This article has been written by Nandini Mahajan pursuing a Lord of the courses (judiciary test prep) from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Consideration holds a very important position in contract law, making the agreements valid and enforceable. For an agreement to mature into a contract, the presence of consideration is vital. The term “consideration” means something valuable in return. Consideration imposes an obligation on both parties to contract to fulfil their respective promises. Section 10 of the Indian Contract Act of 1872 provides that consideration should be lawful for the purpose of a valid contract.

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Background

The Indian Contract Act of 1872 has its roots in common law principles. The concept of consideration has been borrowed from common law.

During the British era, the principles used to govern contracts were mostly based on common law. The Act of 1781 provided the Supreme Court (Calcutta), and the Act of 1797 provided the courts located at Madras and Bombay to govern matters related to contracts by applying Hindu usages and customs in matters governing their contracts and by applying Mohammedan law in matters governing them.

However, these could not solve the complexities arising, and the need to frame a contract law was felt. The Indian Contract Act of 1872 was passed. As Britain ruled over India for a considerable amount of time and enacted various laws to regulate the people, the variety of laws enforced in India has its roots in common law, and the principle of consideration is also based on it. As per Pollock and Mulla, the necessity of consideration in Indian law closely aligns with the common law; Indian law mandates the presence of consideration in contracts for them to be legally enforceable. As stated by Sir Edward Jenks, the concept of consideration was widely used in 1890, but its growth can be traced back to the 12th century. Sir Jenks highlighted that this doctrine was unknown and entered English law incidentally. Later, it was recognized for its substantive legal significance. As per John Wilson Twyford, since 1809, common law has provided that if a person is legally bound to perform an act, then a promise to perform an act is not a good consideration. This means that a promise made in return for something already required by law is not enforceable. This rule remained in force until 1991, regardless of the party’s gains from the exchange.

This historical perspective shows the complexities and evolution of consideration under contract law over time.

Meaning

The term consideration has been given a legal definition under Section 2(d) of the Indian Contract Act of 1872. As per the definition, consideration can be described as something done at the desire of the promisor by the promisee or any other person. Further, the consideration can be present, past, or future. The promisee may do an act, abstinence, or promise for the promisor.

The landmark case of Currie vs. Missa provides a universally accepted definition of consideration. Consideration is described as something having value in the eyes of the law. Consideration may either be in the form of some right, interest, profits, or benefit accruing to one party or some determinants or losses suffered by the other.

Legal maxims

Quid Pro Quo

The concept of consideration is based on the maxims “Quid Pro Quo” and “Nudum Pactum.” “Quid Pro Quo” is a Latin maxim that means “something in return.” For example, A agreed to sell his watch to B for Rs. 5,000, which is a valid consideration for both parties. In this example, the consideration for A is Rs. 5,000; for B, it is the watch. So something in return for the watch is Rs. 25,000.

Nudum Pactum

“Nudum Pactum” is also a Latin maxim, meaning naked promise. In simple words, it refers to a promise without consideration.

For example, A promised his brother B to give him his iPhone. Here, this will not be a contract; rather, it will be a mere naked promise that cannot be legally enforceable due to a lack of consideration.

Doctrine of privity of contract

The doctrine of privity of contract provides that only parties to a contract have the right to enforce it. The doctrine is based on common law. This implies that strangers to a contract cannot sue for its enforcement. Those who are not involved in a contract are referred to as “third parties” or “strangers to a contract.” In simple words, the main focus is that rights and obligations can be enforced and imposed by only the parties to a contract. It does not permit third parties to have rights regarding the enforcement of contracts. This doctrine was established in Twinkle vs. Atkinson.

In Indian contract law, the doctrine of privity of consideration is a fundamental principle that governs the enforceability of contracts. It holds that only parties who provide consideration for a contract can enforce its terms. This means that a third party who is not a party to the contract and does not provide consideration cannot sue or be sued on the contract.

The doctrine of privity of contract was first established in England in the landmark case of Tweddle v. Atkinson (1861). In this case, the plaintiff, Tweddle, had contracted with the defendant, Atkinson, to supply him with goods. Atkinson then sold the goods to a third party, B. When B failed to pay for the goods, Tweddle sued him for the price. However, the court held that Tweddle could not sue B because there was no privity of contract between them.

The doctrine of privity of consideration is based on several policy considerations. First, it prevents third parties from interfering with the contractual relationship between the original parties. Second, it protects the parties to a contract from having their rights and obligations altered by third parties. Third, it promotes certainty and predictability in contractual relationships.

There are a few exceptions to the doctrine of privity of consideration. For example, in some cases, a third party may be able to enforce a contract if they are a direct beneficiary of the contract. Additionally, in some cases, a third party may be able to sue or be sued on a contract if they have been assigned the rights or obligations under the contract.

In India, the doctrine of privity of consideration was first established in the case of Jamna Das vs. Ram Avtar (1959). In this case, the plaintiff, Jamna Das, had contracted with the defendant, Ram Avtar, to sell him a property. Ram Avtar then sold the property to a third party, B. When B failed to pay for the property, Jamna Das sued him for the price. However, the court held that Jamna Das could not sue B because there was no privity of contract between them.

The doctrine of privity of consideration is an important principle of Indian contract law that protects the rights and obligations of the parties to a contract.

Exceptions to the Rule of Privity of Contract:

●       Trust,

●       Family arrangement,

●       Acknowledgment or estoppel,

●       Insurance Contract,

●   Contract through an agent.

Essentials

Consideration to move at the desire of the promisor

The main element of consideration is that consideration should move only at the desire of the promisor to be valid. If the consideration is moved at the instance of some other party, the consideration will not be valid.

Some landmark judgements clarifying the concept are as follows:

In the landmark case of Durga Prasad vs. Baldeo, adjudicated in 1880 and reported in the Indian Law Reports, Allahabad Series, the court delved into the intricate legal principle of consideration in contract law. The central issue at hand was whether a promise made in response to the desire or request of a third party, rather than the promisor themselves, could constitute valid consideration to support a legally binding contract.

The court meticulously examined the facts of the case, paying close attention to the nature of the promise and the circumstances surrounding its formation. It was established that the promise in question was made at the behest of a third party and that the promisor’s motivation for making the promise was primarily driven by the desire to fulfil the wishes of that third party, rather than any personal benefit or advantage.

Based on this analysis, the court concluded that the consideration for the promise did not move at the desire of the promisor, but rather at the behest of a third party. As a result, the court held that this did not constitute sufficient consideration to support the promise.

The court’s decision in Durga Prasad vs. Baldeo underscores the fundamental principle that, in order for a promise to be legally enforceable, it must be supported by valuable consideration. Consideration is defined as something of value that is bargained for and given in exchange for a promise. In this case, since the consideration for the promise originated from a third party’s desire rather than the promisor’s own, it was deemed insufficient to create a binding contract.

The legal principle established in Durga Prasad vs. Baldeo has far-reaching implications in contract law. It serves as a cautionary tale for parties entering into agreements, emphasising the importance of ensuring that the consideration for a promise is provided by the promisor themselves and is not solely driven by the desires or requests of third parties.

In Kedarnath Bhattacharjee vs. Gorie Mohamed (1886), subscriptions were invited from the public for the construction of a townhouse. The defendant subscribed to this fund for Rs. 100. On the basis of the promised subscription, the plaintiff started the construction of the town hall, but the defendant did not pay the amount and alleged that there was no consideration for his promise. The defendant was held liable as the people were asked to subscribe money for the construction of the town hall, and they were well aware that only based on the subscription was the work to be started.

Consideration can either flow from the promisee or any other person

In the realm of contract law, the concept of consideration plays a pivotal role. It refers to the exchange of value between the parties to a contract that serves as the foundation for legal enforcement. While it is generally assumed that the person making a promise (the promisor) should provide consideration to the person receiving the promise (the promisee), this is not always the case.

In certain legal systems, such as many civil law jurisdictions, it is not necessary for the consideration to flow directly from the promisee. This means that if a third party provides consideration on behalf of the promisee, the contract can still be valid and enforceable. This principle allows for greater flexibility in contractual arrangements and enables parties who may not be directly involved in the exchange of promises to contribute to the formation of a legally binding agreement.

However, there are some jurisdictions, such as in English law, where the consideration must flow exclusively from the promisee. This stricter approach ensures that the person making the promise receives something of value in return for their commitment. It also helps to prevent situations where a third party could potentially benefit from a contract without providing any consideration themselves.

In summary, the requirement for consideration to flow from the promisee varies across different legal systems. While some jurisdictions allow for third-party consideration, others demand that the consideration be provided directly by the promisee. This distinction has implications for the formation and enforceability of contracts and reflects the different legal philosophies and approaches to contractual obligations in various jurisdictions.

In the landmark case of Chinnaya vs. Ramayya (1882), a mother’s testamentary disposition ignited a legal dispute between her daughter, Ramaya, and her maternal uncle. The mother, in an act of generosity, bequeathed her entire property to her beloved daughter, Ramaya. However, this gift was accompanied by a significant condition: Ramaya was obligated to make an annual payment of a specified sum of money to her maternal uncle.

Initially, Ramaya diligently fulfilled her obligation, adhering to the terms set forth by her mother. However, as time went on, Ramaya inexplicably ceased making the annual payments. This abrupt change in her conduct prompted her maternal uncle to seek legal recourse. Ramaya, in her defence, contended that the agreement was unenforceable due to the absence of consideration flowing from her uncle to herself.

The court, after careful deliberation, rejected Ramaya’s plea. The judges astutely observed that while Ramaya’s uncle may not have provided direct consideration to her, indirect consideration had been provided by the mother when she transferred her entire property to Ramaya. This indirect consideration was deemed sufficient to create a legally binding promise between the plaintiff (Ramaya’s maternal uncle) and the defendant (Ramaya).

The court’s decision in Chinnaya vs. Ramayya established an important legal principle regarding the enforceability of promises made in exchange for indirect consideration. This principle has far-reaching implications and continues to guide legal proceedings involving contractual agreements and testamentary dispositions to this day.

Consideration may be past, present, or future

Consideration can be of three types, i.e., past, present, or future.

●   Past consideration (has done or abstained from doing): In the case of past consideration, the consideration is given earlier and a promise is made afterward.

For example, A asks B to find his dog after B finds it. A promise to

Pay B Rs. 500. It is a case of past consideration.

●   Present consideration/executed consideration (does or abstains from doing): When both parties to a contract perform their respective parts simultaneously as promised, it is referred to as present consideration.

For example, if A sells his phone to B and B gives him Rs 50,000 in return, it will be an instance of present consideration.

●   Future consideration/executory consideration (promises to do or abstains from doing something): When the parties agree to move consideration to a future date, it is known as future consideration.

For example, A promises to supply the goods to B on a future date, and B promises to pay for the same on a future date. It will be an instance of future consideration.

Consideration may be a promise to do or abstain from doing something.

It can be for a negative or positive act.

●   A positive act refers to a promise to do something.

For example, A agrees to sell his car for Rs. 5,00,000. In this example, selling a car amounts to a positive act.

whereas,

●   A negative act refers to a promise to abstain from doing something.

For example, if A promises that he will not smoke and B promises to help with his habit of quitting smoking.

Consideration must be real and not illusory.

It should be real, not unsubstantial. If it is illusionary, it is not a consideration.

In the landmark case of Chidambaraiyer and Ors. vs. P.S. Renga Iyer and Ors., (1965), the Indian judiciary established important principles regarding the nature of consideration in a contract. The court held that consideration, an essential element of a legally binding contract, must be real and not illusory. However, it clarified that consideration need not be adequate, meaning its value does not have to be equal to or greater than the value of the promise it supports.

The court recognised that consideration must have some value, but it need not be of equivalent worth to the promise being made. The focus is on the existence of genuine consideration, rather than its quantitative comparison to the promise. This principle allows for a wide range of exchanges, as long as both parties agree on the value of what is being offered and received.

The court’s decision in Chidambaraiyer and Ors. vs. P.S. Renga Iyer and Ors. has had a lasting impact on contract law in India. It clarified that the adequacy of consideration is not a legal requirement, and that the presence of real, though potentially unequal, consideration is sufficient for a contract to be valid. This principle enhances the flexibility and practicality of contract formation, enabling parties to negotiate and agree on terms that reflect their respective valuations and objectives.

Impossibilities can be of two types:

  • Physical impossibility: A promised to sell B his dog for $50,000, which was dead at the time of the promise. That would be an example of a physical impossibility worth considering. Since his dog does not currently exist in reality, the promise to sell one would be considered physically impossible and would not be considered a consideration in a contract.
  • Legal impossibility: A promised to rent his liquor shop to B. A had a license to run the shop but B did not have the same. So the agreement entered between A and B is void on legal grounds.

Consideration does not need to be adequate

Consideration doesn’t need to be adequate, but sufficient. It need not have any particular value, but it must be something that should have value in the eyes of the law. Emotions and sentiments are of no value in the eyes of the law.

For example, A agrees to sell his car valued at Rs. 5,00,000 to B for Rs. 50,000. The contract is valid, and inadequacy is immaterial.

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

Consideration cannot be for immoral purposes, unlawful, or against public policy.

Section 23 of ICA 1872 provides for circumstances under which considerations and objects are unlawful. The consideration or object of an agreement is lawful, unless

●       Forbidden by law,

●       Defeat the provisions of any law,

●       Fraudulent,

●       Involves or implies injury to the person or property of another,

●       Immoral,

●   Opposed to public policy.

For example, if A provides his house at rent for Rs. 5,000 for prostitution purposes to B, the agreement is void as it is against morality.

Difference between English Law and Indian Law

In common law, the right to sue lies between parties to the contract, and the consideration must flow from the promisee only, but in Indian law, consideration can flow from the promisee or stranger to consideration. The main difference between English law and Indian law lies in the principle mentioned above. This can be further explained as:

Position under English Law and Indian Law

●       Under English law, consideration must flow from the promisee. If consideration is provided by any other person, then the contract will not be enforceable. The promisee can’t go to court for the enforcement of the same.

For example, A and B enter into a contract whereby A agrees to give his bag to B for Rs. 5,000. Then Rs. 5,000 is given by C to A. Now this does not constitute a valid contract between A and B, and A cannot knock on the door of justice.

●   Under Indian law, there is no rule like English law, and consideration can be given either by the promisee or any other person.

For example, A and B enter into a contract whereby A agrees to give his bag to B for Rs. 5,000. The Rs. 5,000 is given by C to A. Under Indian law, in this instance, there will be a valid contract between the parties, and both B and C can sue for the same.

Analysis

Under English law, a person who has not provided any consideration cannot sue, but under Indian law, a person who has not provided any consideration can sue.

Landmark judgement regarding the same Chinnaya vs. Ramaya in which the court held that strangers to contract can sue.

Position regarding past consideration under English law and Indian law

Under Indian law, consideration is of three types: past, present, or future, but common law does not recognise past consideration. The common law does not recognise past considerations. Past consideration has no value in common law; a promise for a past act is considered a gratuitous act, whereas Indian law recognises past consideration as a valid consideration.

Exceptions

The general rule concerning contracts is that a contract without consideration is void; however, there are certain exceptions in which a contract without consideration is valid.

Section 25 of the Indian Contract provides the exceptions. These are as follows:

An agreement made out of love and affection

As per Section 25(1), an agreement made in writing out of love and affection between two parties and registered according to law does not need consideration.

The main essentials can be regarded as:

●       Agreement in writing

●       A close relationship between the parties

●       Out of love and affection

●   Registered

Bhina vs. Shivaram: The brother was not legally bound to transfer but still did the same out of natural love and affection. It is deemed to be a case of natural love and affection, and it was considered binding upon the parties.

A promise to compensate for past voluntary service

Section 25(2) provides that when a promise is made to compensate for past services voluntarily rendered, there is no requirement for consideration. The English law does not recognise the concept of past consideration.

The main essentials can be regarded as:

●       There must be a promise.

●       Promises must be made.

●   Compensation must be for past services rendered.

For example, A finds B’s purse and provides the same to her. B promises to give him Rs. 500. The consideration is valid as it was for the purpose of past services voluntarily rendered. No consideration is required for the same.

Time-barred debt

Section 25(3) of the act deals with the 3rd exception that provides the promise to pay a time-barred debt.

As per this provision, if a person’s debt has been time-barred as per the law of limitation but he or she promises the creditor to pay the same in writing, it would be legally binding, though there is no consideration.

The main essentials are:

●       Existence of debt

●       Debt must be time-barred.

●       Promise to pay time-barred debt

●       A promise can be made by the promisor or by his agent.

●   A promise must be in writing and signed by the person who is obligated.

For example, A owes B a debt of Rs. 3000.

The debt is time-barred due to the limitation law. A’s agent, legally authorised, agreed to pay Rs. 1500 in writing and signed. The contract is valid.

 No consideration is required in the following other situation also:

To create an agency

Consideration is not required for the creation of an agency. As per Section 185 of the Indian Contract Act of 1872, consideration is not necessary to create an agency. Thus, if an agent is appointed, there is no requirement of consideration for the creation of an agency.

A gift doesn’t require consideration

A gift does not require any consideration. It is made out of mutual love, and nothing in return is required.

For example, Jetha Lal gave a watch to Anupama on her anniversary. Later on, Jetha Lal could not ask for the watch as there was no consideration.

Critical analysis of its role

Consideration plays a pivotal role in the formation of legally binding contracts and is an essential element in contract law in the modern world. Without consideration, the validity and enforceability of a contract are fundamentally compromised. Consideration refers to the bargained-for exchange of value or benefit between the parties involved in a contract. It serves as the foundation upon which mutual promises and obligations are built.

The concept of consideration is deeply rooted in the notions of fairness and reciprocity. It ensures that both parties to a contract receive something of value in return for their commitments. This exchange of value can take various forms, such as the transfer of money, the provision of goods or services, or the promise to refrain from a specific action.

The presence of consideration establishes a legally enforceable agreement, as it signifies the mutual intent of the parties to enter into a binding contract. Without consideration, a promise or offer remains merely an expression of intent and is not legally enforceable. This principle prevents the formation of illusory contracts, where one party makes a promise without receiving anything in return.

Moreover, consideration helps determine the scope and extent of contractual obligations. The value or benefit exchanged between the parties sets the parameters of their respective rights and responsibilities. It defines what each party is entitled to receive and what they are obligated to provide in exchange.

Although an important doctrine of contract law, the concept of consideration has certain loopholes and has been argued by various critics as unnecessary. The Indian Contract Act of 1872 has been revised by the 13th report of the Law Commission of India, and valuable suggestions have been given by the commission for its reformations. Almost every section under the Indian Contract Act has been discussed, and recommendations have been made where revision is necessary. This has been done where the existing law:

●       Is outdated at present.

●   Rigid and needs more flexibility.

In India, the rigidity and limitation of the doctrine of consideration have been the reasons for the lack of understanding in numerous cases. The Law Commission, in its 13th report, suggested the abolition of the concept of consideration, but that didn’t happen. As this doctrine of consideration was given much importance in Indian law by many eminent jurists, it was not considered rational to completely severe the doctrine of the Indian Contract Act.

Also, under Section 2(d) of the Indian Contract Act 1872, the term consideration according to the section may or may not be adequate because it is not clear and can lead to a vague contract.

For example, A agrees to sell his car for Rs. 100 to B. This will be valid as the law of contract recognises inadequate consideration.

The worst consequences of this doctrine are faced in cases of charity, where a person promises to help charitable causes by giving financial aid but then refuses to do so. If such an agreement is not in writing or fulfilling the other conditions of a valid contract, it can’t be upheld in court and would be declared void solely on the basis that it lacks consideration, as was done in the case of Kedarnath Bhattacharji vs. Gauri Mohamed (1886).

The presence of the concept of consideration makes the concept more rigid and less flexible, as argued by some critics, and according to them, the outdated concept is not needed in modern contracts.

Also, the doctrine of privity of contract under consideration has been criticised by various scholars as ambiguous, lacking clarity, and rigid. The third parties are not allowed to enforce if some provision has been made for their benefit.

Due to all these anomalies in the doctrine of consideration, it becomes impossible to execute any such agreements. For the Indian Contract Act to make an advance in modern times, the lawmakers must embrace a change of time and welcome new laws that coexist with the 21st century, help in the advancement of the Indian legal arena worldwide, and have better and more flexible agreements entered into.

Relevant case law

Durga Prasad vs. Baldeo, In this case, a shopping complex was built by the plaintiff on the order of the collector. The defendants occupied the shops and agreed to pay for the construction price on the profit earned by them. The defendant refused to pay the commission. Therefore, the plaintiff filed a suit for the same. The plaintiff’s claim was rejected on the ground that the plaintiff’s act was the result of the act of a collector rather than an act at the desire of the defendants. So, the plaintiff’s claim failed in this case, and this did not provide valid consideration. The defendants were not held liable.

In the case of Abdul Aziz and Ors. vs. Masum Ali and Ors. (1914), the defendant promised to pay Rs. 5,000 as funds for the repair of the mosque, but nothing was done for the same. The defendant and the subscribers were not held liable to pay money since no work was carried out.

Conclusion

So, it can be concluded that consideration remains a vital element in contract formation under the Indian Contract Law. Consideration is the promise to do something or abstain from doing something in a contract. Despite various criticisms, these considerations remain relevant today and cannot be ignored.

References

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