements are called quasi-contracts, as they resemble contracts.
• Quasi contracts are based on the principles of equity, justice, and good conscience. They operate on the maxim that no one should benefit at the expense of another's loss. For example, if a tradesman mistakenly leaves goods at a person's house, and the person treats the goods as their own, they are obligated to pay for the goods, even though there was no formal agreement.

Example 17: A mistakenly pays some money to B, which is actually owed to C. B is required to refund the money to A.

Example 18: A fruit parcel is delivered under a mistake to R, who consumes the fruits thinking of them as a birthday present. R must return the parcel or pay for the fruits. Although there is no agreement between R and the true owner, he is bound to pay as the law regards it as a quasi-contract. The law imposes obligations to prevent one party from unjustly benefiting at the expense of another.

Quasi Contracts: Salient Features

1. Right to Money: The right in a quasi contract is always a right to money, usually a specific amount. 
2. Imposed by Law: This right is not based on an agreement between the parties but is imposed by law. 
3. Specificity: The right is not available against everyone but only against specific individuals, similar to a contractual right. 

Circumstances of Quasi Contracts:
Quasi contracts arise in specific situations where the law imposes contractual liability due to the unique circumstances of the parties involved. 

(a) Claim for Necessaries (Section 68):

• When someone supplies essential goods to a person incapable of contracting, like a minor or a lunatic, the supplier can claim reimbursement from the incapable person's property.
• Example: If A provides necessary items to B, a minor, A can seek payment from B's estate.

(b) Payment by an Interested Person (Section 69):

• If a person pays a debt on behalf of someone else, they can seek reimbursement from the debtor.
• Example:. pays a tax owed by A to prevent the sale of B's leased land.

(c) Obligation of Person Enjoying Benefits of Non-Gratuitous Act (Section 70):

• When someone performs an act or delivers something to another person intending to be compensated, and the recipient benefits from it, they are obligated to pay.
• Example: If A unintentionally leaves goods at B's house and B keeps them, B must pay A for the items.

(d) Responsibility of Finder of Goods (Section 71):

• A person who finds and takes care of lost goods is responsible for them as a bailee.
• They must take care of the goods, not appropriate them, and return them to the owner.
• Example: In a case, H found a diamond and gave it to F for safekeeping. F was required to return the diamond to H since he was entitled to it unless the true owner was found.

(e) Money Paid by Mistake or Under Coercion (Section 72):

• Money or goods delivered by mistake or under coercion must be returned.
• Payments made under mistaken beliefs or coercion are recoverable.
• Example: Recovering municipal tax paid under misunderstanding or coercion, such as extortion.

Difference Between Quasi Contracts and Contracts

Basis of Distinction
Quasi-Contract

• Essential for a Valid Contract: The essentials for the formation of a valid contract are absent in a quasi-contract. 
• Obligation: In a quasi-contract, the obligation is imposed by law. 

Contract

• Essential for a Valid Contract: The essentials for the formation of a valid contract are present in a contract. 
• Obligation: In a contract, the obligation is created by the consent of the parties.