This article is written by Mehar Verma, a 3rd-year law student, from Jindal Global Law School, Sonipat. In this article, the author talks about the meaning and importance of the concept of consideration and doctrine of promissory estoppel under the Indian Contracts Act, 1872.
To form a contract enforceable by law, there must be a valid consideration. For example, ‘A’ asks ‘B’ to paint his wall but B refuses. In this case, neither party has any obligation as there was no consideration thus no contract. However, if ‘A’ asks ‘B’ to paint his wall and in return, he would pay Rs. 100, it gives rise to a legally enforceable contract.
Now if in the same example, when ‘A’ was asked to paint the wall, he said I will not paint your wall but I will provide you with paints and on this promise, ‘B’ started painting his wall, ‘A’ would be liable, even if there was no consideration. This is known as promissory estoppel.
What is consideration?
According to Section 2(d) of the Indian Contracts Act, 1872, when at the desire of the promisor, the promisee or any other person does or abstains from doing an act, such an act is called the consideration for the promise. Section 2(d) explicitly mentions ‘at the desire of the promisor’, thus an act, abstinence or promise at the desire of the third party is not covered. However, the consideration from the promisee need not benefit the promisor and can move from the promisee as well as a third party. For example, ‘Y’ asks Mr. Jain to purchase certain books from Jaipur and in return, you would pay Mr. Jain. As soon as Mr. Jain accepts the offer, there will be a binding contract on both parties. In this example two promises that are taking place:
- Mr. Jain (promiser) promises to purchase the books from Jaipur for ‘Y’ (promisee);
- ‘Y’ (promisor) promise to pay Mr. Jain (promisee).
Further, a consideration given may be executory consideration, past consideration or executed consideration:
- Executory consideration: When consideration consists of promises to be fulfilled in the future, each promise is the consideration for the other. These promises are called reciprocal promises. Both sides have rights and obligations in such instances. Consideration is termed as executory. For example, Mr. Sharma agrees to sell his car to Mr. Gupta on April 15th, 2017. They negotiate the price of the car and settle upon a purchase price of Rs.4,00,000. Mr. Sharma says he will deliver the car to Mr. Gupta’s house on April 15th at 11 am and Mr. Gupta says he will give him a cheque for Rs. 4,00,000 at such time.
- Past Consideration: According to Section 25(2) of the Indian Contracts Act, 1872, past considerations are valid. In India, when a person has already voluntarily done something for the promisor, it amounts to past consideration.
In Webb v. McGowin, the appellant saved the life of McGowin by preventing a block from falling on his head and in doing so, he injured himself. After the incident, McGowin promised to provide maintenance to the appellant. The maintenance money was received only for some years and then the appellant filed a suit claiming maintenance. The court held that even though there was no original duty to pay on the promisor, the subsequent promise to pay for the voluntary act done for the benefit of the promisor would amount to consider and thus the appellant is entitled to claim maintenance
- Executed consideration: Executed consideration exists when an act is performed in return for a promise, the promise is unilateral. The liability exists on one side and not on both sides. For example, Mrs. Anand advertises that whoever finds her lost dog will be rewarded with Rs. 25,000. When Ram finds the dog and goes to Mrs. Anand, the liability only remains on the part of Mrs. Anand. The act of Ram in finding the dog and returning it to Mrs. Anand constitutes not only his acceptance but also his consideration which he has already performed.
Requirements of consideration
From the understanding of Section 2(d) of the Indian Contracts Act, 1872, the following features are essential to constitute a valid consideration:
Consideration must move at the desire of the promisor
If an act is done at the desire of a third party or voluntarily, then there is no valid consideration. Consideration must always move at the desire of the promisor, as there is privity to consideration, in India. For example, if ‘A’ sees ‘B’ drowning and out of his goodwill he saves ‘B’, he cannot later claim any reward or compensation for his effort, as the act was not done at the desire of ‘B’ (promisor).
Consideration may move from the promisee to any other person
As per Section 2(d) of the Act, consideration can be made to a stranger in India. However, it is important to remember that there can be a stranger to consideration but not a stranger to the contract. For example, ‘A’ was given a car by ‘X’, on the condition that he would pay installments to B. However, ‘A’ failed to make payments and argued that as ‘B’ was not entitled to compensation. However, as Section 2(d) provides that ‘promisee or any other person’, ‘B’ is allowed to maintain his suit for recovery.
Must have value in the eyes of the law
According to explanation 2 of Section 25, the inadequacy of consideration, does not make a contract void and thus the court does not question the adequacy of the consideration made. However, the court ensures that the consideration was given with free consent and there was no fraud of any kind.
Should be beyond the promisor’s existing obligation
If the consideration given does not add or is not different from the already existing obligation of the promisor, then it is not a good consideration. For example, ‘A’ is obligated by law to appear before the court and ‘B’ gives him a consideration to appear as a witness in the same case. As the consideration given is not beyond the promisor’s existing obligation, it will not be a valid consideration for a promise.
Cannot be unlawful
The consideration made should not be for unlawful or illegal purposes. No suit for recovery can be claimed when the consideration is against the law. For instance, ‘A’ promised to give ‘B’, a certain amount of money for kidnapping ‘C’. If A fails to fulfill his promise, then ‘B’ cannot claim any remedy in any court of law as the purpose of the contract was illegal.
For a contract to be effective there must be an offer, acceptance, and consideration. Now consider the following example, ‘A’ while shopping with her uncle ‘B’ comes across a jewelry store. Her uncle seeing her excitement promises her that he will pay her next week and she can buy whatever she wants. Relying on her uncle’s promise, ‘A’ buys a diamond ring however, later ‘B’ refuses to pay. ‘A’ is very upset and angry, but she does not have any option as she feels the court would say no consideration means no contract and thus she has no remedy. The situation is unfair as ‘A’ relied on the promise made by ‘B’, which caused her injury and thus she goes to her advocate. The advocate explains to ‘A’ that she does not have to be upset as she can use the doctrine of Promissory Estoppel.
The principle of Promissory Estoppel states that when one party by his words or conduct makes a clear and unequivocal promise to another, with the intention to make a legal relationship in future, and with the intention or knowledge that the other party would act upon such a promise and it is in fact acted upon by the other party, then the party making the promise can’t go back and it is liable to act upon the promise made. In other words, Promissory Estoppel imposes liability on the person making promise even when the promise is made without consideration. Section 115 of the Indian Evidence Act, 1872 defines the principle of promissory estoppel as “ When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.” Thus to apply promissory estoppel, there must be:
- A promise;
- A reasonable expectation of reliance on that promise and;
- An injury resulting due to reliance on such a promise.
In Central London Property Trust v High Trees House Ltd, the court laid down that promises made with the knowledge of the promisor that such promises are going to be relied upon, must be honored and such promises are to be enforced even though there is no consideration from the promisee.
Acts did at the promisor’s request
An act done at the promisor’s desire even when it is of no personal significance to the promisor is considered a good consideration. In Kedarnath Bhattacharji v. Gorie Mohammad, the plaintiff entered into an agreement to build a city hall in Howrah, provided sufficient subscription could be collected for the purpose of building the hall. The defendant was one of the subscribers, and on the faith of such a subscription, the plaintiff entered into a contract with a contractor for building the hall. The defendant failed to pay the amount and argued that as there was no consideration for his promise, he shall not be liable. The court held that the defendant would be liable as he knew the purpose for which the money was subscribed and it was on his promise to subscribe that the plaintiff entered into a contract with the contractors. Once a promise to pay for the performance of an act is made, it cannot be taken back once the promisee entered performance.
The promise of charitable nature
When the promise is of a charitable nature, ie. no request is made by the promisor to the promisee, to do an act, then such a promise would be bare promise without consideration. In Doraswami Iyer v Arunachala Ayyar, more money was required for reparation of a temple which was already in progress and thus subscriptions were called. The defendant put himself in the subscriber list but later on refused to pay and thus a suit for specific performance was filed by the plaintiff. The court dismissed the suit and it was held that in order for consideration to take place there must have been some request by the promisor to the promisee to do something in consideration of the promised subscription. As in this case, there was no bargain between the parties and the promisee did not act upon on something more than a bare promise, there is no consideration.
A contract where there is a promise from one side only and it intends to induce some action from the other party is called a unilateral contract. For example, if A and B enter into a contract wherein A offers to pay Rs. 1000 to B, if he puts his car into the garage. B has no legal obligation to put the car into the garage, but if he does so, A has to pay Rs. 1000The promise is not bound to act, but if he acts, he can hold the promisor to his promise and thus there is no consideration if the promisee has done nothing.
Revocation of unilateral promises
A unilateral promise can be revoked before the promisee acts upon the promise. However, it cannot be revoked after the promisee in some manner or other has embarked towards the promise made The decision laid down in Kedarnath Bhattacharji v. Gorie Mahomed, states that doing so is impossible as in this case the defendant was held liable as soon the contract for construction hall was entered into.
If the promisor is at the liberty to revoke at any stage it would be unfair to the promisee, on the other hand, if he has no such liberty it is unfair to the promisor as the promisee may frustrate the contract at any point.
Promissory estoppel and government agencies
The government agencies are immune from the operation of promissory estoppel. In Delhi Cloth and General Mills Ltd v Union of India, it was held that the only indispensable requirement for applying the doctrine of promissory estoppel is that the party asserting the estoppel relied upon the representation made to them and thereby altered their position.
Estoppel of licensee
While determining the estoppel of licensee, unreasonableness and the interest of the public is to be considered in the totality of the circumstances. In Lekh Raj v State of Rajasthan, the court estopped an owner of the liquor license from saying rights given to the government, like the power to vary issue price of the liquor were unreasonable.
A consideration to be valid under Section 2(d) of the Indian Contracts Act, must move at the desire of the promisor, must have value in the eyes of law, should be beyond the promisor’s existing obligation, and cannot be unlawful. The consideration can be made in the past, present or future. Acts have done at the request of the promisor, even when there is no personal benefit to the promisor are considered a good consideration and are enforceable by law. The doctrine of promissory estoppel makes the person liable for his representation or conduct, relying on which the other party acted.
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