This article is written by Rida Zaidi, a law student of the Faculty of Law, Aligarh Muslim University. The author explains essentials of valid consideration and types of consideration under the Indian Contract Act, 1872.

This article has been published by Sneha Mahawar.

Introduction 

Consideration is the price paid for a promise. As per Section 10 of the Indian Contract Act 1872, an agreement without consideration is void, subject to certain exceptions under Section 25, as consideration is one of the essentials of a valid contract. A contract supported by consideration makes it legally enforceable and makes the obligations of the parties binding upon them. In the absence of consideration, such an agreement would be merely a gratuitous one and not legally enforceable. Consideration can be to the benefit of one party and to the detriment of the other. In the words of Pollock and Mulla, “Consideration is the act, forbearance, or promise done or given at the request of the promisor to any other person.” The detriment of one party is sufficient even if the promisor is not benefited from the promise. It is the price for which the promise of the other is bought. Consideration, in order to be valid, must be real, substantial, and adequate. 

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This article shall try to deal with the concept of consideration and its types as incorporated under the Indian Contract Act of 1872.

Consideration as per Section 2(d) of the Indian Contract Act, 1872

Consideration, as given under Section 2(d) of the Indian Contract Act, 1872, defines it as “when at the desire of the promisor, the promisee or any other person has done or abstained from doing something, does or abstains from doing or promises to do or to abstain from doing something. Such an act, abstinence or promise is called a consideration for the promise”. In order to understand the definition of consideration, one must try to study its essentials which are embedded in the above-mentioned definition.

For example, A enters into a contract with B that he will sell his car to B for Rs 10,00,000. Here, the consideration for B is the car, whereas the consideration for A is the sum of money received.

A enters into a contract with B that B shall provide him with the services of moving his office to a new place, for which A shall provide him with Rs 20,000. Here, the consideration for B is the sum of money, whereas the consideration for A is the services offered by B.

Nature of consideration

The nature of consideration can be of two types. They are:

Unilateral consideration

The contracts under which the promisor offers to pay only after the occurrence of a specified event. In other words, the promisor is willing to pay for the promise. Under unilateral consideration, it moves only in a single direction. Under such a contract, only the promisor is legally bound to fulfil his promise within the prescribed time duration. For example- Mr Raj lost his dog and makes an offer to Mr Rahul to find his lost dog for which he would pay him Rs. 100. Mr Rahul is under no obligation to accept the offer and it is up to him to accept it or not.

Bilateral consideration

The contract where both parties are under an obligation to fulfil their respective promises is known as bilateral consideration. Here, the parties involved must be at least two, unlike that of a unilateral consideration where only the promisor is bound to fulfil his promise. Under such contracts, consideration moves in either direction. For example-  a sale agreement where the seller enters into a contract with the purchaser to transfer the title of the car to him upon receiving consideration for the same within the prescribed time duration.

Essentials of consideration

Consideration can only be moved at the desire of the promisor

For valid consideration, it should be moved only at the desire of the promisor and no one else. A voluntary act by the promisee or at the occurrence of some third party would not amount to a valid consideration as it was not done at the request or desire of the promisor. For example, A’s house caught fire, and he requested B to help him put off the fire by bringing some water, for which he would provide him with Rs 500. It is a case of valid consideration as the consideration was moved at the desire of the promisor. It was held in the case of Durga Prasad v Baldeo (1880) that since the consideration was not moved at the desire of the promisor, it did not constitute a valid consideration. It was held in the case of The Municipal Corporation of…v. The Secretary of State for India (1932) that the subscriber was fully aware regarding the purpose of the subscription and also that a duty to pay the contractor for his work was based on the subscription. Therefore, in the present case, the act of the promisor in entering into a contract with the contractor is said to be made at the desire of the promisor.

Consideration by promisee or any other person

Consideration can be provided either by the promisee or any other person, but the condition that needs to be satisfied is that it should be moved at the desire of the promisor only. According to English law, the rule is somewhat different, as under English law, consideration can only be moved by the promisee and no third party who is a stranger or who is not a party to the contract can move the consideration. It was held in the case of Tweddle v. Atkinson (1861) that no case could be made out as the consideration was not moved by the husband, who was the promisee. Under Indian law, a person can bring an action even though the consideration might have been moved by a third party. It is a general rule that a stranger who is not a party to the suit can sue if the contract is for his enjoyment. Thus, under English law, a third party cannot initiate action for the same, but under Indian law, a stranger who may not be a party to the contract can also enforce the contract against the promisee. 

For example, If A purchases a watch from B, but instead of A paying him the consideration, C makes the consideration. This it is a valid contract as per Section 2(d) of the Indian Contract Act, as it says that the consideration can be made by the promisee or any other person. It was held in the case of Chinnaya v Ramaya (1882) that it is not binding that the consideration has to be made by the promisee only. It was held in the case of S. Premalatha v. Mysore Minerals Ltd. and Anr. (1992) that Section 2(a) of the Indian Contract Act 1872, includes the words ‘promisee or any other person’, which means a stranger to a contract can sue. It was also held by the Karnataka High Court in the present case that where the statute lays down clearly who can give consideration, no precedent is required for the same.

Privity of contract

The doctrine of privity of contract lays down the fundamental rule that only parties to the contract can bring an action to enforce such a contract. Though a third party may be interested in the contract, he cannot initiate an action for the same. There has to be a relationship existing between the parties that bestows certain rights and obligations arising out of it. The rule of privity of contract applies equally to both India and England. The rule of privity of contract has to be distinguished from the rule that a contract can be enforced either by the promisee or any other person. This rule does not affect the rule of privity of contract. Under the Indian Contract Act 1872, there is no provision for or against the rule of privity of contract, but the rule laid down in the case of Tweddle v. Atkinson applies to the cases of India as well. It was held by the Privy Council in the case of Krishan Lal v Pramila Bala Dassi (1928) that clause(d) of Section 2 of the Indian Contract Act 1872, widened the scope of the definition of ‘consideration’ to enable a person not a party to the contract to enforce it, which if it had been under English Law, would have rendered that party as a recipient of the purely voluntary promise and such a party would not be entitled to bring an action on the ground of Nudum Pactam. According to Section 2 of the impugned Act as well, a person who is not a party to the contract cannot sue. Moreover, the definition of ‘promisor’ and ‘promisee’ precludes this perception. Under Indian law, it would be wrong to assume that people who are not parties to the contract can sue. It was held in the case of Utair Aviation v. Jagson Airlines Ltd. & Another (2012) that though privity of contract exists in India from time to time, a number of exceptions to it have evolved according to which a stranger who is not a party to the contract can sue, that is, if he is a beneficiary, a trustee, or a third party. The exceptions are not exhaustive.

For example, If A and B entered into a contract that binds both parties to fulfil their respective obligations, and if any of the parties fail to perform their part, only the parties to the contract can sue each other and no third party can initiate an action for the same.

Exceptions to privity of contract

Under a contract, only parties can sue each other, but with time, the courts have devised a number of exceptions for protecting the interests of the third party who is not a party to the contract:

Beneficiary under a contract

When two parties enter into a contract with the intent of creating a charge in favour of a third party who is the beneficiary of some specific immovable property, then if either party fails to perform his part of the obligations, the beneficiary can enforce his right. The  Privy Council has recognised this exception in the case of Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1906)

Marriage, partition or family settlement

Where an agreement is entered into in the interest of the beneficiary regarding a marriage settlement, partition or family settlement, such a beneficiary can enforce such agreement even though he or she may not be a party to the contract. Section 15(c) of The Specific Relief Act 1963, enables the specific performance of the suit for entitlement of the beneficiary and therefore, forms an exception to the rule that a stranger to a contract cannot sue. It was held in the case of Shappu Ammal v Subranarayan (1909) that the mother, though not a party to the contract, was entitled to receive equal shares of maintenance from both of her sons.

Acknowledgement of a liability

Where a person is under an obligation to make a payment to a third party and he acknowledges it to that third party through his conduct, part payment or estoppel. The third-party can enforce the impugned contract as it is based on the principle of the law of estoppel.

Covenants running with the land

Where a person has purchased land with a notice that the owner is bound by certain duties affecting the land, he shall be bound by those duties even though he might not have been a party to the contract. In the case of Steel Authority of India v. the State of MP (1999), it was held that the right of exemption from paying land revenues by the undertaking would be similar to that of the Central Government.

Statutory exceptions

Under certain circumstances, the statute provides protection for the third party even though he might be a stranger to the contract but can still avail of that advantage. For example-  an insurance company bears all the risks of the third party in the event of a motor vehicle accident.

Consideration can be past, present or future (types of consideration)

Past consideration

When the consideration is made prior to the promise and the promise is made subsequently, it is called past consideration or executed consideration. Under such a type, consideration induces the promise and is made after an act has been done in the past without the other party making a promise by the other party. A Promise for consideration is made for an act already done in the past so as to motivate the promisor to subsequently pay the consideration for the impugned act. For past consideration, the promisor does not expect anything in return for an act or obligation, already performed. Past consideration is more likely a moral obligation and in most cases, it is not legally required. Generally, such an obligation of past consideration cannot be enforced until a material benefit is involved for the promise of the benefit that was made after consideration. For example, if A asks B to find his lost dog, after which he will give him Rs 500, It is a valid example of past consideration or executed consideration. In the case of M/S Atma Ram Properties Pvt Ltd v. M/S Federal Motors Pvt Ltd (2004), the Supreme Court held that where a decree for eviction of the tenant has been passed. The tenant is entitled to pay the mesne profits or compensation for the use and possession of the concerned premises at the same rate at which the landlord would have released the premises to some other person if the impugned tenant had vacated. Moreover, the landlord is not bound by the contractual rate of rent until the proceeding at a superior forum on the same issue continues.

Executed consideration

Every contract is based on the performance of an act. An act forms consideration for the promise. When the consideration is constituted simultaneously with the promise, it is called an executed consideration. Executed consideration involves an act for a promise. The act stipulated exhausts the consideration so that no new act would be performed until further consideration is made. Under such contracts, the performance of one of the parties is completed, and it is only the other party that is yet to perform his part of the promise. Both acts and promises forming consideration are essential and correspond to the same transaction. It was held in the case of Mohammad Ebrahim Molla v. Commissioners (1926) that the absence of a tinder seal in a contract of executed consideration does not nullify it but where it is expressly provided, this exception does not even apply to executed consideration in a contract.

For example – A is a shopkeeper from whom B purchases some stationary and B in return pays the consideration for the same. Here, both the parties have performed their part of the obligations and thus it is executed consideration or present consideration.

Executory consideration

When parties to a contract agree to execute an agreement on a future date, in other words, when the promisor makes an offer to the promisee that would take place on a future date and the promisee in return accepts that offer and promises to pay for it at a future date, it is executive consideration. Under such contracts, the performance of the obligations by each of the parties is to be made ensuing to the making of the contract. Under an executory consideration, one promise is exchanged for another promise. In other words, the liability is outstanding on both sides. Valid promises from both sides conclude a contract. Therefore, under such contracts rights and liabilities are outstanding on both sides. It was held in the case of The Municipal Corporation of the…v. The Secretary of State for India (1932) that executory promise includes two promises which are also called mutual promises. One promise is a consideration for another, and contrarily.

For example, A promises to deliver certain goods to B on a future date, B, on the other hand, promises to pay the consideration on a future date as well.

An act, abstinence or promise by the promisee forms consideration

According to Section 2(d) of the impugned Act, in order to constitute consideration for a promise, an act, abstinence that is restraining from doing something or a promise by the promisee needs to be made. If there were no acts, abstinence, or promises there would be no consideration. In the case of Muhammad Kutty v. Dhanya (2022), the Kerala High Court held that in the present case, the question before the court is not whether the plaintiff has paid the balance scale consideration within the stipulated time or not. In the view of the court it is not necessary that the plaintiff pay the full amount; what matters is the willingness to pay the consideration. Therefore, the plaintiff was not ready and willing to perform his part of the obligations. Moreover, the defendant was also not justified in paying the cost of the suit for the specific performance of the contract. 

Consideration needs to be adequate 

While dealing with the adequacy of consideration, courts do not enquire regarding the adequacy of the consideration but about its sufficiency if the matter comes before the court of law. It is up to the consent of the parties to decide what should be the consideration after bargaining and negotiating for an agreement involving the two parties. Consideration should be a reasonable equivalent in the eyes of the law. The adequacy or inadequacy of consideration is not a legal base as per Section 25(2) of the Indian Contract Act, but where the question is regarding the free consent of the promisor in deciding the consideration the courts can take into account the adequacy of consideration if in its opinion there is a fraud, misrepresentation, conjunction etc as a factor for determining the same. In the case of Vijay Minerals Pvt ltd v. Bikash Deb (1995) the Court held that it would not enquire concerning the adequacy of consideration when the question is whether an agreement is binding or not. In the case of K Kumara Gupta v. Shri Omkareswara Swami Temple (2022), the Supreme Court held that where a public auction has taken place and the sale is effected in the favour of the highest bidder, no subsequent offers made by any third party would be taken into consideration so as to set aside the impugned sale. It could be only done if there was an inadequate consideration offered due to fraud, collusion, misrepresentation, etc, or if there was any material irregularity in conducting the public auction.

Consideration should be real

Consideration as per the Indian Contract Act of 1872 should be real and significant. In other words, consideration should be physically real and should not be deceptive or legally impossible. It was held in the case of Leelamma Ambikakumari & Anr v. Narayanan RamaKrishnan (1991), that it is always permissible to prove that consideration in a document was not a real consideration but something different.

Physically real means something that can be done practically. For example- A makes an offer to B to walk for 200 km in 10 minutes. Such an offer is unreal as it is practically not possible. 

Legally impossible means something which is prohibited by law. For example- A makes an offer to B to commit robbery in the house of C for which he would pay a consideration of Rs 10,000 to B. Here, the offence of robbery is prohibited by law.

Consideration should be legal

According to Section 23 of the Indian Contract Act of 1872, consideration should not be illegal, immoral, or opposed to public policy. It was held in the case of Rai Bahadur H P. v. Commissioner of Income Tax (1940), that the task of the courts is to examine whether the consideration is good and legal in a case.

Performance of a pre-existing duty is not consideration

The legal duty of a person cannot be regarded as a consideration in the eyes of the law. As consideration requires a person to do something more than which he is already compelled to perform. Consideration must originate from a new obligation.

Promise to pay less than the amount due

A promise to pay less than the amount due was not considered a good discharge. It was held in the famous Pinnel’s case that the debtor was bound to pay the whole amount, but if the debtor gifted a horse, hawk, robe, etc., it would be considered a good consideration. The courts, over a period of time, have accepted a number of exceptions for Pinnels’s rule:

Part-payment by a third party

When the creditor accepts part payment of the money due to him by the debtor in place of a larger sum of money, he cannot afterwards maintain an action for the same.

Compromise

When the parties enter into a compromise agreement regarding accepting a lesser amount of money instead of the larger sum due.

Payment before time

Sometimes, the payment before time in a different mode or different place than what was agreed by the parties is valid.

Promissory estoppel

When a promise is made in the future with the intention of being acted upon and is actually acted upon then it is binding and the parties cannot alter their positions afterwards. The rationale behind the doctrine of promissory estoppel is to protect the interests of the people who rely upon such promises from any injustice. The doctrine of promissory estoppel is an evacuation from the doctrine of consideration.

Consideration for charitable purposes

In exchange for a promise, one cannot rely on the promise made by the other party that he would make up for the consideration by giving them an amount for charity purposes. Such contracts are not enforceable in the eyes of the law. If the consideration depends upon the faith of the promise or some obligation is incurred by it, the agreement is enforceable. 

Exceptions when agreements without consideration are not void

As per Section 25 of the Indian Contract Act 1872, an agreement without consideration is void except under the following circumstances:

Arising out of natural love and affection – Section 25(1)

When an agreement is made without consideration that has arisen out of natural love and affection between the parties having close relations amongst them, such an agreement is valid even though it is not backed by consideration. The essentials that need to be satisfied are:

  • The parties should be in close relations with each other, that is either through blood relations or marriage. 
  • The promise should have arisen out of natural love and affection.
  • The promise should have been made in writing and registered as per the law relating to registration enforced in the territory.

It was held by the Calcutta High Court in the case of Rajlucky Dabee v Bhootnath Mookerjee (1900) that as the agreement in question did not arise out of natural love and affection, it is was an invalid agreement. In order to attract the exception under Section 25(1), the concerned agreement must be borne out of natural love and affection between close relations. In the case of Ranganayakamma & Anr v K.S.Prakash (2008), the court held that in the present case, for a partition deed to be hit by Section 25 and be void, it needs to be acknowledged in the documents that it arose out of natural love and affection. Moreover, no issues were framed, no evidence was produced, and no objections were raised at the trial stage. Therefore, the validity of the partition deed could not be questioned and was not void per se.

Past voluntary services (Section 25(2))

According to Section 2(d) of the Indian Contract Act 1872, consideration can only be advanced at the desire of the promisor. When a person voluntarily furnishes his services without any promise or desire for the same by the other party, it falls under the ambit of Section 25(2), which is an exception to the rule that an agreement without consideration is void. As per Section 25(2) of the Indian Contract Act 1872, an agreement where a promise has been made to compensate wholly or in part for the services voluntarily furnished in the past, such an agreement is valid though not supported by consideration. It must be kept in mind that the voluntary services furnished are for the promisor only and nobody else. The promisor must have been in existence and competent at the time when the past services were voluntarily rendered. Moreover, the intention of the promisor must be to compensate the promisee rather than embracing any other motive for the same. For example, A finds B’s purse, which was lost. B promises to compensate A by giving him Rs 100.

It was held in the case of Donngaramal v Shambhoo Charon Pandey (1964) that a promise was made regarding the maintenance of a woman for her past voluntary services which she rendered and a promissory note concerning it was found to have been written by the promisor. Such a promise would be a valid one.

Promise to pay time-barred debt (Section 25(3))

A promise made without consideration for a time-barred debt is not enforceable as per the law of limitation but is a valid promise as it falls under the exceptions given in Section 25(3) of the Indian Contract Act 1872. Section 25(3) permits the promisee to pay wholly or in part the time-barred debt. The promisee can only be made liable for the part for which he has promised to pay and not the whole, except where he has promised to pay the whole. The debt must be such that the creditor might have enforced it but due to the restriction imposed by the law of limitation, he could not. The debt must be due to the promisor. Moreover, it must be in writing and signed by the debtor and his agent. It should be an express promise rather than a mere acknowledgement of the same. The impugned promise should also be unconditional. It was held in the case of Tulsi Ram v Same Singh (1981) that the mere acknowledgement of an endorsement is not enough; rather it should be such that it shows that the defendant intended to pay the time-barred debt.

Recent case laws

M/S Prestige Estates Projects v. Assistant Commissioner of Income (2021)

Facts of the case

  • The assessee is a company that carries out the business of real estate development. It entered into joint agreements with 54 parties relating to the construction of the land. 
  • The particular agreement under the present case was entered between the assessee, that is, the M/S Prestige Estates Projects, and the landowners for the construction of an area of 11 acres of land for the construction of a residential area, including areas for car parking, terraces, private areas, etc.
  • The terms of the agreement, included that the assessee shall build up an area(31.66%) in return for consideration of 64.34% of land which will be transferred to it by the landowners.
  • As per the agreement, the assessee has paid an amount of Rs 21,85,00,000 as a ‘refundable security deposit’ which is interest-free. 
  • The ‘refundable security deposit’ was to be paid after 18 months from the date of the initiation of construction. The impugned sum of money can also be recovered by the sale of the constructed area of landowners. 
  • The Assessing Officer passed an order where it was held that the assessee had failed to deduct taxes as per Section 194 of the Income Tax Act 1961.
  • The Assessing Officer also held that the ‘refundable security deposit’ constitutes consideration as per Section 2(d) of the Indian Contract Act 1872, as the impugned Act does not define the term ‘consideration’ within it.
  • The assessee made an appeal against the impugned order before the tribunal.

Judgement of the court

The Income Tax Appellant Tribunal held that as ‘consideration’ is not defined under the Direct Taxes Legislation, the same meaning as given under Section 2(d) of the Indian Contract Act 1872, would be taken into consideration. The tribunal also held that the value of the constructed area that had to be transferred to the assessee was 31.66% which was the consideration for the transfer of 68.36%, of land that was accepted by the landowners. The ‘refundable security deposit’ is a part of the sale consideration for the transfer of immovable property. The tribunal held that the assessee was not in default in paying the taxes as per Section 201(1) and Section 201(1)(a) of the Income Tax Act 1961.

Mr. Raghunath M.G.v. Sri D.N. Badriprasad (2021)

Facts of the case

  • The accused and the complainant were acquaintances of each other.
  • The accused, in October 2013, requested the complainant to lend him a loan of Rs  9,00,000 to fulfil his certain immediate financial needs. 
  • The complainant lent the accused a loan of the impugned sum of money by withdrawing some cash from his bank account by means of selling his property on the promise that the accused would repay the loan within three years from the date of receiving the concerned loan.
  • Subsequent to the period of three years, the complainant approached the accused of the repayment of the relevant money, to which the accused pleaded for some more time.
  • Subsequently, the accused sent two post cheques of Rs. 4,00,000 and Rs. 5,00,000 respectively.
  • The complainant tried to encash them but it showed ‘insufficient balance’. The complainant sent a notice for the same to the accused.
  • The accused replied by contending ‘no claims’.
  • The complainant filed a complaint about the same against the accused.

Judgement

The court held that, as per Section 25 of the Indian Contract Act 1872, an agreement without consideration is void except for the exceptions provided under the impugned section. The court held that as per the deposition of the prosecution witnesses, where a suggestion was made to the accused that to repay a loan transaction, the limitation period was for three years, which the accused ignored. Another witness also deposed that the accused had provided a cheque in the favour of the complainant in 2017. These depositions lead to the conclusion that it is a time-barred debt that cannot be recovered from the complainant. The court also held that there was no express promise made to give a fresh period of limitation and it is a well-settled law that an implied promise is not considered. There was neither an acknowledgement of the debt by the accused in the favour of the complainant within the first three years of the time period, which means it is a time-barred debt, nor any express promise was made in writing. Hence, the accused was acquitted.

Conclusion

Consideration is the price of a promise made by the other party. Something such as an act, abstinence, or promise to do or abstain from doing something at the request or desire of the promisor by the promisee or any other person constitutes consideration for the promise. A valid Consideration needs to be significant, adequate, unconditional to be valid. Consideration must be a real one in the sense that it should not be impractical or legally impossible. Consideration must be moved at the desire of the promisor only and nobody. It has to be given by the promisee or any third party, whereas under English law, consideration can only be moved by the promisee. The types of consideration are past, present, and future. The law does not recognise consideration for charitable purposes and it is unenforceable in the eyes of the law. Consideration should always originate from a new obligation, as consideration from a pre-existing duty is not enforceable. An agreement without consideration is void, but there are certain exceptions incorporated under Section 25, such as promises arising out of natural love and affection, past voluntary services, promises to pay a time-barred debt, etc, under which an agreement without consideration is valid.

References

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