A contract, in order to be valid requires nine essential elements. One of those essential elements is Consideration. Subject to certain exceptions, an agreement made without consideration in nudum pactum (a nude contract) and is void. Consideration is a technical term used in the sense of quid pro quo (something in return). When a party to an agreement promises to do something, he must get ‘something’ in return. That ‘something’ is defined as a Consideration.
Example: A agrees to sell his car to B for Rs. 50,000. The car is a consideration for B and the Price of 50,000 is a consideration for A.
Consideration has been variously defined. The simplest definition is by Blackstone, “Consideration is the recompense given by the party contracting to the other”. In other words, it is the price of the promise.
Section 2(d) if The Indian Contract Act, 1872 defines it as follows: “when at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
Analyzing the above definition, Consideration can be:
- An act of doing something – In this case, the consideration is in affirmative or positive form. Example: A promises to B to guarantee payment of the price of goods which B sells on credit to C. here selling of goods by B to C is Consideration for A’s promise.
- An Abstinence or forbearance means abstaining or refraining from doing something – In this case, the consideration is in negative form. Example: A promises to B not to file a suit against him if he pays him Rs.500. the abstinence of A is the consideration for B’s payment.
- A return promise – Example: A agrees to sell his horse to B for Rs.10000. here B’s promise to pay the sum of Rs.10, 000 is the consideration for A’s promise to sell the horse, and A’s promise to sell the horse is the consideration for B’s promise to pay the sum of Rs.10, 000.
II. Why consideration is needed
The reason why law only enforces those promises which are made for consideration is that gratuitous or voluntary promises are often made rashly and without due deliberation. Consideration is needed because in an agreement both the parties are required to be in some sort of obligation or burden which would make them perform the promise made. Without consideration, the agreement may just become a gift.
If A promises to pay B Rs. 100 for nothing, B neither doing or promising to do anything in return to compensate A for his money, A’s promise has no force of law.
III. Legal Requirements
A consideration in order to be a valid one requires certain rules to be followed while made. They are listed as:
1. The consideration must move at the desire of the promisor.
The definition in sec. 2(d) clearly emphasizes that an act or abstinence which is to be a consideration for the promise must be done or promised to be done in accordance with the desire of the promisor. If such consideration is made at the will of a third party or without the desire of the promisor, it will not be a good consideration. Example. A saves B’s goods from a fire without being asked to do so. A cannot demand payment for his service.
B spent some money on the improvement of a market at the desire of the Collector of the district. In consideration of this D who was using the market promised to pay some money to B. Held, the agreement was void being without consideration as it had not moved at the desire of D.
2. The consideration may move from the promisee or any other person.
This means as long as there is a consideration it is immaterial who has furnished it. In English law, consideration must move from the promisee, but under Indian Law, consideration may move from the promise or even a stranger. But the stranger to the consideration cannot sue until he’s a party to the 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 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 (1882) 4 Mad.137]
4. The consideration may be an act, abstinence or forbearance or a return promise
It may be noted that the following are a good consideration for a contract:
- Forbearance to sue – Forbearance to sue has always been regarded as valuable consideration. It is indeed, a kind of abstinence, which is so very clearly recognized as good consideration in the definition itself. “Forbearance to sue” means the plaintiff has a certain right of action against the defendant or any other person and on a promise by the defendant he refrains from bringing the action. This results in a benefit to the person not sued and a detriment to the person who could sue.
- Compromise of a disputed claim – Compromise can also fall under the principle of forbearance; as such, the same applies to bona fide compromise of a disputed claim. The claim should be reasonable and the person claiming should believe that it is a valid claim.
- Composition with creditors – A debtor who is financially challenged may call upon his creditors and request them to accept a lesser amount in satisfaction of their debts. If the creditors agree to it, the agreement is binding both upon the debtor and the creditor and this amounts to a compromise of the claims of the creditors.
5. The consideration may be past, present or future
The words used in sec 2(d) are “… has done or abstained from doing (past), or does something or abstains from doing (present), or promises to do or abstain from doing something(future) something…” this clearly states that consideration may be past present or future.
- Past – if the consideration by a party to an agreement was given in the past, i.e. before the date of promise, it is called past consideration. Example: A renders some service to B at the latter’s desire. After a month B promises to compensate A for the services rendered to him. It is past consideration.
- Present or executed – When the consideration is given at the same time the promise is made. It is called present or executed consideration. The best example of such consideration would be a cash sale. When we buy something in consideration for money from a shop it is a present consideration.
- Future or Executory – When the consideration from one party to the other is to pass subsequently to the making of the contract, it is a future consideration. Example: D promised to deliver certain goods to P after a week; P promises to pay the price after a fortnight. The promise of D is supported by the promise of P. consideration in this case is future or Executory.
6. Consideration need not be adequate
It is however not necessary that consideration must be adequate to the promise made. Consideration as considered to be “something in return”, it need not necessarily be equal to the value to the “something given”. But it should be something to which the law attaches value. The adequacy of consideration depends upon the parties, how valuable it is to them while entering the agreement, not for the court when it is sought to be enforced.
Example: A purchases a table from B for Rs. 500. It is a difficult task for the court to ascertain whether the value of the table is worth the price is given or not.
7. Consideration should not be illusory but real
Although the consideration accepted may not be adequate but it should be real and not illusory and should be competent and of some value in the eye of law. There is no real consideration in the following cases.
- Physically Impossible – A promises to put life in B’s dead wife on behalf of Rs. 500. This is physically impossible to perform.
- Legally Impossible – A owes to B Rs. 100. He promises to pay Rs. 510 to C, the servant of B, who in return promises to discharge A from his debt. This is legally impossible because C cannot give a discharge for a debt due to B.
- Uncertain Consideration – A engages B for doing certain work and promises to pay a “reasonable” sum. There is no recognized way to ascertain the “reasonable” remuneration. This consideration is uncertain consideration.
8. Consideration should not be something which the promisor is already bound to do
A person may already be bound to do something by law or by contract. A promise to do something which he is already bound to do is not a good consideration. Likewise, a promise to perform a public duty by a public servant is not a good consideration.
9. Consideration must not be illegal, immoral or against the public policy
Sec 23 of the Contract Act 1872 refers that consideration to an agreement should not be something illegal, immoral or something against the public policy. The court should decide whether the consideration promised is lawful or unlawful. Where it is unlawful the courts should not allow the action on the agreement.
IV. Stranger to a Contract
It is a general rule that only the parties to a contract can sue or be sued. This rule is called the privity of contract. The rule of Privity of contract means, that a relationship subsisting between two parties who have entered into contractual obligations. Lord Justice Denning has criticized the rule in a number of cases and has observed that “the privity principle has never been able to supplant another principle whose roots go much deeper.”
This rule has the following two consequences.
- A person who is not a party to a contract cannot sue upon it even though the contract is for his benefit and he provided consideration.
- A contract cannot confer rights or impose obligations under it on any other person other than the parties to it.
- Elements of Mercantile Law (N.D Kapoor)
- Contract and Specific Relief (Avtar Singh)
- Legal Bites