CONSIDERATION UNDER INDIAN CONTRACT ACT, 1872

Consideration – understand the concept of consideration and its importance for a contract

Introduction

Consideration is an essential element of a valid contract without consideration no single promise will be enforceable.

In this blog post, we shall try to understand the concept of consideration and also the legal requirements regarding consideration.

WHAT IS CONSIDERATION?

Consideration is the price agreed to be paid by the promisee for the obligation of the promisor.

“A valuable consideration in the sense of law may consist either in some right, interest, profit or benefit accruing to one party (i.e. promisor) or forbearance, detriment, loss or responsibility given, suffered or undertaken by the other (i.e. the promisee).”

Section 2(d) defines consideration as follows:

“When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something, such an act or abstinence or promise is called a consideration for the promise”.

RULES REGARDING CONSIDERATION

• Consideration must be accessible by the promisee or the third party at the desire or request of the promisor. A contract of marriage in consideration of the promise of settlement is enforceable.

An act done at the desire of a 3^rd party is not a consideration

Example:

A saves B’s goods from fire without being asked to do so. R cannot demand any reward for his services, as the act is done voluntarily.

• In India, consideration may move from the promisee or any other person who is not a party to the contract. Section 2(d) makes that proposition clear. According to the definition of Section 2(d), when at the desire of the promisor, the promisee or any other person does something that an act is called consideration

Example:

In the case of  Chinmaya V. Ramayya (1882) ILR (1876-82) An old lady made a gift of her property to her daughter with a command to pay a certain sum of money to the maternal uncle by way of annuity. On the same day, the daughter wrote in favor of the brother agreeing to pay the annuity. The daughter did not pay the annuity and the uncle sued to recover it. It was held that there was sufficient consideration for the uncle to recover the money from the daughter.

• A consideration that consists in the performance of an act is said to be executed. When it consists of a promise, it is said to be executory

Executed Consideration

The liability is remaining on one side only, it is a present as opposed to future consideration.

Executory Consideration

The liability is remaining on both sides. It is in reality a promise for a promise; one promise is bought by the other.

Example:

Ram pays ` 5,000 to Shyam and Shyam promises to deliver to him a certain quantity of wheat within a month. In this case, Ram pays the amount, whereas Shyam merely makes a promise. Therefore, the consideration paid by Ram is executed, whereas the consideration promised by Shyam is executory.

• Consideration may be Past, Present, or Future

Past Consideration

Past consideration is a promise for an intentional act done in the past to help the party who is making a promise to pay or to do something subsequently. Earlier past consideration was no consideration but now it is a good and valid consideration.

Present or Executed Consideration

When the promisor receives consideration at the same time as his promise, the consideration is called Present Consideration.

Future or Executory Consideration

When a promise is to be performed on a future date it is called executory consideration or future consideration. In this case, both parties move the consideration to a future date. The liability becomes outstanding to both parties on a future date.

Example

1. ’Z’ performed some services to ‘X’ at his desire. After a week, ‘X’ promises to compensate ‘Z’ for the work done by him. It is said to be past consideration and Z can sue X for recovering the promised money.
2. A cash sale of goods is an illustration of present consideration. The consideration is immediately made against the delivery of goods

• Consideration need not be of any specific value. It need not be approximately of equal value with the promise for which it is exchanged but it must be something that the law would respect as having some value.

Something in return need not be equal to something given. It can be considered a bad bargain of the party.

An agreement to which the consent of the promisor is freely given is not void just because the consideration is inadequate. Explanation 2 to Section 25. But as an exception, if it is shockingly less and the other party alleges that his consent was not free then this inadequate consideration can be taken as evidence in support of this allegation.

Example

A promise to sell a house `8 lacs for `1 lacs only, the adequacy of the price in itself shall not render the transaction void unless the party pleads that the contract takes place under coercion, undue influence, or fraud

• The performance of an act by a person who is legally bound to perform the same cannot be a consideration for a contract. Hereafter, a promise to pay money to a witness is void, for it is without consideration. such a contract is void for want of consideration. Similarly, an agreement by a client to pay to his counsel after the latter has been engaged, a certain sum over and above the fee, in the event of the achievement of the case would be void, since it is without consideration

Where a person promises to do more than he is legally bound to do, such a promise is not opposed to public policy and it is a good consideration. It should not be vague.

• Consideration must be real and must not be false. It must be something to which the law awards some value. If it is legally or physically impossible it is not valid consideration.

Example

A man promises to discover treasure by magic or bring the dead person to live again.
This transaction can be said to be void as it is illusory.

• The Existence of consideration is not sufficient it must be lawful. Anything which is immoral or opposed to public policy cannot be valued as valid consideration. Hence Consideration must not be unlawful, immoral, or opposed to public policy

Example

ABC Ltd.’s promise to give a job to Mr. X in a Government bank against a payment of ` 50,000 is void as the promise is opposed to public policy.

SUIT BY A 3rd PARTY TO A CONTRACT

In the Indian Contract Act, 1872, the consideration for an agreement may continue from a third party, the third party cannot prosecute on contract. Only an individual who is a party to a contract can sue on it. So, the Concept of a Stranger to Consideration is valid and is different from a Stranger to a Contract.

Example

 X who is indebted to Y, sells his property to Z and Z promises to pay off the debt amount to Y. If Z fails to pay, then in such a situation Y has no right to sue, as Z is a stranger to contract.

Strangers to a contract cannot sue is known as a “Doctrine of Privity of Contract”,

Exceptions to this Rule

(1) In the case of a trust, a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of a family who originally had not been parties to the settlement may enforce the agreement.

Example

Two brothers A and B agreed to pay an allowance of ` 20,000 to their mother on the partition of joint properties. But later they denied abiding by it. Held their mother although a stranger to a contract can require their sons for such allowance in the court of law.

(3) In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract but such assignment should not include any personal skill.

(4) Acknowledgement or estoppel – where the promisor by his conduct admits himself as an agent of the 3rd party, it would result in a binding duty towards 3rd party.

Example

If A gives B Rs 20,000 to be given to C, and B informs C that he is holding the money for him, but later B refuses to pay the money. C will be entitled to recover the same from the previous i.e. B.

(6) In the case of a pledge running with the land, the person who purchases land with notice that the owner of the land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.

(7) Contracts entered into through an agent where the agent has acted within the scope of his authority and in the name of the principal

VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATION

Section 25 says that the Universal Rule is that an agreement made without consideration is void.

Consideration is very important in every Valid Contract. A contract only is enforceable when consideration is there.

There are certain exceptions to this rule. Below are the cases where the agreement still made without consideration will be valid and enforceable.

Natural Love and Affection

1. It must be made out of Natural Love and Affection between the parties
2. Parties must be in a near relationship with each other.
3. It must be in writing.
4. It must also be registered under the law.

Example

A husband, by a registered agreement, promised to pay his earnings to his wife. Held the agreement through without consideration, was valid.

Example

Out of natural love and affection promises to give his newly wedded daughter-in-law a golden necklace worth ` 5,00,000. ‘A’ made the promise in writing and signed it and registered. The agreement is valid.

Compensation for past voluntary services

A person who has already voluntarily done something for the promisor is enforceable under Section 25(2). A promise to pay for past voluntary services to be necessary, the following essential factors must be:

• The services should have been rendered voluntarily.
• The services must have been rendered for the promisor.
• The promisor must be in existence at the time when services were rendered.
• The promisor must have intended to compensate the promisee

Example

X finds Y’s wallet and gives it to him. Y promises to give X 10,000. This is a valid contract.

Promise to pay a time-barred debt

Where a promise in writing signed by the individual making it or by his authorized agent, is made to pay a debt barred by the Limitation Act it is valid without consideration.

Example

X is indebted to Z for `60,000 but the debt is barred by the Limitation Act. X sign a written promise now to pay `50,000 in the final settlement of the debt. This is an enforceable contract without consideration

Agency

According to Section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency

Completed Gift

Gifts do not require any consideration. In the case of completed gifts, the rule no consideration no contract does not apply

Conclusion

Consideration is a value for the promise of the other party and it may also be in the form of ‘benefit’ or some ‘detriment’ to the parties. Consideration must transfer to the desire of the promisor. It may be executed or executory. Past consideration is valid if it moved at the previous request of the promisor. It must not be something that the promisor is already legally bound to do.

FAQ

• Meaning of consideration in simple terms?

Something in Return

• What does past Consideration mean?

Consideration is provided prior to the making of the contract.

• What is General Rule of law and its exception?

The General Rule of Law is “No Consideration, No Contract”.

Exceptions are:-

Natural Love and Exception, Compensation for past voluntary services, Promise to pay the time-barred debt, Completed gift, Agency.

MUST READ

INDIAN CONTRACT ACT, 1872

TYPES OF LAW IN THE INDIAN JUDICIAL SYSTEM

DIFFERENCES AMONG LAWYERS, ADVOCATE, BARRISTERS

Difference Among Article, Section, Rules & Regulation.