This article describes the consideration under Indian Contract Act and its other aspects.
Consideration is the foundation of every contract and also one of the essential elements thereof. The law insists on the existence of consideration if a promise is to be enforced as creating legal obligations. In the absence of consideration a promise or undertaking is purely gratuitous and therefore creates no legal binding effect. Consideration must be of two-directional nature. That means both parties should get benefitted mutually. The term “consideration” means something in return i.e. quid pro quo.
What is ‘something’ has been explained by Justice Lush in a leading English case Currie v. Misa as follows-
“A valuable consideration in the sense of the law, may consist either in some right, interest, profit or benefit accruing to one party or some forbearance detriment, loss or responsibility given, suffered or undertaken by the other.”Justice Lush
Pollock has suggested that,
“Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable.”Pollock
Consideration may be in the form of cash, goods, act or abstinence. A promise without consideration is null and void. It is called a naked promise or “Nudum Pactum.” Nudo pacto non orituractio, i.e. an agreement without consideration is void. Section 25 of the Indian Contract Act supports this contention and provides that agreement without consideration is void.
CONSIDERATION UNDER INDIAN CONTRACT ACT
Sec. 2(d) of the Indian Contract act, 1872 defines consideration as–
“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 act or abstinence or promise is called a consideration for the promise.”Sec. 2(d) of the Indian Contract act, 1872
ESSENTIAL ELEMENTS OF A VALID CONSIDERATION
- Consideration must move at desire of the promisor: An act or abstinence constituting consideration must have been done at the desire of the promisor only. Any act performed at the desire of the third party or without the desire of the promisor cannot be a valid consideration.
- It may move from the promisee or any other person: An act constituting consideration may be done by the promisee himself or any other person. Thus, it is immaterial who furnishes the consideration & therefore may move from the promisee or any other person. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract (Chinayya v. Ramayya)
- Consideration may be of past, present or future:
- Past Consideration: A consideration for the act done in past or which has already moved before the formation of the agreement is a past consideration. Past consideration is valid in Indian Contract Act, but past consideration is no consideration in English Law.
- Present Consideration: When both the parties are ready to give consideration at the same time or the consideration which moves simultaneously with the promise is a present consideration.
- Future Consideration: When a party promises to do or to abstain from doing something in future, it is a future consideration. The consideration which is to be moved after the formation of agreement is called future consideration.
- Consideration need not to be adequate: As per the definition of consideration it simply indicates that “something in return” is consideration which must actually be of some value in the eyes of law, that ‘something’ can be adequate or grossly inadequate. Law only requires the presence of some consideration in a valid contract; its adequacy is not required in law. According to Explanation 2 of Sec. 25, an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.
- Consideration must be real: It should not be uncertain, illusory or impossible.
- Consideration must be lawful: For a valid contract it is necessary that the consideration should be lawful as according to Sec.23 of the Indian Contract Act, otherwise it will become void and unenforceable i.e. it must not be illegal, immoral or opposed to public policy.
- Must be something other than the promisor’s existing obligation: Consideration must be something which the promisor is not already bound to do because a promise to do what a promisor is already bound to do adds nothing to the existing obligation.
RELEVANT CASE LAWS ON CONSIDERATION UNDER INDIAN CONTRACT ACT–
- Durga Prasad v. Baldeo (1880)
- Kedar Nath v. Gouri Mohammed (1886)
- Abdul Aziz v. Masum Ali (1914)
- Chinnaya v. Ramayya (1882)
- Tweddle v. Atkinson (1861)
A CONTRACT WITHOUT CONSIDERATION IS VOID UNDER INDIAN CONTRACT ACT
The general rule as laid down under Section 25 is “An agreement made without consideration is void”. Every agreement to be enforceable at law must be supported by valid consideration. An agreement made without consideration is void and is unenforceable except in certain cases.
- Agreement made on account of natural love and affection [Sec. 25(1)]: An agreement though made without consideration will be valid if it is in writing and registered and is made on account of natural love and affection between parties standing in a near relation to each other. An agreement without consideration will be valid provided-
- It is expressed in writing;
- It is registered under the law for the time being in force;
- It is made on account of natural love and affection;
- It is between parties standing in a near relation to each other.
- Agreement made to compensate past services voluntarily rendered [Sec. 25(2)]: An agreement made without consideration will be valid if it is a promise to compensate wholly or in a part a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do. To apply this rule, the following essentials must exist:
- The act must have been done voluntarily;
- For the promisor or it must be something which was the legal obligation of the promisor;
- The promisor must be in existence at the time when the act was done;
- The promisor must agree now to compensate the promisee.
- Promise to pay a time-barred debt [Sec. 25(3)]: A promise to pay a time-barred debt is also enforceable. But the promise must be in writing and be signed by the promisor or his agent authorized in that behalf. The promise may be to pay the whole or part of the debt. An oral promise to pay a time-barred debt is unenforceable.
- Completed gifts [Exp. 1 to Sec. 25]: Explanation 1 to Section 25 provides that the rule ‘No consideration, No contract‘ shall not affect validity of any gifts actually made between the donor and the donee. Thus if a person gives certain properties to another according to the provision of the Transfer of Property Act, he cannot subsequently demand the property back on the ground that there was no consideration.
- Agency (Sec. 185, Indian Contract Act): There is one more exception to the rule. It is given in section 185 which says that no consideration is needed to create an agency.
- Guarantee (Sec 127, Indian Contract Act): A contract of guarantee is made without consideration.
- Remission (Sec 63): No consideration is required for an agreement to receive less then what is due. This is called remission in the law
DOCTRINE OF PRIVITY OF CONSIDERATION AND PRIVITY OF CONTRACT
The Indian law is different from the English law and the definition of consideration under the Indian Contract Act clearly provides that consideration may move from the promisee or any other person. So consideration may flow from a stranger to the contract as well. Under the English law the consideration must move from the promisee only and not from a stranger, and a stranger to a consideration cannot enforce it. This is known as “the principle of privity of contract”.
It means that as per privity of contract, a stranger to a contract cannot enforce that contract or cannot sue on such contract. Only parties to a contract can sue each other or be sued upon. A stranger to a contract can’t sue in England as well as in India though it may be for his benefit. Privity of contract means the relationship subsisting between the parties to a contract.
Exception to this principle-
- Trust: In case of trust a beneficiary can sue upon the contract. This exception to the rule of Privity of contract has been recognised in a well known case of Khwaja Mohd. Khan v. Hussaini Begum (1910)
- Family settlement/Marriage contract: In case of family settlement members who were not originally party to the contract can also sue upon it. A female member can enforce a provision for marriage expenses made on partition of HUF.
In a case, two brothers, on partition of family joint properties, agreed to invest in equal shares for their mother’s maintenance. It was held that the mother was entitled to require her sons to make the investment
- Acknowledgement of liability: Where a person admits his liability thereafter if he refused, he will be stopped from denying his liability.
- Assignment of contract: Assignee (the person to whom benefits of contract are assigned) can enforce upon the contract.
- Contract entered into through an agent: A principal may sue under the contract entered into by his agent on his behalf.
- Pollock and Mulla Indian Contract Act, 1872
- Avtar Singh Law of Contract
- R.K Bangia, Law of contract