Contingent Contracts (Section 31 in the Indian Contract Act, 1872)

Master of Management Studies (SEM-II) Project on the topic of,

“Contingent Contract” For the subject,

“Legal & Tax Aspect of Business”. Submitted to: Prof. I.R. Panjwani

2011-12

Prepared By: Harish Jangir Division: B Roll No.: 2011064

Indian Contract Act, 1872. Introduction to Indian Contract Act, 1872. Indian Contract Act 1872 is the main source of law regulating contracts in Indian law, as subsequently amended. It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement of these rights and duties upon the parties. The Indian Contract Act 1872 sections 1-75 came into force on 1 September 1872. It applies to the whole of India except the state of Jammu and Kashmir. It is not a complete and exhaustive law on all types of contracts. Definition Section 2(h) of the Act defines the term contract as "any agreement enforceable by law". There are two essentials of this act, agreement and enforceability. Section 2(e) defines agreement as "every promise and every set of promises, forming the consideration for each other." Again Section 2(b) defines promise in these words: "when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a promise." And other words Say Agreement is Sum of Promise Essential Elements of a Valid Contract According to Section 10, "All agreements are contracts, if they are made by the free consent of the parties, competent to contract, for a lawful consideration with a lawful object, and not hereby expressly to be void." Essential Elements of a Valid Contract are:

1. Proper offer and proper acceptance. There must be an agreement based on a lawful offer made by person to another and lawful acceptance of that offer made by the latter. Section 3 to 9 of the contract act, 1872 lay down the rules for making valid acceptance 2. Lawful consideration: An agreement to form a valid contract should be supported by consideration. Consideration means “something in return” (quid pro quo). It can be cash, kind, an act or abstinence. It can be past, present or future. However, consideration should be real and lawful. 3. Competent to contract or capacity: In order to make a valid contract the parties to it must be competent to be contracted. According to section 11 of the Contract Act, a person is considered to be competent to contract if he satisfies the following criterion:   

The person has reached the age of maturity. The person is of sound mind. The person is not disqualified from contracting by any law.

4. Free Consent: To constitute a valid contract there must be free and genuine consent of the parties to the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake. 5. Lawful Object and Agreement: The object of the agreement must not be illegal or unlawful. 6. Agreement not declared void or illegal: Agreements which have been expressly declared void or illegal by law are not enforceable at law; hence they do not constitute a valid contract. 7. Intention to Create Legal Relationships:-when the two parties enter in to an agreement, there must be intention must be to create a legal relationship between them. if there is no such intention on the part of the parties. There is no contracts between them, Agreements of a social or domestic nature do not contemplate legal relationship; as such they are not contracts. 8. Certainty, Possibility of Performance 9. Legal Formalities

Contingent Contracts 1. Introduction According to Section 31 in the Indian Contract Act, 1872, “A contract to do or not do something, if some event, collateral to such contract does or does not happen”. So in simple words, it may be defined as conditional contract. Quite a good part of commercial business transaction consists of contingent contract; hence the necessity for the separate treatment for such contracts. They are also known as “conditional contracts”. In such contracts, the liability is not absolute but dependent upon the happening or not happening of a certain event, e.g. arrival of a ship, production by a particular mill, etc. Ordinary contract some of insurance are also contingent contract, so also contracts of guarantee and indemnity. It is important to note in this connection that it is not every contract in which liability is dependent on a contingent that can be called a contingent contract. Thus A’s promise to pay Rs. 500 to B if B marries C. In other words if the contingency is of the essence or foundation of the contract, there is no case for a contingent contract. It is only if the contingency is as regards matter “collateral”, i.e. incidental to the main purpose of the agreement that the contract can be called a “contingent contract”. Thus a builder contract with a stipulation that payments shall be against the architects’ completion certificate, and insurance company’s contract to pay “if claim is properly made and proved to the directors’ satisfaction” are contingent contracts. Notice in this connection that a contingency depend on the mere will and pleasure of one of the parties to the contract is not enough. Thus an agreement to work on such payment as the employer pleases to make, is no contract at all. The contingency must be dependent on the act of a party, even though the act is voluntary or discretionary. Thus an agreement to pay “as A shall decide,” is a good contract. A under the agreement is bound to exercise his discretion honestly and not capriciously.

A. Meaning of Contingent Contract A contract may be unconditional or absolute on the one hand and conditional or contingent on the other. The absolute or unconditional contract is one without any reservations or conditions and is to be performed under any event. On the other hand, conditional or contingent contract is one in which a promise is conditional and the contract shall be performed only on the happening or not happening of some future uncertain event. The event must be collateral to the contract. The condition may be precedent or subsequent. A collateral event is defined as one which is neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise. The event, therefore independent of the contract and does not form part of consideration to it. The performance of such a contract depends on contingency and such contingency is uncertain. The test of determining whether the contract is contingent or not, is uncertainty. If contingency is certain it is not a contingent contract. B. The virtues of contingent contract: Two parties with common interests fail to reach an agreement--about a sale, a merger, a technology transfer--because they have different expectations about the future. They are both so confident in their prediction, and so suspicious of the other side's motives, that they refuse to compromise. Such impasses are hard to break through. Fortunately, they can often be avoided altogether by using a straightforward but frequently overlooked type of agreement called a contingent contract. The terms of a contingent contract are not finalized until the uncertain event in question--the contingency--takes place. In some areas of business, such as compensation, contingent contracts are common: a CEO's pay is tied to the company's stock price, for instance. But in many business negotiations, contingent contracts are either ignored or rejected out of hand. That's a mistake, according to the authors. In an increasingly uncertain world, flexible contingent contracts can actually be more rational and less risky than rigid, traditional ones. In particular, contingent contracts offer six benefits:

 They enable a difference of opinion to become the basis of an agreement, not an obstacle to it  They cancel out the biases of negotiators  They level the playing field by reducing the impact of asymmetric information;  They provide a means of uncovering deceitful dealings  They reduce risk by sharing it among parties and  They motivate parties to fulfill their promises While contingent contracts are not appropriate in all instances, they are much more broadly applicable than managers may think. C. Essential characteristics of a Contingent Contract: a) There should be existence of a contingency; happening or non-happening of some event in future. b) Contingency must be uncertain. c) The event must be collateral, for example incidental to the contact.

2. Statutory Analysis Rules Regarding Contingent Contracts: A) Enforcements of contracts contingent on happening of a future uncertain event: (Sec32) Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible such contracts become void. Illustrations: (a) A makes a contract with B to buy B’s houses if A survives C. This contract cannot be enforced by law unless and until C dies in A’s life time. (b) A makes a contract with B to sell a house to B at a specified price, if C to whom the house has been offered refuses to buy. The contract cannot be enforced by law unless and until C refuses to buy the house. (c) A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contact becomes void. Contracts so contingent become void when the event becomes impossible. Performance of such contract becomes impossible as the event on which the contract was contingent becomes impossible for example, imposition of government restrictions. Applicability: The essential idea upon which doctrine of frustration is based is that of impossibility of performance of contract; Satyabrata Ghose v. Mugneeram Bangur, AIR 1954 SC 44.

B) Enforcement of contracts on the non-happening of a future uncertain event: (Sec 33) Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced when the happening of the event becomes impossible and not before.

Illustration: A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks. C) Contracts contingent on future conduct of a living person: (Sec 34) If future event which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under future contingencies. Illustration: A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may afterwards marry B. D) Contracts contingent on a specified event happening within a fixed time: (Sec 33(1)) Contingent contracts to do or not to do anything if a specified uncertain event happens within a fixed time become void if, at the expiration of the time fixed, such event has not happened or if before the time fixed, such event becomes impossible. Illustrations: A promises to pay B a sum of money if a certain ship returns within a year. The contracts may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

3. Judiciary Analysis Case on Contingent Contract Allahabad High Court In Re: Jaunpur Sugar Factory Ltd. vs Unknown on 13 May, 1925 Equivalent citations: AIR 1925 All 658 JUDGMENT : Mukerji, J. The Case: 1. The liquidators of the Jaunpur Sugar Factory, Limited, in liquidation placed, for the decision of the Court the objection on the part of the firm, Lallu Mal Ramchunder to be put on the list of contributories. 2. The case of Lallu Mal, as stated in his Counsels letter addressed to the official liquidators, is briefly as follows: An agent of the Jaunpur Sugar Factory, Ltd., by name of Simeon approached the sole proprietor Ram Chunder in company of a broker Lachmi Narain, with a view to Earn Chunder's purchasing some shares in the Company which had just been started. Ram Chunder trades in sugar and other commodities and he cared more for the profits that might accrue to him by sale of sugar than for any dividend which, the Company might declare later on. He stipulated with Simeon that he would purchase the shares on condition that he was appointed the sole agent of the Company for sale of sugar in Cawnpore. To this Simeon agreed and accordingly Ram Chunder signed the application for 500 shares and paid the deposit money of Rs. 500 at the rate of Re. 1 per share. This was on the 20th February, 1921. Later on the Company gave information to Ram Chunder of the fact that 500 shares had in fact been allotted to him and called upon him to pay Rs. 2 more per share which was payable on allotment. Ram Chunder declined to pay anything till the question of agency was settled. Later on the Company made the first call of Rs. 2 per share and this too Ram Chunder declined to pay on the grounds already mentioned. 3. Ram Chunder's contention, therefore, is that his purchase of shares was conditional on his being appointed the sole agent for sale of sugar in Cawnpore and that the Company having failed to appoint him the sole agent, he is not bound to carry out his promise. 4. The liquidators have not filed ally written statement, but their case has been put something like this by their learned counsel, Mr. Indu Bhusaan Banerji, who has argued their case extremely well. The Company saay:

We told Ram 'Chunder take shares we will give you agency.' We could not give Ram Chunder any agency at the time because no terms had been settled and no sugar was actually being manufactured at time. We Promised to give him agency and would have given him the agency if we had manufactured sugar and if terms had been settled upon. The condition attached to Ram Chunder's purchase of shares was a condition subsequent 'and failure of the subsequent' condition does not entitle Ram Chunder to back out of the promise. 5. The question that has to be decided is primarily a question of fact, viz., What was the agreement between the parties? 6. The evidence on this point consists of certain letters exchanged between the parties and the testimony of Ram Chunder and the broker Lachmi Narain. Before examining the evidence, I may state at once that there is a certain document Ex. F. which, if accepted as trustworthy, would at once decide the case in favour of linn Chunder. But I feel considerable difficulty in accepting the document as trustworthy. It appears that Messrs. Bebari & Co. were the Managing Agents of the Sugar Factory. No evidence has been adduced to this effect, but it appears to be the case that one Mr. Section M. Bose was one of the moving spirits of Behari & Co. The document Ex. F. purports to be a letter from Bose bearing date 11th of April 1921 by which it is said Bose confirmed the undertaking given by Simeon to Ram Chunder, that Ram Chunder's purchase was conditional on his being appointed agent at Cawnpore, and that if the contract of agency fell through, the purchase of shares of Ram Chunder would be treated as cancelled. It has been proved that the document was signed by Bose. But throughout the correspondence between the parties we never hear of this letter. Lachmi Narain, the broker, says that he was told that Bose was staying in the Civil and Military Hotel at Cawnpore and he went and saw him and obtained the letter Ex. F. Ram Chunder had to explain the reason why this letter was never mentioned in the correspondence and was not even mentioned in his Counsel's letter addressed to the liquidators. Tire explanation was put forward through the mouth of Lachmi Narain. The latter said that he kept the letter with himself simply because he was a relation of Earn CI milder and it mattered little whether the document remained with him or with Ram Chunder. The relationship that is supposed to exist between Ram Chunder and Lachmi Narain is this : that the paternal uncle of Lachmi Narain's wife was married in Ram Chunder's family. Needless to say that I entirely disbelieve Lachmi Narain as to now he obtained Ex. F, and I accept Mr. Indu Bhusan Banerji'a suggestion that the letter was obtained from Bose after the present question of contribution by Ram Chunder had started. 7. Discarding then Ex. F, there is enough in the correspondence and statement of Ram Chunder to show that Ram Chunder wanted to have the sole agency at Cawnpore and he agreed to purchase the shares only because he was told that he could not be appointed an agent without purchase by him of 500 shares. Oral testimony of what happened in February 1921 when given in May 1925 is bound to be hazy and somewhat indefinite and

we have to remember this in examining the evidence of Ram Chunder and Lachmi Narain. Ram Chunder says that two gentlemen dressed in European costume went to him with Lachmi Narain for sale of shares. Then says Ram Chunder: I told the Sihabs that I wanted agency and I wanted to sell sugar. The Sahabs said that they would give me the agency. The Sahabs told me that I would get my agency if I purchased 500 shares. 8. Further on he says: If the Sahabs had not offered me the agency, I would not have agreed to purchase any shares. 9. In cross-examination he said: The Sahabs told me that I could get the agency only by purchase of 500 shares and not otherwise. 10. This statement on oath of Ram Chunder is supported by the copy of his letter he wrote on receipt of notice of allotment Ex I. The latter which has been marked as Ex. A acknowledges the allotment letter and goes on as follows: In the meantime we would point you out that oar application for the shares was on condition of your agency in Cawnpore being given to us, but we regret that we have not yet been favoured with the rules thereof. We shall feel obliged if you will let us know if the Company is prepared to grant us the agency and send us the rules to see if they are agreeable to us. We can take the shares only if we are able to get the agency. 11. It is common ground that Ram Chunder declined to pay the allotment money of Rs. 2 per share. Evidently, this conduct on his part supports his case. In reply to Ex. A, which does not bear any date, but which was probably written on the 6th of March, 1921, the Company wrote on the 14th of March, 1921. This is Ex. J. They said: We have registered your name for the above agency and shall be glad to offer you our terms and conditions regarding the same when we are able to produce our manufacture of sugar in the market which will probably be in July next. Please write to us on the subject then. 12. It will be noticed that the Company's answer was not a fair and honest answer to Ram Chunder's letter. Later on the Company made the first call of Rs. 2 per share and wrote the letter Ex. K. dated the 9th of August, 1921 to the firm of Lallu Mal Ram Chunder. The firm again replied on the same terms as before. They said, among other matters:

Will you kindly let us know if your mill has commenced manufacturing sugar and whether you have decided finally to appoint us sole agent at Cawnpore for the same. Unless we are placed in a clear position on this subject, we regret we cannot make further remittances. 13. The Company's reply (Ex. L, dated 3-9-21) was again as evasive and non-committal as before. Behari & Co. purported to offer the terms of agency but without entering into any details. They said that the firm Lallu Mal Ram Chunder would have to undertake to purchase certain quantity of sugar per year, but did not mention what that quantity would be. Then they said that Lallu Mal Ram Chunder would be required to make a certain deposit per maund for sugar delivered to them, but here again they did not mention what the amount of deposit would be. It is clear that the Company were avoiding coming to any definite terms as to the question of agency. 14. It is clear to my mind that Mr. Simeon, the agent of the Sugar Company, agreed that as a condition precedent to Lallu Mal Ram Chunder becoming subscribers to 500 shares they would be appointed the sole agents at Cawnpore for sale of sugar. This agreement on the part of Simeon was impliedly, ratified by Behari & Co., by not disputing the correctness of the statement contained in Lallu Mal Earn Chunder's letter, dated the 6th of March, 1921 (Ex. A). 15. Now the question is what is the position in law of the parties? Mr. Indu Bhusan Banerji argued that the appointment of lallu Mal Ram Chunder as agents of the Company was not a condition 'precedent' to the former's purchase of shares and he relied upon three cases - two English and one Indian. These are Moti Lal Chunni Lal v. Thakorlal Chiman Lal (1912) 36 Bom. 557, In Re Richmond Hill Hotel Co. Elkington (1899-67) 2 Ch. 511 and In Re Southport. etc. Co. 31 Ch. D. 120. I have considered all the three eases and it appears to me that all that they lay down is this where persons agreeing to take shares have attached to it a condition 'precedent' to their purchase, the purchase is not effective and does not make the would be purchaser a member of the Company till the condition is fulfilled. Further, where the condition attached to the purchase is a subsequent condition the would be purchaser becomes a member although the subsequent condition be not fulfilled. Authorities are useful only so far as they lay down the law, but they are usually not safe guides when questions of fact are involved. 16. In Elkington s case (1899-67) 2 Ch. 511 it appears that Elkington & Co. applied for 150 shares of 10 each in a Company on the faith of an agreement with a promoter (the agreement was subsequently ratified) that they should pay only 30s. per share in cash and the further calls should be set off against the goods to be supplied by them. Elkington & Co. paid a deposit of 10s. per share and the shares were allotted to them and then they paid the further sum of 20s. per share. They received the certificates and they were entered on the register. No goods were ordered because the Company had to be wound up. The question then arose whether Elkington & Co, were liable to be put on the list of

contributories or not. It was held that they were liable. Dealing with the position of Elkington & Co., the facts and law were discussed and the Lord Justice hearing the appeal differed from the Vice-Chancellor (who had heard the case in the first instance) a3 to the position of Elkington & Co. They pointed out that as a matter of fact Elkington & Co. had agreed to become members of the Company and the condition that was attached as to purchase by the Company of the goods of Elkington. & Co. was, as a matter of fact, not a condition precedent. Lord Justice Cairns says at p. 526: Therefore of the two questions which seem to me to represent the two alternative views of the case, I am bound to answer in the affirmative the one which suggests that Elkington & Co., intended to bo share-holders in praesenti. If that be so, that is enough for the present application. 17. At p. 525 the same Judge said: Now I am not prepared at all to say that it would not have been perfectly competent for Elkington, on receiving the letter of allotment, to have returned it to the Company and to have said : 'There is a complete misunderstanding in sending us this letter of allotment; referring to the correspondence that has passed between your promoter and ourselves, you will find that although we went through the form of applying for shares, the whole of that was subject to the understanding that either you should give us a resolution of the Company that we were to be under no liability upon those shares, or that we should have right of refusing to take shares upon which we were to be liable.' They did nothing of the kind. They received the letter of allotment; they kept it. 18. It is clear that the case was decided on a question of fact. So every case must be decided, mainly on the question of fact. 19. It is rather curious that none of the learned Counsel for the parties ever thought of referring to the Indian Law on the question. English Law is certainly useful in clearing up obscure points, but it is after all the Indian Law that matters most. It is conceded by the parties that there is nothing in the Companies' Act itself which would differentiate the case from ordinary cases of contract. That being so, in my opinion, the law in India would be found in Sections 31, 51 and allied sections of the Contract Act. Section 31 defines a " contingent contract" as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Section 51 lays down, the rule as to performance of reciprocal promises in the following terms. "When a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise." Section 3d of the Contract Act lays down : "If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does

anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies". 20. In the case before me the agreement was that Ram Chunder would become a member of the Company by purchase of shares in case he happened to be appointed the sole agent of the Company for sale of sugar at Cawnpore. Under Section 31 of the Contract Act, such a contract would be a contingent contract and under Section 32 of the same Act the contract could not be enforced unless and until that event happened. Further, whereas in this case, that event became impossible by the company going into liquidation, under Section 33, the contract cannot be enforced at all. Even if we treat the agreements of the parties as reciprocal promises, we shall see that Ram Chunder was under no legal liability to perform his part of the contract unless and until the Company were ready and willing to perform their promise, vide Section 51 of the Contract Act. Under the Indian Law, therefore the Company having failed to appoint Ram Chunder their solo agent, Ram Chunder is absolved from his liability to become a member of the Company. 21. It has been pointed out that at the time of the agreement with the firm of Lallu Mal Ram Chunder it was known to the parties that the Company was not, as a matter of fact, manufacturing any sugar and it is also common ground that the terms of the agency had not yet been settled when Ram Chunder signed the application for shares. From these facts it is argued that the circumstances were such that Lallu Mal Ram Chunder knew that they could not at all be appointed agents. I do not agree with this contention. There was nothing in law to prevent the Company from appointing Lallu Mal Ram Chunder their sole agents in Cawnpore by settling the terms although sugar was not being manufactured at the time. The agreement would have been that if, and when, sugar was produced in the Factory, Lallu Mal Ram Chunder would be the only firm which would sell sugar manufactured by the Company at Cawnpore. The terms were not settled, but there is no reason why they could not be settled at once and if they could not be settled it was clear that the agreement on the part of Ram Chunder to take the shares would fall through at once. 22. I hold, therefore, that in terms of the English Law it was a condition 'precedent' to Lallu Mal Ram Chunder becoming a member of the Company that they should be appointed the sole agents of the Company for sale of sugar at Gawnpore. In the language of the Indian Contract Act the agreement on the part of Lallu Mal Ram Chunder to become a member of the Company was contingent, i.e., dependent for its validity and enforcement on the condition of the Company appointing them their sole agents. In the events that have happened the Company either declined or failed, and later made it impossible, to appoint Lallu Mal Ram Chunder their sole agents, and it would follow that Lallu Mal Ram Chunder are not liable to contribute towards the liquidation. 23. I allow the objection of Ram Chunder, the proprietor of Lallu Mal Ram Chunder with costs. The liquidators are not to be blamed for having contested Ram Chunder's

application for the matter was not entirely clear, and a good deal could be fairly said on behalf of the liquidators. The liquidators will get their costs out of the estate and I assess the Counsel's fees of the liquidators as between Counsel and client at Rs. 75. Conlusion: Being the party entered in contingent contract but the company dishonouring it, the court made mr. Lallu ram was made member of the company but not liable as it was not mentioned in the contract, and was made agent for the sales of companies product

4. Conclusion This unusual contract arrangement clearly falls within the meaning of "contingent”. To conclusion it can be said that, contingent contract is also known as conditional contract. It is valid contract. The parties have real interest in the occurrence or non-occurrence of the event. Contracts of guarantee, indemnity and insurance are its example. For example, In a contract of insurance, the insurance company pays the sum of money if and when an accident happens and the claim is made on it. When it is impossible for the event to occur the agreement becomes void.

5. Bibliography Book referred: Business Law by Dr. Ashok Sharm Website used: www.indiankanoon.org www.wikipedia.org