CONSIDERATION

Consideration – Introduction

Consideration is an essential element of a contract without which no single promise will be enforceable. It is a term used in the sense of quid pro quo, i.e., ’something in return’. Having a double aspect of a benefit to the promisor and a detriment to the promisee, it has to be really understood in the sense of some detriment as envisaged by English Law.

WHAT IS CONSIDERATION?

Consideration is, in a sense, the price agreed to be paid by the promisee for the obligation of the promisor. Consideration has, therefore, been defined in an English judgment as “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)” at the request of the promisor. The word consideration was described in a very popular English case of Currie v. Misa.

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 consideration for the promise”.

1. That is to say, consideration is the doing or not doing of something which the promisor desires to be done or not done.
2. Consideration must be at the desire of the promisor.
3. Consideration may move from promisee or any other person.
4. Consideration may be past, present or future.
5. Consideration need not be adequate, but should be real.

For example, A promises to carry B’s goods free of charge, and B allows A to carry the same. Here A will be the promisor and B will be the promisee. The question that arises in this case is, does B offer any consideration as against A’s promise to carry his goods? The answer must be in the affirmative, because the detriment or the disadvantage which B suffers in parting with the goods so that goods may be carried by A is sufficient consideration as against A’s promise to carry. So the essence of consideration is detriment suffered or burden taken by the promisor. The promisor may or may not derive any benefit from the consideration given by the promisee. But in most cases, the promisor derives some benefit from the consideration which may be said to be quid pro quo from the promise of the promisor.

Examples: (i) A promises to maintain B’s child, and B promises to pay A `1000 yearly for the purpose. Here, the promise of each party is the consideration for the promise of the other party.

(ii) ‘C’ promises his debtor ‘D’ not to file a suit against him if he agrees to pay ` 10,000 more on the Principal amount. Here the abstinence of ‘C’ is the consideration for ‘D’ promise to pay.

 Legal Requirements regarding Consideration

• Consideration must move at the desire of the promisor: Consideration must be offered by the promisee or the third party at the desire or request of the promisor. An act done at the desire of a third party is not a consideration.

Example: R saves S’s goods from fire without being asked to do so. R cannot demand any reward for his services, as the act being done voluntary.

• Consideration from promisee or any other person: In India, consideration may proceed from the promisee or any other person who is not a party to the contract. The definition of consideration  as given is Section 2(d) makes that proposition clear. According to the definition, when at the desire of the promisor, the promisee or any other person does something such an act is consideration. In other words, there can be a stranger to a consideration but not stranger to a contract.

Example: ‘A’ by gift deed transferred certain property to her daughter with the direction that the daughter should pay an annuity to ‘A’s brother as had been done by ‘A’. Whereas daughter executed a writing in favour of brother to pay the annuity. Afterwards she refused to fulfil her promise saying that no consideration had moved from A’s brother. The court held that ’A’s brother was entitled to maintain the suit.(Chinnayya v. Ramayya)

• Executed and executory consideration: A consideration which consists in the performance of an act is said to be executed. When it consist in a promise, it is said to be executory. The promise by one party may be the consideration for an act by some other party, and vice versa. For example, A pays ` 5,000 to B and B promises to deliver to him a certain quantity of wheat within a month. In this case A pays the amount, whereas B merely makes a promise. Therefore, the consideration paid by A is executed, whereas the consideration promised by B is executory.
• Past Consideration: The words “has done or abstained from doing” [as contained in Section 2(d)] are a recognition of the doctrine of past consideration. In order to support a promise, a past consideration must be moved by a previous request. It is the general principle that consideration is given and accepted in exchange for the promise. The consideration, if past, may be the motive but cannot be the real consideration of a subsequent promise. But in the event of the services being rendered in the past at the request or the desire of the promisor, the subsequent promise is regarded as an admission that the past consideration was not gratuitous.

Example: ’A’ performed some services to ‘B’ at his desire. After a week, ‘B’ promises to compensate ‘A’ for the work done by him. It is said to be present consideration and A can sue B for recovering the promised money.

• Adequacy of consideration: Consideration need not to be of any particular value. It need not

be approximately of equal value with the promise for which it is exchanged but it must be something which the law would regard as having some value.

Example: A agrees voluntarily to sell his motorcycle for ` 2,000 to B. It is a valid contract despite the inadequacy of consideration. It may be noted in this context that Explanation 2 to Section 25 states that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.

Example: X promises to sell a house worth `6 lacs for `1 lacs only, the adequacy of the price in itself shall not render the transaction void, unless the party pleads that transaction takes place under coercion, undue influence or fraud.

• Performance of what one is legally bound to perform: The performance of an act by a person who is legally bound to perform the same cannot be consideration for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration. Hence 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 success of the case would be void, since it is without consideration. But where a person promises to do more that he is legally bound to do, such a promise

provided it is not opposed to public policy, is a good consideration.

• Consideration must be real and competent: Consideration must be real and must also be competent. It must be something to which the law attaches some value.

Examples: A man promises to discover treasure by magic. This transaction can be said to be void as it is illusory.

• Consideration must not be unlawful, immoral, or opposed to public policy.

Suit by a third party on an agreement

Though under the Indian Contract Act, 1872 the consideration for an agreement may proceed from a third party, the third party cannot sue on agreement. Only a person who is party to a contract can sue on it. Thus, the concept of stranger to consideration is a valid and is different from stranger to a contract which means contract by the person who is not a party to the contract.

Example: P who is indebted to Q, sells his property to R and R promises to pay off the debt amount to Q. If R fails to pay, then in such situation Q has no right to sue, as R is a stranger to contract. The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of contract”, is however, subject to certain exceptions. In other words, even a stanger to a contract may enforce a claim in the following cases:

1. In the case of 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 family who originally had not been parties to the settlement may enforce the agreement.
3. In the case of certain marriage contracts, a female member can enforce a provision for marriage expenses, made on the partition of the Hindu Undivided Family.
4. In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract.
5. In the case of an estoppel by acknowledgement of liability or part performance thereof, that is when, one admits the liability. For example, if L gives to M ` 2,000 to be given to N, and M informs N that he is holding the money for him, but afterwards M refuses to pay the money. N will be entitled to recover the same from the former.
6. In the case of covenant running with the land, the person who purchases land with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.
7. Contracts made by the agent: The principal can enforce the contracts entered by his 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

The general rule is that an agreement made without consideration is void (Section 25). In every valid contract consideration is very important. A contract may only be enforceable when an adequate consideration is there. However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable.

1.      Natural Love and Affection: A written and registered agreement based on natural love and affection between the parties standing in near relation (e.g., husband and wife) to each other is enforceable even without consideration.

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

2.      Compensation for past voluntary services: A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable under [Sec. 25(2)]. In order that a promise to pay for the past voluntary services be binding, the following essential factors must exist:

• 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: P finds R’s purse and gives it to him. R promises to give P ` 1,000. This is a valid contract.

3.      Promise to pay time barred debt: Where a promise in writing signed by the person making it or by his authorised agent, is made to pay a debt barred by limitation it is valid without consideration [Section 25(3)].

Example: A is indebted to C ` 6,000 but the debt is barred by the Limitation Act. A signs a written promise now to pay ` 5,000 in final settlement of the debt. This is a contract without consideration, but enforceable.

4.      Agency: According to Section 185 of the Indian Contract Act, no consideration is necessary to create an agency.

5.      Completed gift: In case of completed gifts, the rule no consideration no contract does not apply. Explanation (1) to Section 25 states “nothing in this section shall affect the validity as between the donor and donee, of any gift actually made.” Thus, gifts do not require any consideration.

6.      Bailment: No consideration is required to effect the bailment (Section 148).

7.      Charity: If a promisee undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid. (Kadarnath v. Gorie Mohammad)