Exception to the Rule of Consideration

By | January 19, 2019
Bond of Accused and Sureties

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The exception to the rule of consideration squarely falls within the purview of the statute. Indian Contract Act in section 25, categorically provides for the three situations whereby the requirement of consideration ends. It is natural to love, affection, voluntary service and payment of the time-barred debt.

Introduction

As defined under §2 (d) of the Indian Contract Act (hereinafter “The Act”), any act or abstinence amounts to consideration. It is a very crucial component of a contractual relationship. But in some situations, as provided under law, there can be exceptions. The coming article would examine such exceptions keeping in purview the necessary requirement and the inadequacy aspect.

Requirement of Consideration in a Contract

The consideration that is lawful is an essential element for the formation of the contract.[1] Without the involvement and the inclusion of this element, the contract cannot be fructified.[2] The contract would simply become void if not consideration is there.[3] This element can follow at any stage, whether past, present or future.[4]

It is said that a promise, that can be verbal or written can be without consideration. But in that case, it would merely amount to nudum pactum ex quo non oritor actio. It means that contract or pact upon which no action would arise.[5]

This is the reason that a disposition of property brought by a transfer is not a contract.[6] The source for such a proposition is Section 122 of the Transfer of Property Act. It provides that the transfer can be without consideration.

Similarly, if no benefit is being transferred to a judgment debtor when he agrees to pay the decremental amount, the agreement would amount to be void. In this particular case, the respective judgment debtor agreed to do the same because the dismissal of objections to the money decree had to be allowed.[7]

To have a consideration doesn’t mean that it should be provided separately. It has been authoritatively held by the courts that an independent agreement of re-conveyance is sufficient. It is because it includes the agreed price at which the property would be sold. No separate consideration is required.[8]

Adequacy for Consideration

Now, it is well settled that the consideration is mandatory, but whether the consideration should suffice a particular limit or be adequate is another question to be determined. Can one say that an inadequate consideration is an exception to the rule of consideration? It would be discussed as follows.

The principles of common law are clear; they do not go into the aspect of the adequacy of consideration. It is the domain of the equity to be dealt with.[9] If the parties have had the opportunity to bargain on equal terms, it is no more open to the parties to argue for inadequacy.[10]

The very reason for the courts to not delve into such questions is that there can be measures of price control or administrative law that can truly deal with the problem of inadequacy of the benefit so awarded in a contract.[11]Courts are, after all, concerned with the consideration of having some value. If a bargain has been made out by the parties, the courts, as a matter of principle should not interfere with the pre-decided claim.[12]

The Statute is also not silent on this aspect and the Explanation II of the § 25 of the Act provides for such provision.-

“Explanation 2.—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.”

Thus, the inadequacy of the consideration is no more ground for being invalid or being an exception to the rule of consideration. For determining the validity of the agreement, therefore, the adequacy of the agreement is not an element to be considered.[13]

Exceptions provided under Law

But the presence of consideration is not universal. The reason arises from the very statutory provision of having exceptions to this general principle of having a consideration. §25 of the Act provides for the same. It is being appended herein bellow-

25. Agreement without consideration, void, unless-An agreement made without consideration is void, unless-

(1) it is expressed in writing and registered under the law for the time being in force for the registration of 1[documents], and is made on account of natural love and affection between parties standing in a near relation to each other; or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless

(3) It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract. …”

Natural Love and Affection

This naturally (but not always) turns to the conjugal relationships and the contracts entered into between them during that time.[14] Hence, if there is an agreement between a Hindu Husband and his wife to provide maintenance, such an agreement is not considered without consideration.[15]

Similarly, a family settlement, again, for providing maintenance between the husband and the wife would be held to be valid. The logic is that the consideration is considered to be love, affection, peace, harmony and satisfaction.[16] Such a contract would even bind the legal representatives of the promisor provided that no contrary intention appears from the contract.[17]

Hence, in the case of a deed of trust in favour of the mother, the court considered that sufficient consideration existed.[18] Each assesse executed a registered indenture in favour of their mother.[19] The settlement between a cousin brother and sister was held to be binding being contractual in nature and having natural love and affection as consideration.[20]

A crucial difference has to be drawn out from the other kinds of contracts like that of gift etc. If a person provides an annuity to his alleged wife, there is no natural love and affection involved. But, it is a pure gift and has to be considered accordingly.[21]

On the same logic, the liability of the father under the Mitakshara law would be arising out of moral and religious obligations. Hence, no love and affection can be attached to such an arrangement.[22] On the other hand, if the sons execute an agreement in favour of their father for the sake of the great regard they have for their father, is a classic example of the exception that would fall under the purview of this provision.[23]

Another essential condition for the fulfilment of this exception is the presence of near relationship among the parties.[24] The courts do not attach any restricted meaning to this vast phrase. Parents of a Muslim lady have been including within the said phrase. Accordingly, the agreement to provide maintenance to the wife’s father and mother was considered a valid agreement.[25]

In the end, it is important to bear in mind that love and affection must be present naturally. It is like a question of fact to be determined by the Courts. This is the reason why no consideration was found to be ascertainable in the case where the maintenance was claimed by the wife on the stipulation of not molesting the husband.[26]

Voluntary Services

The services that are being referred to in the provision are like past services.

The aspect of voluntariness is very important and crucial. The term signifies that the work or the task is being performed at one’s own will and impulse. The choice so exercised is not constrained, prompted or suggested by any other person.[27]

If the services are rendered in return for some wage or some benefit, it cannot be considered to be voluntary at all. Hence, the services rendered even for a bonus become excluded from the purview of the exception provided in Section 25(2) of the Act.[28]

Such services cannot be unlawful and immoral. The best example in this classification is that of prostitution. In one of the cases, the agreement to pay the money for cohabitation with a prostitute was held to be void on the grounds of illegality.[29]

Recognition of the Time barred debts

This is the third exception as provided in §25 of the Act. It shows that the limitation of the right would not lead to the extinguishment of the right. Such kind of debt continues to be due from the debtor through the statute may have barred the remedy seeking capacity through the courts.[30] The logic is that the outstanding debt cannot be considered as non- existent only because of the time.[31]

Another reasoning that can be found to be used by the courts is this- a time-barred debt itself is the good consideration for the debt is not extinguished although the remedy is lost.[32] Meaning of the term “debt” is also to be taken in its natural and ordinary meaning.[33] The word is of large import[34] and means an obligation to pay immediately.[35]

The essential conditions to fulfil this exception are-

  1. It is made in writing,
  2. It is signed by the concerned person,
  3. It is a promise to pay wholly or in part a debt[36]

Such a promise to pay the time-barred debt is without consideration. Hence, it can be called a gratuitous promise. But, even if there is a consideration, it need not be adequate.[37]

The term “person charged with” is also not be given a restricted meaning. It is wide to cover a case of a person who agrees to become liable for the payment of date due by another. Hence, it is not, in any case, limited to such a person who has been indebted from the beginning.[38]

Also, to invoke this exception, either party has to acknowledge the barred and outstanding debt clearly.[39] Hence, when a tenant disclosed in the responded that the arrears of rent could be collected from the mentioned persons therein was not considered an agreement to pay time-barred rent. The response was to a notice of the landlord.[40]

The acknowledgement need not be express, it can be implied and be with necessary implication. The prime purpose is the acknowledgement must be clear and unequivocal.[41] Hence, if the debtor makes a written admission of the existence of an unsettled account with a promise to pay the balance, the court has considered the same to be sufficient enough.[42] In another case, the written expression, “baki rahe lene lekha harke” was understood to be an acknowledgement by the court.[43]

There have also been cases where the reference to the time-barred debt was made through a sheer mistake and inadvertence. In such a situation, the courts do not come to the conclusion that there is any promise to pays since there falls no consideration for the implied promise.[44]

If the above-mentioned conditions are fulfilled, the limitation would stand revived. It is substantiated by practical examples. In one of the cases, the authorized munim of a firm acknowledged the outstanding liability of a firm. This was considered sufficient by the court and thus, the limitation was understood to be revived.[45]

Even the admission of the legal heir of willingness to pay the barred debt was considered as a valid acknowledgement and hence, the payment of time-barred debt could be done.[46] The courts look at the promise to pay from the side of the other party. If there is a letter containing such promise, it would amount to a contract.[47] Hence, the consideration is not required in such cases.

An analogy can be drawn with the novation of the contract. If the party acknowledges the liability, the agreement’s performance that was otherwise barred becomes novated.[48] To put to effect such novation, recitation of the past time-barred debt is required.[49]

Conclusion

It is not denied that the consideration is an essential element to fulfil the whole requirements of a valid contract. The promise to perform an existing contract can also become a part of the good and valid consideration.[50] The failure of consideration would lead to the cancellation of the entire agreement.[51]

But, the statutory exceptions can also be not ignored. It is very clearly and expressly provided that the three situations so explained above would fall in exception to the general rule of the consideration applicable in general principles. In such cases, the courts consider that the requirement of consideration has been met and the terms of contracts are supported by such stipulation.[52]


[1] §10, Indian Contract Act, 1872.

[2] Ram Rattan v. Basant Rai, AIR 1921 Lah 205.

[3] Ram Bahadur Singh v. Hanuwant Singh, AIR 1957 Raj 29 (DB).

[4] Central Bank of India v. Tarseema Compress Wood Mfg. Co., AIR 1997 Bom 225.

[5] Gopal Vinayak Deshmukh v. Trimbak Narayan Deshmukh, AIR 1953 Nag 195 (DB).

[6] Bhai Hiradevi v. Official Assignee of Bombay, AIR 1955 Bom 122 (DB).

[7] Kamta Prasad v. IInd Additional District Judge, AIR 1997 All 201.

[8] Dasrath Gayen v. Satyanarayan Ghosh, AIR 1963 Cal 3325.

[9] P.C. Markanda, The Law of Contract 581 (Wadhwa & Company2006).

[10] Vijaya Minerals Pvt. Ltd. v. Bikash Chandra Deb, AIR 1996 Cal 67.

[11] G.H. Trietal, Law of Contract 70 (8th Edn.).

[12] Id. at p. 59 (6th Edn.)

[13] Bindeshri v. Sarju, AIR 1923 All 590.

[14] Indira Bai v. Makarand, AIR 1931 Nag 197.

[15] Id.

[16] Manali Singhal v. Ravi Singhal, AIR 1999 Del 156.

[17] Vijaya Ramraj v. Vijaya Ananda, AIR 1952 All 564 (DB).

[18] Khanderrao Gaekwar v. Commissioner of Income Tax, AIR 1949 Bom 17.

[19] Id.

[20] Ram Das v. Kishen Dev, AIR 1986 HP 9; Latif Jahan Begam v. Mphd. Nabi Khan, AIR 1932 All 174.

[21] Gopal Saran Narain Das v. Sita Devi, AIR 1932 PC 34.

[22] A.C.A. Ganapati Mudaliar v. Arumugathammal, 1997 (2) Mad LJ 608.

[23] Lalit Mohan Dutta v. Basudeb Dutta, AIR 1976 Cal 430.

[24] §25(1), Indian Contract Act, 1872.

[25] Nisar Ahmad Khan v. Rahmat Begum, AIR 1927 Oudh 146.

[26] I v. G, AIR 1926 Nag 501.

[27] Hyderabad State Bank v. Ranganath Reddy, AIR 1958 AP 605.

[28] T.V. Krishna Iyer v. Official Liquidator, AIR 1952 Trav- Co 99 (DB).

[29] Chandrakali v. Shambhunath, AIR 1935 Oudh 71.

[30] Kishan Singh v. Bachna, AIR 1954 PESPU 44.

[31] Devi Ditta v. Saudagar Singh, 65 Pun Re 1900.

[32] Nathu Singh v. Girwar Singh, AIR 1929 All 657.

[33] Doraisami Paddayachi v. Vaithilinga Padayachi, AIR 1918 Mad 1145.

[34] P. Ramanatha Aiyar, Law Lexicon 483 (1997 Edn.).

[35] DPP v. Turner, (1974) AC 357.

[36] Kasturchand Jiwaji v. Manekchand Devchand, AIR 1943 Bom 447.

[37] Debi Prasad v. Bhagwati Prasad, AIR 1943 All 63.

[38]Adiraja Ariga & Ors. v. K. Beeranna Rai., AIR 1940 Mad 678.

[39] Ghourinissa v. S.J. Kirmani, AIR 1974 Mad 191.

[40] Daulat Ram v. Som Nath, AIR 1981 Del 354.

[41] Sarangdhar Singh v. Lakshmi Narayan Wahi, AIR 1955 Pat 320 (DB).

[42] Bhansarlal Paramukh v. Navalkishore Mungalal, AIR 1958 MP 21.

[43] Shiv Ram Punnun Ram v. Faiz, AIR 1942 Lah 50.

[44] Mohd. Mumtaz Ali v. Raja Ram Shukla, AIR 1937 Oudh 300.

[45] Mithin Lal Jwalal Prasad v. Marguerite Butter Dairy Farm, AIR 1932 All 38.

[46] State Bank of India v. Dilip Chandra Singh Deo, AIR 1998 Ori 129.

[47] Maidens Hotel v. Willnot, AIR 1935 Lah 984.

[48] Lalji v. Ghasi Ram, AIR 1930 Oudh 287.

[49] Maidens Hotel v. Willnot, AIR 1935 Lah 984.

[50] Indermal Tekaji Mahajan v. Ramprasad Gopilal, AIR 1970 MP 40.

[51] State of M.P. v. Firm Gopichand Sarju Prasad, 1971 MPLJ 898.

[52] Kothari Revashankar Amalukh v. Gauriben Jayashankar Vyas, AIR 1954 Sau 8.


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