This article has been written by Rugved Prashant Manore pursuing a Diploma in US Contract Drafting and Paralegal Studies course from LawSikho.
This article has been edited and published by Shashwat Kasuhik.
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The growing complexity of business in the corporate world has resulted in an increase in the number of organisations as well as individuals entering into contractual relationships. The legal aspects of contracts in India are governed by the Indian Contract Act, 1872. According to Section 2(h) of this Act, a contract is “an agreement enforceable by law.” To constitute a valid contract, certain essentials must be fulfilled. One of the most important among them is “consideration.” In layman’s language, consideration is “something in return.” Consideration by both parties is necessary for a contract to be valid and enforceable by law. Let’s consider a simple example to get a basic idea of what consideration is. If Mr. A purchases a house from Mr. B and, in return, pays Rs. 50,00,000 to Mr. B, the money paid is the consideration for Mr. B, and on the other hand, the house purchased is the consideration for Mr. A. Now that we are acquainted with the basic idea of consideration in a contract, let’s go ahead and take a legal look at the same.
What is consideration
The meaning of consideration can be derived from the Latin term “quid pro quo,” which means “something for something.” It states that each party entering into a contract should offer something to the other party. The definition of consideration under Indian law (Indian Contract Act, 1872) has a more flexible approach than that of English law.
According to Section 2(d) of the Indian Contract Act, 1872, “when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.” In the following definition, a promissor is the party that performs a promise and a promisee is the party to which a promise is made.
Many other legal scholars have also defined the term “consideration.” I have shortlisted some of them below.
Blackstone says, “Consideration is the recompense given by the party contracting to the other.”
Pollock says, “Consideration is the price for which the promise of the other is brought, and the promise thus given for value is enforceable.”
Patterson says, “Consideration means something, which is of some value in the eye of the law. It may be some benefit to the plaintiff or some detriment to the defendant.”
Lush J. in Currie v. Misa (1875) is a landmark case in English contract law that established the modern definition of consideration. The case involved a dispute over whether a promise to pay a debt that was already due and payable constituted valid consideration for a new contract.
The plaintiff, Misa, had borrowed £100 from the defendant, Currie. The loan was due on March 1, 1875. On February 28, 1875, Currie wrote to Misa, promising to pay the debt on March 1 if Misa would agree to sign a new contract for the loan. Misa agreed to sign the new contract, and Currie paid the debt on March 1.
Misa later sued Currie for breach of contract, claiming that Currie’s promise to pay the debt on March 1 was not supported by consideration. The trial court found in favour of Misa, and the Court of Appeal upheld the decision.
The Court of Appeal held that Currie’s promise to pay the debt on March 1 was not supported by consideration because Misa had already incurred a legal obligation to repay the debt. The court defined consideration as “something which is of value in the eyes of the law, moving from the promisee to the promisor.” In this case, Misa’s promise to sign the new contract was not of value to Currie because he was already entitled to repayment of the debt.
The Currie v. Misa decision has been widely cited as authority for the modern definition of consideration. The case established that consideration must be something that is bargained for and that is of value to both parties to the contract. This requirement ensures that contracts are not formed on the basis of gratuitous promises, which would be unenforceable in the courts.
The Currie v. Misa decision has also been criticised for being too narrow. Some scholars argue that the court’s definition of consideration excludes certain types of promises that should be enforceable, such as promises to make charitable donations. However, the decision remains the law in England and Wales, and it has been adopted in many other common law jurisdictions.
Essential elements of consideration
Consideration is one of the essential elements of a contract, and at the same time, consideration itself has some essentials for it to be considered valid. Some important essential elements are as follows.
The consideration must move at the desire of the promisor
The definition of consideration under the Indian Contract Act, 1872, starts with “when, at the desire of the promisor….”, which clearly specifies that any act or abstinence or promise by the promisee should act at the desire of the promisor. It means that any act or abstinence done voluntarily or without the desire of the promissor is not a valid consideration in the eyes of the law. To understand it more clearly, let’s take an example, if you help a person lift his luggage and then demand payment for the service provided, that person is not liable or bound to pay you. The service or help provided by you was a voluntary act that was not asked for by the person. Thus, the desire of the promissor is a must when it comes to consideration.
The consideration may move from the promisee to any other person or a third party
As long as there is no objection by the promissor, the consideration may move to any other person or proceed from any other person than the promisee. In simple words, it states that it is not a mandate that only the promisee should grant the consideration; it can also be provided by any other person. The following example will make it easier for you to understand, imagine your friend Mr. A has taken a loan of a certain amount from you. After a few days, Mr. A comes to you and says that the remaining debt amount will be paid by his elder brother, Mr. B. Here, the consideration has moved from Mr. A (the promisee) to his brother, Mr. B. This transfer of obligation to pay from one person to another does not have any effect on the validity of the consideration involved in the promise, which also means the doctrine of privity of consideration is, thus, not applicable in India.
The consideration must not be unlawful
It’s very obvious that any act, abstinence or promise made that is considered illegal in the eyes of the law is not a valid consideration. Also, if there is an involvement of any injury to a person or property of another person or is immoral in nature, it makes the consideration invalid under the Indian Contract Act, 1872. Such considerations make the contract void. For example, if you promise a person to pay Rs. 10,000 for selling drugs at his workplace, such consideration will not be valid.
The consideration must not be physically impossible
A consideration that is not physically possible to be performed or carried out is considered invalid. A decision should always be something that is capable of being performed or carried out. For example, X makes a promise to Z to pay Rs. 1,00,000 if Z runs 100 km in 1 minute. Here, it is impossible to perform the said task. Thus, such considerations that are physically impossible to perform are deemed invalid.
The consideration may not be adequate
While entering into a contract, consideration is something that is to be mutually decided by the parties to that contract. When the question of adequacy of consideration arises while enforcing the contract, the court is not concerned with the adequacy of consideration in it. In simple words, the court has nothing to do with the question of whether the consideration in the contract is adequate or not. But at the same time, the court may take into account the inadequacy of consideration to verify whether there was free consent given by the parties or not. If the contract is signed with the free consent of the parties, the consideration stands to be valid regardless of its inadequacy. To get a clear understanding of this part, we can refer to Explanation 2 of Section 25 of the Indian Contract Act, 1872, which clarifies that “an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.”
Types of consideration
Now that we have gone through the concept of consideration and its various essential ingredients, it will be easier to understand and differentiate between several types of consideration. It can be mainly classified into three types:
- Executory consideration
- Executed consideration
- Past consideration
Let’s go through a detailed analysis of all these types one by one:
Whenever there is a contract between two parties, there are some promises and obligations that need to be fulfilled. When these promises or obligations are not yet fulfilled by the parties involved in the contract, it is known as executory consideration. It generally refers to those promises or obligations that will be executed in the future. Just like a general contract, here also there is an exchange of promises or obligations between the promissor and the promisee, but the execution of the same tends to be on a future date.
For example, if you hire a freelancer to provide legal services for your company and you both enter into a contract wherein you promise to pay Rs. 50,000 for the services in the next month, then in this scenario, till the promises made in the contract are not fulfilled, the status of the consideration in the contract stands to be executory.
Now it is very easy to understand executed consideration, as we have already gone through the concept of executory consideration. The principle element of executed consideration is contrary to that of executory consideration. Under executed consideration, the promises and obligations made by the parties in the contract are already fulfilled or completed. It is also known as present consideration, as the concerned parties have successfully completed their part of the contract.
For example, if you purchase a car from a showroom and make the payment for it, the car will also be delivered to you. At this point, both parties have completed their promises or obligations under the contract. This scenario comes under the ambit of execution consideration.
Till now, we have observed that a voluntary act or abstinence done by the promisee does not amount to a valid consideration in the eyes of the law. But here comes an exception to the rule if certain circumstances are associated with the parties. This part can be a little tricky to understand, so rather than jumping into the legal interpretation of this concept, let’s take a real-life scenario to understand it easily.
Imagine you are an unpaid intern in a law firm and after the completion of your internship, your senior pays you Rs. 8,000 for your hard work and performance shown during the internship. The reason for paying you turned out to be the acts you have done in the past. This consideration is known as the past consideration.
Agreement without consideration is void : exceptions
No doubt consideration is an integral part of every legal contract; however, this rule is accompanied by certain exceptions. These exceptions are laid down under Section 25 of the Indian Contract Act, 1872. It states that “agreement without consideration is void, unless it is in writing and registered, or is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law.”
It basically covers some circumstances where, even in the absence of consideration, an agreement is not void. Let’s take a brief overview of these exceptions.
An agreement in the absence of consideration is void unless:
- Section 25(1)– This Section exempts the rule of consideration in cases of agreements made on account of natural love and affection between the parties.
- Section 25(2)- This Section spells out the concept of past consideration as an exception to the rule of consideration. Generally, past consideration is not considered as valid but there are certain exceptions that we have previously gone through under the types.
- Section 25(3)- When a promise is made to pay a debt that is barred by law of limitation, such promise is valid even in absence of any new consideration.
- Section 185– This Section simply says that there is no need for consideration to create an agency.
Many times, judgements delivered by the court set an important example with respect to the interpretation of the law involved in the case. Precedents are one of the best sources to ascertain the in-depthness of any law. Let’s take a glance at some landmark judgements related to the importance of consideration in a contract.
Kedarnath Bhattacharji vs. Gorie Mahomed (1886)
This case laid down a very important principle, which stated that “any act done at the will of the promisor’s wish is taken as the fulfilment of consideration of a contract.” It reasserted the significance of the promise made and the obligation to perform the duty towards its fulfilment. Another important part of the Calcutta High Court’s decision stated that, even if the defendant does not benefit from the promise he made, he is liable to pay. This is because the defendant made a promise to pay the plaintiff, and he is responsible for fulfilling his promise.
The defendant was responsible for the promise he made and cannot step back or take it back after its commencement. Once the defendant made the promise, he was bound to fulfil it, regardless of whether or not he benefited from it.
The court’s decision is based on the principle of contract law, which states that a promise is a legally binding obligation. When a person makes a promise, they are agreeing to do something in the future. If they do not fulfil their promise, they can be held liable for damages.
In this case, the defendant made a promise to pay the plaintiff a certain amount of money. The defendant did not benefit from the promise, but he is still liable to pay because he made a legally binding obligation. The court’s decision sends a clear message that people should be careful about the promises they make because they are legally binding.
Doraswamy Iyer vs. Arunachala Ayyar and Ors. (1935)
As we already know, the primary essential element of a valid consideration is that the consideration must move at the desire of the promisor; this case reaffirms this factor. In this case, Justice Cornish at the Madras High Court held that in order for consideration to be valid, there must have been some request by the promisor to the promisee to do something. Where there is no such request for an act, the promise will be a bare promise without any consideration.
For example, if A promises to give B Rs. 100 but B does not do anything in return, then the promise is not enforceable because there is no consideration. However, if A promises to give B Rs. 100 if B does something, such as mowing A’s lawn, then the promise is enforceable because there is consideration in the form of B’s mowing of A’s lawn.
The requirement of consideration is based on the principle that a person should not be able to enforce a promise unless they have given something in return. This prevents people from making promises that they have no intention of keeping.
The doctrine of consideration has been criticised by some scholars, who argue that it is unnecessary and that it prevents people from enforcing legitimate promises. However, the doctrine of consideration remains a fundamental principle of contract law in India.
The principal difference between these two cases is that in Kedarnath Bhattacharji vs. Gorie Mahomed, the construction of the hall began on the faith of the promised subscriptions, but in Doraswamy Iyer vs. Arunachala Ayyar, temple repairs were already in progress when the subscriptions were invited. The action was not induced by the promise to subscribe but was rather independent of it.
In conclusion, consideration plays a very vital role under contract law by assisting us in distinguishing a contract from a mere promise. The different types of consideration that we went through enabled the parties to enter into agreements according to their requirements and transactions. In depth knowledge of various aspects of consideration under the contract law assists businesses, legal professionals or individuals in drafting contracts that are not only legally sound but also legally enforceable in court. For that reason, next time while drafting or entering into a contract, be conscious and take into account the essentials, various types, exceptions and precedents with respect to consideration as discussed, irrespective of whether you are a legal professional, a business entity or a law student.
- https://indiankanoon.org/doc/767538/#:~:text=It%20was%20 held%20that%20the,was%20 no%20 consideration%20at%20 all