Arbitration clause and contingency

When does the contingency clause become enforceable?
As per Sec. 31 of the Indian Contract Act, a contingent contract is a contract to do or not to something, if some event, collateral to such contract, does or does not happen. The Contract Act itself explains, for instance, if A contracts to pay B Rs. 10,000 if B's house is burnt, then it is a contingent contract.

Section 32 and 33 provide for when are such contracts enforceable. Section 32 says when a contingent contract to do or not to do anything depends on the happening of an uncertain future event cannot be enforced by law unless and until that event has happened and in case the event becomes impossible, then the contract becomes void. Section 33 provides 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.

Arbitration agreement
Section 7 of the Arbitration & Conciliation Act, 1996 defines an arbitration agreement as an agreement by which the parties submit to arbitration all or certain disputes which have arisen between them or which may arise in the future. All that is required is that it must be in writing and can be in form of a separate agreement or a clause in a contract.

What if the arbitration clause depends on a contingency?
Section 16 (1) (a) of the 1996 Act says that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. This creates a grey area in case where a clause of the contract provides for arbitration and another clause/clauses of the contract provide for the enforceability of the contract only when certain contingencies are fulfilled. In such a case, when the contingencies are not fulfilled, does the arbitration clause still stand valid since it is independent of the rest of the contract?

This issue had been addressed in the case of U.P. Rajkiya Nirman Nigam Ltd. vs. Indure Pvt. Ltd. and others [AIR1996SC1373]. The Supreme Court, while holding that in absence of a contract, there could be no enforceable arbitration agreement, said wherein in para 16 it was held by the Supreme Court as follows: “There did not exist any concluded contract between the Board and the appellant for the performance of the work as per terms and conditions of the tenders floated by the Board. Under section 32, it was a contingent contract until it was accepted by the Board. In this Background, the question emerges: Whether there is an arbitration agreement between the parties? It is seen that Clause (14) of the agreement (subject to the dispute whether it is arbitrable under clause (14) which is yet another issue with which we are not concerned independently does not come into existence unless there is a conceded contract pursuant to the proposal made by the appellant on June 22, 1984 or a counter proposal by the respondent dated June 26, 19894. It is not the case of the respondent that there exists any such independent arbitration agreement.''

This was subsequently followed by the Delhi High Court in the case of Tulip I.T. Services Limited vs. Punjab National Bank [112(2004)DLT638]. The court held: “…since the response to the tender by the petitioner was not accepted, it had not transformed into a contract and no arbitration agreement could be said sought to exist between the parties permitting the petitioner a resort to arbitration as per the terms of the tender.”

Conclusion
The enforceability of a contingent contract is very clear i.e. it comes into force only when the required contingent event has happened. Till the happening of such event, it would not come into force. And as seen from the above cases, the arbitration agreement cannot operate independently if the contract is unenforceable. Hence, an arbitration clause could come into effect only when the contingencies have been fulfilled and the contract has come into force.

The  author can be reached at: deveshrs@legalserviceindia.com