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Consideration in Business Law

January 13, 2024

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This article has been written by Dhriti Thingalaya. It discusses in detail the meaning, importance, and elements of consideration in business law. Its significance and relevant judicial precedents are the same.

Table of Contents

Introduction

According to Section 11 of the Indian Contract Act, 1872 (hereinafter referred to as “the Act”):- Every person who has attained the age of majority, is of sound mind, is prohibited from entering into a contract needs to have attained the legal age as per the law of the land. He or she should be mentally sound and capable of making decisions for entering into a contract and not be prohibited by any law from entering into a contract. In our lives, we have entered into contracts and agreements with each other at some point in time or another. However, the nature of these agreements may vary from a simple borrowing of math notes in return for lending science notes to something complex like the sale of a valuable property like a car, flat, gold, or machinery for the setting up of a factory or any other asset, either to an individual or a corporation.

The term ‘contract’ has a very wide ambit and can include complex commercial agreements as well as simpler agreements. However, the law does not recognise and protect all the possible agreements between the parties. For any agreement to become a contract, it needs to fulfil certain conditions laid down in the Act, to be called a contract that is enforceable by law. One such essential condition of a contract is ‘Lawful Consideration’ which refers to any tangible or intangible thing that has some value in the eyes of law. Consideration simply means something in exchange for something, i.e., ‘Quid pro Quo’.

Consideration being the foundation of every valid contract helps in ensuring a fair exchange of value between the parties involved. It prevents gratuitous promises backed by some reciprocal obligation, and agreements with consideration are further strengthened by legal formality, demonstrating the parties intent to be bound by the terms of the agreement. Lawful consideration also helps in preventing unfair treatment by allowing for flexibility in negotiations and ensuring that one party doesn’t benefit unfairly at the expense of the other. Let us dive deep into the details of the necessity of consideration in business law.

What is consideration in Business Law

Consideration in business law is something of value being exchanged between the parties. So, for a promise to be enforceable, there has to be some form of benefit or gain involved on both sides. In recent times, the basic requirement of consideration is that one party to an agreement must not be bound by it if the other party is not similarly bound by the contract. The parties to a contract, whether oral or written, cannot enforce it if there is no consideration. The concept of consideration is an essential element in forming a contract, requiring the parties to give something in exchange for something as the price of their respective promises.

Section 2(d) of the Act defines consideration as an Act or abstinence, which is to be a consideration for the promise, that must be done at the desire of the promisor and that the promisee or any other person should do it; and lastly, that the act or abstinence may have been executed is in the process of being done or maybe still executory, that is to say, to be performed in the future.

Illustration

Company A agrees to buy raw materials from Supplier B by paying Rs. 50000; here A’s promise to buy the required raw material for a certain amount from B is a valid consideration for A’s and B’s promise to sell the required raw materials in exchange for the value of the amount to be paid by A.

Types of consideration in Business Law

Past consideration in Business Law

This means that voluntary action is already done by an individual, and the party to whom such voluntary help or action is directed makes a promise to compensate another in return for what the latter had done for the promisor in the past; such promise is said to be past consideration.
Past consideration is more of a moral responsibility that an individual executes without any expectation in return. It is restitution made by the promisor, who has received a benefit in the past and tries to compensate it later on, forming a good ground for valid consideration.

Illustration

P is a legal consultant who provides legal advice and drafts a letter and an affidavit for Q, helping him with his legal issues. P commits this act purely with the intention to offer help to his dearest friend; however, Q promises P that he shall pay the due amount within a week. Despite the fact that P was not lawfully needed to help Q, he felt morally committed, and his satisfaction in itself was a reward of the ethical duty that he performed. This constitutes a valid contract, as the work done by P and Q assuring him to compensate for his action is of the nature of past consideration.

Note: Under English Law, past consideration is no consideration. But under Indian Law past consideration is a good consideration because of the use of the words “has done or abstained from doing” in the definition of consideration.

Past voluntary service

Past voluntary service means to make a promise to compensate wholly or partially an individual who has already helped the promisor in the past by doing something voluntarily that benefited or solved the problem of the promisor; this constitutes a valid and enforceable consideration. As per Section 25(2), an agreement without consideration is void, unless it is a promise to compensate, wholly or in part, to the person who has already at his own will done something for the promisor or something which the promisor is compellable to do.

Illustration: A child is caught in a fire, and a passerby B immediately rescues that child by putting his own life at stake. Later on, the child’s parents decide to reward the person for his bravery in some form or another. This is covered under Section 25(2) of the Indian Contract Act.

Past service at request

This concept emphasises the fact that when a request is made by somebody to do something for you and, in return, you provide them with monetary charges at a later stage, there will be a binding agreement. However, there is no clear instruction on whether the person needs to be paid in case the request is made, and there is no upfront promise to pay.

Present (executed) consideration in Business Law

Executed consideration refers to those promises or agreements that have been completed in their entirety in response to the promise made. Also, there is a very clear distinction between past considerations and present considerations. In past consideration, voluntary action is committed without any promise, and in present consideration, an act is done in response to a positive promise.

Future (executive) consideration in Business Law

Executory consideration refers to future consideration, which will be carried out later since the promisor is making an offer for a date after that and if the promisee is willing to perform the contract after the later date. The promise here is not yet complete, and the contract is not fully executed.

Illustration: Suppose A decides to buy makeup products from an e-commerce website and pay for the charges incurred at the time of delivery, but the product has not yet been delivered. In that case, mutual promises made to each other are considered for future consideration.

Essential elements of consideration in Business Law

Consideration must proceed at the desire of the promisor

If an act or abstinence is done by an individual voluntarily without the desire or request of the promisor, such an act shall not come under the definition of consideration. Similarly, if an act or abstinence is done at the instance of any third party other than the promisor, then such an act shall not be a good consideration.

Illustration

A sees that B has fallen into a huge pit and decides to rescue him. Here, A cannot demand payment or any reward for his act as he did it out of his own moral and ethical obligation and not with an expectation of getting any reward, and B never requested or asked for help from A, so it is not considered as a good consideration.

Case law

In the case of Durga Prasad v. Baldeo (1879), Durga Prasad chose to construct several shops following the collector’s direction. Those who subsequently occupied these shops committed to paying Durga Prasad a commission based on their sales but failed to fulfil this promise. Hence, Durga Prasad decided to take legal action against the shopkeeper. The Allahabad High Court ruled the consideration to be invalid This was because Durga Prasad had constructed the shops based on the collectors’ order and not at the request of the shopkeepers.
It is important to note, however, that it is not mandatory that the promisor has to benefit from the act or abstinence; it is only necessary that it be done at his desire. This was held in the case of Kedarnath Bhattacharji v. Gorie Mahomed (1886)

Consideration may proceed from the promisee to any other person

Another essential element for consideration is that an act or abstinence that will then lead to forming a valid consideration for a contract can be given not only by the promisee but by any other person as well. This means that as long as a promise carries a consideration, even the third party can give the consideration as long as it fulfils the other essentials of consideration. This is a concept of ‘consideration from the third party’.

Illustration

If A asks for a loan from the bank and assures to repay the loan as per the due date, B acts as the guarantor of the loan. Then the consideration for the loan comes not only from the borrower (A) but also from the third party (B), constituting a valid consideration and making the contract more robust, as B’s act of being the guarantor here adds to the level of security.

Case law

In this case, an old lady owned some estate that she wanted to transfer to her daughter (the respondent, Venkata Ramayya Garu) before her death. The transfer was to be made by means of a ‘Gift Deed’ on the condition that Ramayya would pay an amount of Rs 653/- every year to the sister (the appellant, Venkata Chinnaya Rau) of the old lady. The elderly lady asked her daughter to come to her home and convert her final wish before passing away. The daughter (Ramayya) agreed to the condition and committed to fulfilling the annuity payments to her aunt (Chinnaya). Ramayya and Chinnaya strengthened their contract through mutual consent and confirmation, making it a valid contract.

Facts of the Case

This principle was held in the case of Chinnaya v. Ramayya, ILR (1876-82). In this case, A gave property to her daughter in the form of a gift deed with the explicit instruction that the daughter would give her brother an annuity.

This daughter agreed to give the annuity amount to her uncle and sign the written agreement on the very same day. However, the daughter chose not to keep her word, which resulted in the brother filing a lawsuit to get back his money. The sister, the defendant, contended that her brother lacked the right to sue as there was no consideration from his side and there was no direct involvement in the agreement because he was not a party to the consideration.

Held

It was ruled that consideration does not necessarily have to come directly from the promisee The brother was therefore permitted to proceed with the lawsuit.

Similarly, in the case of S. Pre Malatha v. Mysore Minerals Ltd. and Anr. (1992), it was held that Section 2(a) of the Indian Contract Act 1872 includes the words ‘promisee or any other person’, which implies that even a third party or a stranger to the contract can sue. The Karnataka High Court in the present case also emphasised that when a statute specifies who can provide consideration, no precedent is required for the same.

Consideration is an act, abstinence, forbearance or detriment

The legal term consideration is often believed to be value in exchange for money, but the term consideration is not just restricted to that. According to the Act, consideration can be in the form of an act, abstinence, forbearance, or detriment.

Consideration as an Act

An act is a moral or ethical duty that one performs without any legal obligation to do something.

Illustration

If S sees D drowning in the water without giving it a second thought, S jumps into the water to save D from drowning. Here, neither did D request S to help nor was it a legal obligation on the part of S to do such a dangerous act, but it was out of humanity that he did it.

Consideration as an abstinence

To constitute abstinence, one must refrain or promise to refrain from doing something that he or she has a legal right to do.

Illustration

Tanvi owns a unique vintage car, which is highly valuable. Rishabh is eager to buy that car. Tanvi abstains from selling the car to anyone else for a specified time, and in return, Rishabh promises her to pay a premium amount. Here, Tanvi’s abstinence from selling the cars to others is the consideration for Rishabh’s promise to pay a premium

Consideration as forbearance

Forbearance means giving up one’s legal right or a claim to perform such an act that he is entitled to do.

Illustration

Nisha owes money to her friend Riya but is facing financial difficulties, so Riya agrees not to ask for repayment of the loan for one year, and in return, Nisha helps Riya with her computer issues. Here, Riya’s forbearance (delay in seeking repayment) acts as a consideration for Nisha’s promise to provide technical assistance.

Consideration as detriment

A detriment suffered by the promisee or the third party, whether actual or prospective, constitutes a good consideration

Illustration

Ankita needs her car repaired and asks her friend Sushant, who is a mechanic, to do the same. She promises to pay his fees after the work is done. Now Sushant invests his time and resources in fixing the car, so here time, resources, and efforts spent act as the detriment and serve as a valid consideration for Ankita’s promise to pay for the repair.

Note: The promisor doesn’t need to receive any benefit as long as the promisee or someone else suffers any sort of detriment.

In all these situations, consideration takes 4 different forms: an act, abstinence, forbearance or deteriment. But as long as it fulfils the essential condition for a valid consideration, i.e., something of value being exchanged in return for something, it forms a valid contract between the parties

The consideration should be mutual

Consideration means something for something, constituting a reciprocal relationship between the two parties, the offeror and offeree, where both parties act or abstain from doing something that results in the benefit of the opposite party. This results in the establishment of a mutual relationship between both parties.

Illustration

Riva promises to tutor Zaid in dancing for six months, and in return, Zaid agrees to teach Riva to play the guitar. Here, the parties are providing something of value to each other, creating a mutual exchange of consideration.

The consideration must be real

Consideration must be real, which means it must be in the form of a right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other. Thus, consideration is essentially the price of a promise.

Illustration

Beena promises to sell one of her authentic pieces of art to Janvi, and in return, Janvi pays her Rs. 2000. Here the consideration is real, as Beena is giving up something valuable and tangible (her authentic painting) and Janvi is providing her with a monetary payment

The consideration must have some value in the eyes of law

Consideration must have some value in the eyes of the law. It is not necessary for the price of the consideration to be proportional to the market value, but it should have some tangible value. However, the courts cannot assume the authority to determine what would be an appropriate consideration for the parties because the adequacy of consideration is up to the parties to decide.

Illustration

Shivani promises to pay Jay Rs. 10,000 if he quits smoking until he attains the legal age. Jay agrees to this offer and quits smoking and drinking. Jay’s act of forbearance is a legal detriment and has value in the eyes of Law. Shivani’s promise to pay Jay a certain amount constitutes a valuable consideration.

Case law

In the case of Chidamabara Iyer v. P.S. Renga Iyer (1966) the Supreme Court stated that consideration “shall be ‘something’ which not only the parties regard but the law can also regard as having some value.”

When is consideration invalid in a contract

Performance of pre-existing duty is not a consideration

If an individual is already under a legal obligation to do something, then performance or execution of that pre-existing duty is not a relevant consideration for a new contract. This implies that if a person is already bound by a contract or a legal obligation, performing that duty cannot be used as a consideration for a new contract.

Promise to pay less than the amount due

If a person agrees to accept payment less than the amount due to him, such a promise is not a valid consideration. This implies that if a person had earlier agreed upon paying a certain amount but later, due to some reason, paid a lesser amount in settlement, that itself would not be considered a valid consideration for a contract.

Consideration must be real

Consideration between the two parties must be real; it should not be physically or legally impossible to carry out. If the consideration is not considered to be real and comes with a level of uncertainty, then it would be impossible to carry it out. Following are the instances where consideration will be unreal and hence void in the eyes of the law.

Physical impossibility

Physical consideration refers to those promises or acts that, due to their very nature, cannot be carried out. This type of consideration is not enforceable here because it involves a practically and physically impossible task. For example, if A promises to sell a car to B in exchange for a magic carpet that can fly, this is a physically impossible consideration, according to our current understanding of physics and reality. There is no such thing as a magic carpet that can fly without any external aid.

Legal impossibility

A promise to do an act that is forbidden by the law or is of such nature as to go against the rules and regulations. For example, if a person asks you to murder his enemy and then, as a consideration, provides you with 5 lakh rupees, this will constitute an unlawful consideration.

Uncertain consideration

Consideration must be certain; if it is not, then it would lead to an ambiguous situation, and uncertain consideration will be held invalid as it becomes uncertain as to what exactly the trade-off is between the parties to form a valid contract. For example, if you go to a shop and ask the price of a dress whose price tag is missing and the shopkeeper is unsure about the price and says that it might be 2000 or 4000, this will be called an uncertain consideration because there is no certain price of the dress that you can surely pay to the shopkeeper.

Illusionary consideration

Illusionary consideration, as the name suggests, is something that does not have any value in the eyes of the law because it is a promise to give something that does not impose a real obligation.

Unlawful consideration

According to Section 10, consideration must be lawful, without which an agreement is void. Section 23 states that a consideration is unlawful if it is:

Forbidden by law
Or is it of such nature that, if allowed, it would defeat the law of the country,
If it is fraudulent,
It involves injury to the property or person of the other
If Courts regard it as immoral or opposed to public policy

In all these cases, the consideration or object of an agreement is said to be unlawful. Every agreement in which an object or consideration is said to be unlawful is considered void.

Case law

In the case of Fisher v. Bridges (1854), the defendant agreed to buy the land from the plaintiff. According to Bridges, before the official agreement was made, the plaintiff knew that the land would be exposed to a sale illegally through a lottery, which goes against the law. Even though part of the purchase money was unpaid and the defendant made a covenant for payment, the Court ruled against that enforcing promise. The Court found that a promise was made to secure payment of the part of the purchase money for the land that was involved in an illegal agreement. Since the main deal was tainted with legality, the Court decided not to enforce the promise to pay, considering it security because it originated from and was connected to an illegal agreement.

Section 24 of ICA

Section 24 of the Act states that the agreement is considered void if the considerations or the objects are unlawful. There may be cases where one part of the consideration is lawful and the other is not. In such cases, the entire agreement is void if the unlawful part cannot be separated from the lawful part.

A promises to work for B, who runs both illegal and legal businesses, for a sum of Rs. 4,000 per month, and B agrees to pay this amount to A. The business can be separated from illegal business; the part of the salary pertaining to legal business is lawful consideration. In the above case, if legal and illegal businesses cannot be separated, the whole salary of A will constitute unlawful consideration.

Case law

In Alice Mary Hill v. William Clarke, a woman agreed to live with a man in adultery in lieu of a monthly consideration of Rs. 50. The agreement was declared void as the lawful part cannot be separated from the unlawful part.

Exceptions and limitations to consideration requirement in Business contracts

Promissory Estoppel

The doctrine of promissory estoppel is rooted in equity, aiming to prevent injustice between parties. The true principle of promissory estoppel is to avoid injustice to the party. It operates on the principle that if one party makes an unequivocal promise to another intending for it to create legal relations or affect future legal dealings and knowing or intending that the promise will be acted upon by the other party, the promisor cannot go back out of the promise once it becomes binding. In simple terms, it involves a unilateral promise made by one party without receiving a reciprocal commitment from the other party. The promisee is not obligated to act upon the promise, but if they do, the promisor is bound by their original commitment. The act of the promisee becomes both an acceptance of the promise and a form of consideration. For the doctrine to apply, certain conditions must be fulfilled, including a clear promise from one party, the intention to create legal relations, and the knowledge that the other party would act in reliance on the promise. Essentially, promissory estoppel holds parties accountable for their promises when it would be unjust allow them to go back on their words. The following are essential conditions for promissory estoppel:

That the promise was intended to affect the legal relationship of the parties and to be acted upon accordingly
That it is one on which the other side has acted to its prejudice

Existing legal obligations

When a party is already under a pre-existing legal obligation, that act cannot be used as a consideration for a new contract. This means that if you’re already legally bound to do something, it is not counted as a valid consideration. However, if a party promises to go above and beyond what you are obligated to do, this might constitute a sufficient consideration. This fresh consideration should be offered freely without any threat.

Illustration

If a contractor agrees to complete a construction project for a fixed amount according to the industry standard and later on an additional payment, this will not be enforceable as there is no new consideration. Nevertheless, if the contractor agrees to complete additional work beyond their original obligation, this consideration of providing an additional payment is enforceable.

Nominal considerations

In certain circumstances, a token or nominal consideration may be deemed sufficient to support a contract. This implies that a value of exchange that is very minimal or of little value can still be considered valid consideration because the adequacy of consideration depends on the parties to the contract. For example, if a painter sells his top-notch painting for just Rs. 100, it will still be considered a valid contract because there is mutual consideration between both parties.

Statutory exceptions

Certain statutory obligations may modify the essential requirements of consideration. For instance, charitable pledges and donations are often enforceable without consideration. Section 25 of this Act recognises this special concept. As long as the consideration fulfils the given purpose or criteria of a charity under the law.

Part-payment by the third party

In the Indian Contract Act, 1872, there’s a specific exception to the usual requirement of consideration. This exception applies when a third party makes a partial payment on behalf of the debtor. If the creditor accepts this partial payment, it is viewed as a valid consideration for the creditor’s promise to release the debtor from the obligation to pay the remaining debt This exception is based on the idea of “benefit conferred upon a third party,” wherein the creditor gains an advantage through partial payment made by the third party as consideration for the promise to alleviate the debtor’s obligation.

Payment before time

Another exception to the general rule of consideration is found in cases where a debtor makes a payment to the creditor before the debt’s due date. In such situations, if a debtor willingly settles a debt before it is officially due, the creditor has no authority to any form of consideration. The debtor can rightfully consider the debt discharged. Once the creditor accepts this early payment, the debtor is entitled to claim a valid discharge of the debt, and they are not allowed to demand any additional payments related to that particular debt.

Section 25 of the Act

Section 25 of the Act states that an agreement to which the consideration of the promisor is freely given without any threat or influence is not void merely because the consideration lacks the adequate value of exchange, but the inadequacy of the consideration may be taken into account in determining whether consent or approval was given by the promisor in making the consideration.

Case law

In Tweddle v. Atkinson (1861), the father of the groom and the father of the bride agreed that each of them shall pay a sum of money to the boy, and after marriage, the boy shall have full power to sue for such a sum. After the deaths of both contracting parties, the husband sued the executors of the wife’s father upon the execution of the agreement, but the action was held not to be maintainable because the husband was not a party to the contract.

Exception to Section 25

Section 25(1): Promise made on account of love and affection

In this kind of consideration, the parties to the contract are in close relation to each other, which means that the agreement is based on love and affection. Here, the contract is enforceable even without consideration because the parties are related by blood or marriage.

Section 25(2): Promise to compensate for voluntary services

In such a contract, an agreement is enforced based on the consideration of compensation, wherein a person has already done something for the promisor, something that the promisor was compliant to do. Such an act should be done voluntarily without having any knowledge of the promisor and should be solely done for the promisor.

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

The promise of a time-barred debt is enforceable without any additional consideration if the debtor makes a promise to pay it. The time-barred debt is signed by the debtor, and the creditor may enforce the payment under the limitations of the suit.

Complete gifts

The term complete gifts has not been exclusively given under the Indian Contract Act However, the concept of certain types of “gifts,” wherein parties are involved with each other without making any consideration, is valid. For a gift to be legally effective, it often needs the following elements:

The donor must have a clear intention to make a gift.
The gift must be delivered to the donee, and the donee must accept the gift.

Formation of an agency

There is no need for consideration in the creation of any agency.

Privity of consideration in Business Law

The doctrine of privity of consideration states that a person is not a party to the contract but rather is a stranger to the contract, and according to the Indian Contract Act, a contract can be enforced against the parties involved in the agreement. Hence, neither a stranger can sue nor sue upon it. However, if the party to the contract is a stranger to the consideration, it does not affect its legal rights Another implication of this is that according to the Indian Contract Act, a contract is said to be valid when the consideration may move from the promisee to any other person. In this case, when the consideration moves from a person other than the promisee, the promisee can be categorised as a stranger to the consideration. The privity of consideration does not confer any right on the party providing consideration to enforce the contract at the court of law.

Exceptions to the Doctrine of Privity of Consideration

Trust

Even though an individual is not a party to the contract, a trust was created by the promisor, and thus the beneficiary can enforce the rights given to him under the trust.

Family settlement

When an arrangement or agreement is made in connection to marriage, partition, or any other family arrangement, and if the provision is made for the benefit of a third person. Being the beneficiary of it, he or she is entitled to sue if her rights are being infringed.

Case law

On the partition of a joint Hindu family property, an agreement was entered among its male members to make provision for the marriage expenses of a female member. It was held in this case that the female member was entitled to sue the parties to the partition deed to enforce the provision in her favour – Sunder Raja Aiyengar v. Laxmi Ammal, 1915, 38 Mad. 788.

Two brothers on a partition of the family property agreed to pay Rs. 300 in equal share to their mother for maintenance. It was held that the mother, though a stranger, could enforce the provision in her favour even though she is a stranger to contract – Shuppu Ammal v.Subramanian (1910).

Promissory estoppel

The above-mentioned doctrine holds that both parties must be treated fairly and equally. To be more precise, under this doctrine, if a person makes a promise to the other and the person incurs a detriment relying upon the promise, in such a scenario, the promisor is estopped from going back on his promise to the extent the promise has incurred a detriment based on such a promise. However, courts at times, will enforce gratuitous promises.

Agency

When contracts are entered into by an agent, the principal can be held liable for the actions of his agent even if the principal is not in direct contact with the party.

Practical application of consideration in contracts

In the business world, consideration is fundamental to commercial transactions. It helps to establish a framework for fair business dealings and protects parties from arbitrary changes or challenges. To safeguard the interests of all the parties involved in the contract and avoid potential disputes and legal issues, careful drafting and negotiation of consideration clauses are necessary.

Drafting and negotiating consideration clauses

While drafting or negotiating consideration for a contract, all the essential ingredients of a valid consideration must be kept in mind and framed accordingly. It must ensure that the terms of the contract are clear and unequivocal and leave no space for ambiguity. Failure to do so may lead to disputes in the future.

Identify the consideration

Understanding the intention and purpose of the parties while framing the contract is of utmost importance. Specifying the nature of the exchange of value, i.e., either goods and services, monetary payment, or any other valid promise mutually benefitting the parties to the contract. This helps to avoid ambiguities and misunderstandings.

Ensure sufficient consideration

While framing the consideration, both parties must ensure that the consideration has some legal value, and more than being sufficient, the value of the exchange should be adequate. It is up to the parties to ensure whether the consideration is fair or not.

Avoid past consideration

Past considerations are generally not considered valid or good consideration. Be mindful enough to ensure that any act or promise relied upon as consideration is either present or future, rather than an already existing legal obligation or previously performed promise.

Ensure the legality of the consideration

The consideration agreed upon by both parties must be legal and have some value in the eyes of the law. Promising something illegal, unlawful or invalid will not serve as a fresh consideration

Be acquainted with the parties involved

This principle must be paid heed in case of multiparty agreements or contracts, be careful and aware of who provides obligations to whom. Each party’s obligation must be clear and very well defined to constitute a legally valid and enforceable consideration in a court of law.

Appropriate drafting

Be specific and avoid vague and ambiguous language while drafting a consideration clause. In cases of complex or unique consideration arrangements, try consulting a legal expert while drafting such consideration clauses accurately and in a precise manner.

Negotiation process

Both parties must be open to discussions regarding the terms of the agreement; a clear mutual understanding of the terms of consideration can help avoid disputes in the future.

Relevance of consideration in Business Law

Equitable exchange of value

Consideration ensures a fair exchange of value between the parties involved. This reflects the principle that both parties need to mutually benefit from the contract and that both sides should give and receive something in return, which would make the consideration valid and the contract more robust.

Prevents unfair treatment

Consideration prevents unjust enrichment, ensuring that one party doesn’t benefit unfairly at the expense of the other. As we know, consideration attempts to mutually benefit both parties. In a real sense, this implies that consideration would only promote fair and just treatment among the parties involved in the contract.

Prevents gratuitous promises

Consideration helps prevent gratuitous promises or one-sided commitments. It is backed by some form of legal obligation on both parties. If the consideration is valid and has fulfilled all the essential elements, then it would further strengthen the trust between the parties regarding the value that is going to be exchanged.

Flexibility in negotiations

Consideration allows for flexibility in negotiations. Both party members can form considerations depending upon the sufficiency and adequacy of the value of a product to be exchanged between the parties.

Legal formality

Consideration in a contract makes it enforceable because there exists a legal obligation on the part of both parties. It also helps in understanding the parties’ intent on the terms of the agreement and how strongly both parties agree to the terms of the contract.

Key highlights for consideration in valid contracts

The importance of clearly stating considerations in contractual agreements

Being clear in business contracts and agreements is a crucial criterion for understanding the considerations involved. Consideration is a value or a benefit that each party receives on entering into the contract. It is an essential element in making the contract legally enforceable, and thus stating clearly the considerations would make it easier for the parties to know what they are giving and receiving in return. If the terms of the agreement are not clear, ambiguity, confusion, disputes, and potential legal issues may arise. Clearly stating consideration would help prevent misunderstandings and ensure that both parties are aware of their obligations.

Tips

To ensure that considerations are clear enough to avoid potential disputes in contractual agreements:

Be precise

Being specific about the consideration, which might be in various forms, whether it be money or the nature of goods or services, and clearly defining things for both parties may avoid any misinterpretation.

Use simple and clear language

Using vague or ambiguous language could only lead to false impressions and misconceptions. Hence, it is recommended to use concise language to accurately convey their feelings

Consider future contingencies

Anticipate unforeseen circumstances that might be a potential threat to the consideration and address such contingencies to avoid any disputes.

Case law

In Hamer v. Sidway (1891), an uncle promised his nephew a sum of money if he refrained from drinking, smoking, and gambling until the age of 21. The nephew complied with the conditions, but the uncle later refused to pay. The Court upheld the agreement, emphasising that the nephew’s refraining from vices constitutes a valid consideration. The clear statement of consideration in the contract played a pivotal role in enforcing the agreement.

Requirement of adequate and sufficient contractual agreements

Adequate and sufficient consideration is necessary to enforce legally enforceable contracts.

Adequate consideration implies that each party must provide something of value to each other. This means that the consideration exchanged must be fair and reasonable
Sufficient consideration refers to the requirement that each party must provide something valuable in a contract that is not only adequate but also legally sufficient.

Tips

Consider non-monetary exchanges

Consideration can be of any form; it doesn’t always have to be monetary; it can be like goods or services or even forbearance from doing something. However, when no monetary consideration is involved, it is essential to ensure that the value is still fair and reasonable.

Avoid nominal consideration

Nominal consideration means a small-value item given as consideration. Courts are often sceptical of contracts with nominal considerations; this indicates a lack of interest and a weak intent toward the contract. It instead needs to provide consideration according to the value that is being exchanged.

Case law

One of the notable cases that highlights the significance of consideration is Carlill v. Carbolic Smoke Ball Co. (1893). In this case, the Carbolic Smoke Ball Company advertised that if anyone contracted influenza after using their product as directed, they would pay 100 pounds. Mrs. Carlill purchased and used the smoke ball but still contracted influenza. When she claimed the reward, the company argued that it was not a legally binding contract as there was no consideration. However, the Court ruled in favour of Mrs. Carlill, stating that the purchase and use of the smoke ball constituted sufficient consideration as per the company’s advertisement.

Consideration and its impact on the enforceability of contracts

Consideration is a vital element in business contracts as it ensures fairness, mutual obligations, and ultimately the enforceability of agreements in the court of law. Without consideration, a contract is not enforceable in a court of law

Case law

Legal cases have highlighted the importance of consideration in determining the enforceability of business contracts. One such case is Hamer v. Sidway (1981) , where an uncle promised his nephew a sum of money if he refrained from drinking, smoking, gambling, and swearing until he reached the age of 21. The nephew successfully refrained from these activities, and upon reaching 21, sued his uncle for the promised amount. The Court held that the nephew’s abstinence from these activities constituted valid consideration, and he was entitled to the promised sum.
Another notable case is Stilk v. Myrick (1806), where sailors on a ship demanded additional wages for their journey after several crew members deserted. The Court ruled that the sailors were not entitled to the extra wages as their continued performance of their existing duties did not amount to valid consideration.

Case laws

Valuable insights, complexities, and nuances were answered through some of the unique instances where the legal concept of ‘Consideration’ was applied. Significant cases relating to consideration in UK Contract Law have been discussed below. These are some of the key cases that delve into the intricacies and clarify the legal position of this concept of law.

Williams v. Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1

Facts of the Case

In this case, the appellants, Roffey Bros., were builders who were contracted to refurbish 27 flats belonging to a housing corporation. The contract had a penalty clause for late completion. The appellants subcontracted some work to Williams, a carpenter. When Williams fell behind with his work, the appellants offered him a bonus payment to finish on time. Williams carried on working until the payments stopped. He sued the appellants for breach of contract.

Decision

The Court of Appeal held that the doctrine in Stilk v. Myrick had been refined since then. Goldwell LJ said a promise to make bonus payments to complete work on time was enforceable if the promisor obtained a practical benefit and the promise was not given under duress or by fraud. It was the appellants’ idea to offer the extra payment. Therefore, there was no duress. The appellants also gained a practical benefit by avoiding the penalty clause. Russel LJ said that the Court would take a pragmatic approach to the true relationship between the parties. Consequently, the promise of extra pay was enforceable.

Chappell & Co Ltd v. Nestle Co Ltd [1960] AC 87

Facts of the Case

In this case, the defendants, Nestlé, contracted with a company manufacturing gramophone records to buy several recordings of music. The plaintiffs, Chappell & Co., held the copyright to these recordings. Nestlé offered to sell these records at a discount to anyone presenting three wrappers from their chocolate bars. The wrappers themselves were worthless and were thrown away by Nestle. The plaintiffs sought an injunction restraining the manufacture and sale of the records because they breached copyright.

Decision

The court held that the chocolate wrappers had some value and constituted valid consideration, as they encouraged customers to buy the chocolates.

Notable consideration cases under Indian Contract Law

Kedarnath Bhattacharji v. Gorie Mahomed [1886]

Facts of the Case

In the case of Kedarnath Bhattacharji v. Gorie Mahomed (1886), the plaintiff was a municipal commissioner of Howrah and was also one of the trustees of the Howrah city council fund. A town hall was planned to be built in Howrah. After gaining enough membership to support the funds required to build a town hall, the commissioners, including the plaintiff, agreed with the defendant to build a town hall. The plans and proposed structures for the same were submitted and also passed. Later, because of the expansion in the membership list, the plans also expanded. Therefore, the expected construction cost increased from Rs. 26,000 to Rs. 40,000. The defendants made a subscription to pay 100/- for the construction of the town hall, which he later refused. The commissioner sued the defendant for the same.

Decision

The Court held that even if the defendant does not benefit from the promise he made, he is liable to pay. The defendant was responsible for the promise he made and could not step back or take it back after its commencement. Therefore, the suit was successful.

Durga Prasad v. Baldeo [1875]

Facts of the Case

In this case, the District Authority of Etawah proposed establishing a two-grain market in Etawah, one known as Hume Ganj and the other as Ram Ganj, with the plaintiff and extended a significant amount of rupees for constructing shops and purchasing land for the same. The defendants acted as commission agents for a 6-anna commission in 1875, as documented in a contract. Upon municipal advice, the plaintiff sought registration for legal validity. However, the defendant refused, leading to a dispute. The plaintiff filed a lawsuit, initially leading to a dispute. The plaintiff filed a lawsuit initially in the lower court and later appealed to the higher court, seeking enforcement of the agreement’s terms. The core issue revolves around the defendant’s refusal to consent to the agreement and registration upon the plaintiff’s; hence, the plaintiff filed a lawsuit to enforce the terms of the agreements first in the lower court and later in the higher court after an unsatisfactory response from the lower court.

Decision

The claims of the plaintiff were denied, and the case was dismissed by the Judge. According to Section 2(d) of the Indian Contract Act, 1872, the arrangement was rejected as a contract because there was no significant and well-known consideration involved in this case. According to Section 25 of the Act, the transaction was deemed defective because there was no consideration. The judges also determined that there was no option for an appeal because the Act stipulates the significance of consideration as a necessary component of a contract, and the appeal was rejected by the court.

Conclusion

This article gives an overview of all the important judgements, essential elements, practical application of the legal concept of consideration, and a lot more. In this article, the author attempts to provide readers with an all-inclusive understanding of various aspects of consideration in contract law. Both parties need to ensure that whenever a person is entering into a contract, he or she should be aware of all the requirements of consideration while forming a valid contract, and hence this article benefits its readers in gaining an all-round perspective of different concepts and legal backing received in various situations.

Frequently Asked Questions (FAQs)

Is consideration necessary for every commercial contract?

For a contract to be valid, it needs specific elements to make it a robust contract, and one of them is having a lawful consideration. In a business contract, if there’s no consideration, i.e., something of value being exchanged between the parties, then the contract is unlikely to be enforceable.

Can there be contracts without any consideration?

Even though consideration is an essential element, there are certain cases where you can enter into valid contracts without consideration. These are agreements out of natural love and affection, voluntary services.

Is it necessary for a consideration to be monetary?

While consideration is often money, it doesn’t always have to be that. It must still be valuable to the parties involved if something of value is being exchanged between them. where money is not involved. For instance, non-monetary consideration might involve, instead of cash, one party providing goods to get service from the other. Imagine working at a hotel and, in return, getting food and accommodation. This serves as a non-monetary form of consideration.