Contingent Contracts impact on Arbitration Proceeding
What is a contingent contract?
Section 31 of the Indian Contract Act,1872 defines the Contingent Contract as “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”. In different words a contingent contract is the one which depends on the happening and non-happening of an event, it is the one where the promisor performs his condition only certain conditions are met. The Contract of guarantee, indemnity, and insurance are some of its examples.
Enforceability of a contingent contract
Section 32 and 33 deals with the enforceability of such contract. Section 32 states that when a contingent contract depends on happening or non-happening of an event and in case the event becomes impossible, then such a contract becomes void. Section 33 states that if a contingent contract to do or not to do anything depends on an uncertain future event not happening, it can be enforced only when the happening of that event becomes impossible and not before.
One of the essential condition of an arbitration proceeding is that the parties to the contract can only go for arbitration only if there is an arbitration agreement between the parties and further the arbitration agreement must satisfy the condition mentioned under section 2(a) of the Arbitration and Conciliation Act,1996. Further, the agreement must be in writing between the parties. An arbitration agreement is itself a contingent contract. The same also depends on the happening of a dispute between the parties
The arbitration clause in a Contingent Contract
Section 16(1) of the Arbitration and Conciliation Act,1996 states that an arbitration clause mentioned in a contract shall be treated independently of the other terms of the contract. Now the crucial question arises that in the case where a clause of contract provides for arbitration and the other clause of the same contract is stating about the performance of a specific event i.e. contingent event is to be fulfilled. In such a case, when the contingencies are not fulfilled, then the arbitration clause will still be valid keeping in the mind that the obligation in the contract is not fulfilled i.e. contingencies?
The same question was dealt in, in the case of U.P. Rajkiya Nirman Nigam Ltd. vs. Indure Pvt. Ltd. and others [AIR1996SC1373]. The Supreme Court held that in the absence of a contract no arbitration proceeding can be conducted. As per the case, there was no concluded contract between the appellant and the respondent regarding the performance of the obligation mentioned in the terms and conditions of the tender. The offer was made by one party and the same was accepted by the other party by making a certain alteration. There was no further communication by the offeror, regarding this event the question arose whether the acceptance of the counteroffer by the party could be inferred from the subsequent conduct of the offeror.
It was then held that since tender never became a contract even though there was an offer, it would be considered as a contingent contract. Since the counter-proposal cannot be enforced in the court of law no arbitration proceeding can be held and the respondent claim for independent arbitration agreement cannot be entertained. The same was followed by Tulip I.T. Services Limited vs. Punjab National Bank [112(2004)DLT638.
but a different opinion has been followed by the high court like in the case of J.K.Jain v. D.D.A, it was held that, the fact that there no arbitration clause in the agreement is immaterial if the agreement states that the terms and conditions mentioned in a tender then those terms and condition will be applicable on the parties. Therefore it was decided that the arbitration clause was valid.
Therefore it is very clear what is contingent contract ie. A contract that depends on the happening and non- happening of an event. Thus, it is evident from the above cases that an arbitration agreement cannot operate independently if the contract is unenforceable. The parties to a contingent contract can only go for arbitration if it is mentioned in the contract, and the contract has come into existence, and if there is a condition mentioned in the contract is met.