Consideration in Indian Contract Act 1872

Consideration in Indian Contract Act, 1872.

Meaning of Consideration

When anything has been done or refrained from being done at the request of the promisor, the promisee, or any other person, or when a promise has been made to do something or refrain from doing something, such action, refraint, or promise is referred to as a consideration in a contract for the promise. Every deal is built on consideration. If a promise is to be upheld as establishing legal responsibilities, the law demands the presence of consideration. A pledge made without thinking is worthless.

“Something in return” is what the word “consideration” refers to. Whenever the promise, or any other person, acts or refrains from acting as the promissory desires, or when the promissory promises to act or refrain. A consideration in a contract for a commitment is something like an act, abstain, or promise. This represents the contract’s purchase price. It ought to be true. Without consideration, the contract is null and invalid. A contract must be formed through consideration.

A contract’s consideration must have monetary worth and be given in exchange for the other party’s performance or assurance of performance (the latter of which is consideration in and of itself). When the intended consideration is found to be worth less than anticipated, is damaged or destroyed, or is not created properly, a contract may become unenforceable for failure of consideration. Acts that violate established public policy or are illegal cannot be used as consideration for binding contracts.  

Why is Consideration Needed?

Only promises that are supported by thinking are upholdable. Since promises made in the absence of any responsibility are typically made hastily and without any form of thought. Making consideration a requirement in a contract imposes some form of obligation on the parties to uphold the terms of the agreement. As an illustration, if A promises to give B a car without B providing anything in return or refraining from doing so, this renders A’s promise by unenforceable. It will be a gift rather than a formal agreement.

1. There are some vital components of Consideration that are mentioned in Section 2 (d) of the Indian Contract Act, 1872.

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

Essential 1:

Consideration can be moved at the desire of the promisor. Section 2(d) of the Indian Contract Act mentions that consideration should be at the desire of the promisor and not at the will of any other third person otherwise it will not be a good consideration.

Examples-

• The collector of a district asked D to spend some money on the improvement of a market and he did so. The shopkeepers of the market promised to pay commission to D on their sale. Later on they refused to pay the commission. D cannot demand payment from the shopkeepers who are using the market for having improved the market as he had done so at the desire of the collector and not at the request of shopkeepers – Durgaprasadv. Baldeo [1880] 3 All. 221.

• Radha Govinda Rai v. Khas Dharmaband Colliery Co. Ltd. is another case. The entitlement to receive rent from the sub-lessee of the mining rights became a point of contention between the landlords and their assignees of underground coal and mining rights. As long as the assignee executed an indemnification bond, which they did, the sub-lessee agreed to pay the rent. According to the ruling, the contract is valid because the sublessee made the payment at the assignees’ request (the indemnification bond) and there was a legal consideration.

Essential 2:

Consideration may move from the promise or any other person- It implies that it is irrelevant who provided the promise as long as there is consideration for it. If the promisor has no objections, it may come from the promisee or from anyone else.

Examples-

• An old lady, by a deed of gift made over certain property to her daughter D under the direction that she should pay her aunt, P (sister of the old lady), a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the amount on the plea that no consideration had moved from P to D. Held, P was entitled to maintain the suit as consideration had moved from old lady, sister of P, to daughter D – Chinnayav. Rammaya [1882] 4 Mad. 137.

Essential 3

Consideration is an act, abstinence, forbearance, or determinant. Consideration is usually understood as an exchange of money but in legal terms, it does not mean payment of money only. Moreover, Consideration can be an act, abstinence, forbearance, or determinant according to Indian Contract Act 1872.

• Consideration as an act- Consideration can be an action taken by a person. The availability of an overdraft account cannot be deemed to be without consideration when a person signs an undertaking in favor of a bank in exchange for receiving a major benefit from having one. – Tripura 10 (AIR, 1953).
• Consideration as abstinence- One must commit to stop acting in a way that they are privileged to do in order for abstinence to qualify as consideration.
• Consideration as Forbearance- Forbearance refers to giving up a legal claim or right. When the debtor requests it, the creditor should refrain from enforcing execution and grant the debtor additional time to pay. 1912 AIR Cal. 67 (69)
• Consideration as determinant- A real or potential harm experienced by the promisee or another person can be considered a favorable factor. The typical guarantee contract is a nice illustration of a consideration in harm. In exchange for A financing B Rs. 1000, C agrees to pay back the debt if B defaults. Given that A loses out by lending the money in this situation, which C does not gain from, this is sufficient consideration to uphold C’s pledge. This is only true if A gives the money at C’s request.

Consideration can be past, present, or future

Past Consideration

A past consideration is an action that one has already taken in exchange for another’s pledge. As a result, a promise to pay someone back for something they did for the promisor in the past or before making the promise is said to be for past consideration or something that happened in the past. The past should be taken into account just as much as the present or the future. For instance, A works for B in the month of April without anticipating payment from B. B pledges to reimburse him for the job done in April later on, in June. This is a legal contract because A’s labor was done in exchange for prior consideration.

Present Consideration

Present consideration is the consideration that advances together with the promise. It entails either “doing” or “refusing to do” anything. Cash sales, where both the vendor and the buyer behave simultaneously, are the best examples of present consideration. Another illustration is a marriage contract when both parties must fulfil their obligations simultaneously.

Future Consideration

A future commitment is taken into account legally. Future consideration is what is used when one party is paying for something that will happen in the future. A promise by B to A could be the reward for A’s promise to B. It is therefore claimed that the consideration is executory. If B agrees to marry A in exchange for A agreeing to marry B, then each commitment is given in exchange for the other’s pledge.

Section 10 of the Indian Contact Act, 1872.

Consideration should be lawful- Consideration must be lawful which is also one of the conditions of a valid agreement. Without a lawful consideration agreement is void.

Section 23 states that Consideration in Indian Contract Act 1872 unlawful if-

• it is forbidden by law;
• or, is of such a nature that if allowed it would defeat some law of the country;
• it is fraudulent;
• it involves injury to the property or person of the other;
• the court regards it as immoral or opposed to public policy.

In some circumstances, one aspect of the consideration may be illegal but the other may not. If the unlawful portion cannot be distinguished from the legal portion, the entire agreement is void in such circumstances.

Example: A agrees to work for B, who owns both legal and criminal businesses, in exchange for a monthly salary of Rs. 4,000, and B agrees to pay A this cash. The legal portion of wage is a legal concern, and the legal business can be distinguished from the unlawful business.

The exception to the concept of Consideration in Indian Contract Act 1872

Above we have understood that a lawful consideration is important to make an agreement. However, there may be some situations when it is not appropriate to use the doctrine of consideration to satisfy the fundamental purposes of the law. In such cases, the Indian Contract Act, 1872’s Section 25 applies. It says that,

“Agreement without consideration, void unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law”

Affection and Love [Section 25(1)]

Affection and love [Section 25(1)] – though an agreement is valid and enforceable, even though there is no consideration if it is

(i) written expression,

(ii) registered in accordance with the law currently in effect for document registration,

(iii) arises from natural love and affection, and

(iv) between parties that are close to one another.

Simply said, even if there is no consideration, a written and recorded agreement

Examples:

F, for natural love and affection, promises to give his son, S, Rs. 1,000. F puts his promise to S in writing and registers it. This is a contract.

Compensation for prior volunteer activities [Section 25 (2)]

Compensation for prior volunteer activities [Section 25 (2)] – Even without consideration, a promise to compensate someone who has already freely done something for the promisor, in whole or in part, is enforceable. A pledge to pay for previous voluntary work is, to put it simply, legally enforceable.

Examples:

B receives A’s purse after he finds it. B guarantees to provide A 50 rupees. This is an agreement.

A provides for B’s young son. B promises to cover A’s costs in exchange. This is an agreement.

Promise to pay a time-barred debt [Section 25(3)]

Promise to pay a time-barred debt [Section 25(3)] – A time-barred debt is one that cannot be collected since the limitation period (now three years) has passed. Normally, the lender has no recourse to recover his money if a debt is declared time-barred. Therefore, if a debt becomes time-barred, the debtor is not required by law to make repayment.

If the debtor makes a subsequent commitment to pay the time-barred obligation, there appears to be no change in the other party’s consideration, yet the agreement is still enforceable. This is due to the fact that a debtor’s commitment to pay a past-due obligation is enforceable under section 25(3) of the Act if certain conditions are met.

(i) It is communicated in writing,

(ii) is signed by the debtor or a representative who has been specifically or generally authorized to act on his behalf,

(iii) the debt must be one “of which the creditor might have enforced payment but for the Law of the limitation of suits.”

The promise could be to pay off the entire debt or just a portion of it.

Example: D owes C $1,000, but the Limitation Act bars collection of that obligation. D promises in writing to pay C Rs. 1,000 as payment for the loan. This is an agreement.

Completed gift [Section 25 Explanation 1]

Completed gift [Section 25 Explanation 1] – Done gifts are not covered by the “No consideration, no contract” adage. Nothing in Section 25 will have an impact on the legality of any gift that has already been made between the donor and the donee, according to Explanation 1 Section 25.

Thus, the Transfer of Property Act’s provisions for the transfer of property by one person to another as a gift (i.e., by a written and registered document) are valid, and the person making the transfer cannot later demand the property back on the grounds that there was no consideration.

The Legality of Object and Consideration in Indian Contract Act 1872

A lawful consideration and object are required elements of a valid contract, according to section 10 of the Indian Contract Act, 1872. The circumstances in which the consideration and goal (purpose or design) of an agreement may be judged to be unlawful are outlined in Section 23.

For the purposes of an agreement or compromise, anything that is not permitted by section 23 is unlawful, and any decree that incorporates such an agreement or compromise is invalid. The following agreements are declared void by the section for being illegal:

Where the consideration or object is illegal

Where the consideration or object is illegal – A party seeking to enforce a contract that is expressly illegal and made a crime by law lacks a cause of action.

Example–

• B agrees to pay A Rs. 1,000 in exchange for A getting him a job in the government. Due to the illegality of the consideration, the agreement is null and invalid.
• The J&K Transfer of Property Act prohibits the oral sale of any immovable property, hence any oral contract made in violation of that law would be null and void [1989 3 Cur CC 56(57) J&K].
• A contract to sell paddy over the maximum price indicated in the Maximum Price Control Order is void or illegal [AIR 1972 Andhra 367 (368)].

Where the consideration or object defeats the provisions of any law

Where the consideration or object defeats the provisions of any law– When a contract calls for doing something that would require breaking the law, it is void whether the parties were aware of the law or not. This can happen when the consideration or object violates the terms of any law.

Examples-

• Pledges to drop the robbery case he has filed against B, and B promises to pay back the value of the items taken. The agreement is null and void because it attempts to circumvent legal requirements.

Where the consideration or object is of such nature that it is fraudulent-

Where the consideration or object is of such nature that it is fraudulent- Agreements are illegal and unenforceable when they involve the commission of a wrong, the commission of a fraud against a third party, or the commission of a fraud against the public.

Examples-

• A, B, and C come to an agreement to divide whatever gains they have or would receive by fraud among themselves. The deal is null and invalid.
• Being the agent for a landowner, A agrees to lease some of his principal’s property to B in exchange for money, without the knowledge of his principal. The agreement between A and B is null and void since it suggests a deception by A on his principle. 

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