This article is written by Nishtha Pandey (batch 2023), student of Dr. Ram Manohar Lohiya, National Law University, Lucknow. This article seeks to give some insights on Consideration as per the Indian Contract Act, 1872.
Consideration is defined under Section 2d of the Indian Contracts Act, 1872. It is defined as when the promisee at the request to the promisor has:
- Done or abstained from doing something,
- Does or abstains from doing something,
- Promises to do or abstain from something,
Then such act or abstinence is called consideration.
Why do we need consideration
Only the promises that are backed by consideration are enforceable because any promise made without any obligation is usually very rash and without any sort of deliberation. The reason for making consideration an essential part of a contract is because it levies a sort of burden on the parties to fulfil the terms of the contract. For Example, if, A promises to give B a car without B doing or abstaining to do anything for it, makes the promise by an unenforceable. This will be a gift and not a contract per se.
Legal requirements as to consideration
- Must move at the desire of the promisor- Section 2d of the Indian Contract Act, 1872, clearly mentions that the consideration should be at the desire of the promisor if the consideration is made at the will of the third person or is not according to the promisor then it is not a good consideration.
- Can move from the promisee or another person- Unlike English law in which the consideration must move at the desire of the promisor, in Indian law as long as there is consideration it is immaterial as to who has furnished it. Moreover, in the case of Chinnaya vs Rammyya the consideration can also move at the desire of the third party but only in the condition where he is the beneficiary of the contract.
- Can be an act, abstinence or even a promise- If the promisee does something or abstains from doing something for the promisor, at his desire, then it will be a good consideration.
- Can be past, present or future:
PAST- When the consideration is given before the promise was made. For example- A saves B at the latter’s desire. B after a month promises to pay A. the act of A will amount to past consideration for the payment made by B.
PRESENT- When the consideration is given at simultaneously to the promise made, then this is present consideration or executed consideration. For example- cash sales.
FUTURE- When the consideration of the promise made is to be passed at a future date then that is called future or executory consideration. For example- A promises to pay B, when the latter will fetch newspaper for him.
- Consideration need not be adequate- It is not necessary that the consideration is equal or adequate for the promise made. However, it is mandatory that the consideration should be something in which the law attaches some value. It is for the parties to decide the value of the consideration and not a court of law. For example- A sells table to B and B gave him rs 500. It will be difficult for the court to ascertain the value of the table, so if A is satisfied with the amount given then the consideration is valid.
- Should be real- although the consideration need not be adequate it should be real and not illusory. The consideration should not be physically impossible, legally not permissible or based on an uncertain event or condition.
- Should not be something which the promisor is already bound to do- a consideration to do something which the promisor is already required to do is not a good consideration. For example- the public duty done by a public servant.
- Should not immoral, or against the public policy of the state- under Section 23 of the Indian contract it is given that consideration should not be illegal, immoral or against public policy. the court should decide the legality of the consideration and if found to be illegal than no action on the agreement should be allowed.
Stranger to a contract
It is a general principle that the contract can be enforced only at the behest of the parties to the contract. No third party could enforce it. It arises from the contractual relationship between the two parties. However, Lord Dennings has criticised this rule a number of times as this rule has never benefited the third party whose roots go deeper in the contract. This rule has two consequences-
- No third party could enforce the contract.
- The contract between the parties cannot levy an obligation on any person other than those party to a contract.
There are three exceptions to this rule:
- Marriage settlements- When an agreement is made with regards to marriage, family settlement or partition and is made in such a way that it benefits another person who is not a party to the contract then he may sue for the enforcement of the contract.
- Covenants running with the land- in cases of the contract of property the purchaser will be bound by all the conditions and covenants of the land, even though he was not a party to the original contract.
- Acknowledgement of estoppels- in case the terms of the contract require that an agreement has to be made with the third party, then this has to be acknowledged. This acknowledgement could be expressed or implied. This exception covers the areas where the promisor either expressly or by conduct has posed himself to be an agent.
It is the consideration which is made before the agreement. It is something which the promisee has already done at the desire of the promisor.
For example- A rescues B. B promises to give him Rs. 1000 for the same. Here it is a past consideration as the act of rescuing happened before any agreement.
In English law past consideration is no consideration. If A saves B and B promises him to pay but later refuses to do so, then under English law, A cannot enforce it in a court of law. B can give him the money, but that would not be considered as a past consideration but it would be by way of gratitude. This, however, causes a lot of inconveniences, as if a person would pay for the past act then he shall have to recognise the past consideration which is not valid under English Law. the report of the law commission of England proposes to remove this rule.
In India however, there is no compulsion to follow the English law and past consideration is regarded to be valid.
Past act at request good consideration
The past act done for consideration would be a good consideration. In the case of Lampleigh vs Brathwait, in which the defendant requested the plaintiff to help him get a pardon from the king. The plaintiff put in efforts, travelled up to the king etc.his request was not sanctioned. The defendant promised to pay him for the same. Later he refused to do so. Plaintiff sued him in a court of law. The court held that the defendant must pay the plaintiff because he has himself requested him to help him. Hence the act of the plaintiff, although done in the past, would still be regarded as a valid consideration.
Past voluntary service
If a person renders voluntary services without any request or promise from another and the person receiving the services makes a promise to pay for the services, then such a promise is enforceable in India under Section 25(2) of the Indian Contract Act, 1872 which states: ‘‘An agreement made without consideration is void unless it’s a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless.’’
For Example- Peter finds Noah’s wallet on the road. He returns it to him and Noah promises to pay Peter Rs 500. This is a valid contract under the Indian Contracts Act, 1872.
Past service at request past and executed
An act done before the giving of a promise to make a payment or to confer some other benefit can be a consideration for the promise. The act must have been done at the promisor’s request, the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit, and payment or the conferment of a benefit must have been legally enforceable had it been promised in advance.
Consideration may be something which is done or in the process of being done. It also consists of an act which is promised to be done in the future. There may be promises which form the consideration for each other. Before the completion of a promise which forms a part of the consideration of the other promise, then such consideration is called executory consideration.
For example- if A promises to pay B when he will sell the goods to him. Until time A does not get the goods, the consideration is executory, when he got the goods and paid for the same, the consideration is executed. If B does not sell the goods then A could also breach for the suit.
Value need not be adequate
Consideration is defined as an act of abstinence from doing something, at the desire of the promisor. The consideration should be of some value in the eyes of law, but the courts have been very liberal in interpreting and anything of value by the parties is regarded as a valid consideration.
The value need not be adequate for the promise made. The court will not enquire whether the value of the consideration is equivalent to the promise that is made. If the parties agree to the value of the consideration then it is sufficient. This rule is applicable as per Indian and English law.
Inadequacy as evidence of imposition
The inadequacy of consideration is regarded to check whether the consent is freely given. For example- A agrees to sell his property worth Rs 1 crore to B for Rs 10,000. denies that his consent for the sale of the property was not freely given. A party seeking to set aside the transaction based on the inadequacy of the consideration must show that he was unable to understand it or was by way of some imposition. If the court is satisfied that the contract was freely entered into then it would not matter whether the consideration was adequate or not.
Where the consideration is inadequate it could be because of fraud, coercion, mistake etc. the same would be the case when the consideration is so low that it shows some serious inequality of the bargaining power.
Forbearance to sue
The most usual form of forbearance is the forbearance to sue within a reasonable time. This promise to forebear can be expressed or implied from the circumstances. Sometimes it is very difficult to construe from the fact whether it was an agreement to forbearance (which is not a good consideration until not backed by the request of the promisor) or actual forbearance. Hence to clarify in the case Bittan Bibi vs Kuntu Lal, it was held that the promise of forbearance should move at the desire of the promisor.
Forbearance to sue on a claim which is void is not a consideration. Moreover, abstaining to sue could be valid consideration only when the person who is abstaining, has a valid right to sue. Also, it is not necessary to specify the time for such abstinence. A request for forbearance without specifying the length is understood to be a forbearance for a reasonable time.
Compromise good irrespective of merits
It is an important kind of forbearance which is undertaken by way of a compromise of a doubtful claim. The important element here is to ascertain the limits of which the compromise will function and will still be a good consideration. The difference between forbearance and compromise is that in the latter claim is not admitted and the claimant promises to abandon the claim.
The abandonment of a doubtful or disputed claim is a good consideration even if it later turns out to be unsustainable. The test is to find whether the person thought in good faith and he has a case which he was abandoning. A compromise of a claim arising out of an illegal contract is insufficient as a consideration unless the compromise arises out of a dispute of fact as to whether the contract is illegal.
Performance of existing duties
Performance of legal obligations
The performance of what one is already bound to do, either by general law or by a specific obligation to the other party, is not a good consideration for a promise, because such performance is not a legal boundation a person. Moreover, on the performance of a legal obligation, a reward from the private organisation is taken then it would be against the public policy. It should be ensured that the legal duty actually exists. But if a man who already has a legal obligation undertakes to do something or to do something in any of the admissible way i.e. the person has forgotten the choice that the law allows him to take is a good consideration.
Moreover, the actual performance of an existing duty may confer a factual benefit, because on actual performance the promise is saved of pursuing a legal remedy for its breach.
Performance of contractual obligations
Pre-existing contract with the promisor
Usually, the performance of a duty already owed under the contract to the promisor is not good consideration. Even in terms of public policy, it is necessary to discourage a tendency to use improper pressure or threatening to break one’s contract unless another party complies by paying or promising to do so. The promisee must find it beneficial to perform the promise immediately rather than paying for its breach which may not fully compensate the promisor.
Promise to pay less than the amount due
A promise to pay less than what is due in the contract cannot be regarded as consideration. This rule was given in Pinnel’s case. The court held that a smaller amount cannot in whole satisfy a larger sum. However, a gift of the horse, robe etc can be considered as a good satisfaction because under certain circumstances it is considered to be more beneficial than money, otherwise, the person would not accept it.
This holding was criticised in a way wherein several cases the jurist held that if the party is content to receive any amount be it less than the sum and he is satisfied by the same, then it should be considered to be a valid consideration. However, in spite of all this criticism, the Pinnel’s Case was applied unanimously in various circumstances.
Exceptions to the rule in Pinnel Case
Part-payment by the third party
The part payment by the third party may be a good consideration for the whole debt.
Payment of a lesser amount would be a good consideration for the larger sum where this is done for some already entered compromise.
Payment before time
Payment of a lesser sum before the time or in a different mode, a different place than agreed by the parties or the gift of a horse or robe etc is a valid satisfaction of the goods.
The doctrine of promissory estoppel is considered to be a departure from the doctrine of consideration. A promise that was made in future is estoppel. If the promise is made with the intention that it would be acted upon and it was in actuality acted on, then the promisor cannot be allowed to back out and it could be enforced in a court of law as well.
Promissory estoppels differ from traditional contract theory. It protects reliance. This doctrine was developed to prevent injustice if the promisee suffers from any injustice due to the reliance on the promise of the promisor, even though it was not required a consideration. However, in English law, the doctrine of promissory estoppel is used only as passive equity and is invoked only in the cases of defence.
Position under the Indian contract act is different than under English Law
Under English Law
It is an established rule under English law that the third party cannot sue a contract made for his own benefit. Apart from special circumstances. A person who is not a part of the contract cannot enforce or rely for protection on its provisions. Such right can be conferred to a property by way of trust but it cannot be on a stranger to a contract as a right to enforce the contract.
Under Indian Law
It is established that the consideration can move from a third party but it cannot sue for its own agreement. However, there was lots of confusion on this point. Although the definition of “consideration” is wider in the Indian than in the English law since common law is applicable, therefore it is generally applied that the third party cannot enforce the contract.
Law Commission of India in one of its reports mentioned that the contract must be enforceable by a third party if it expressly for his benefit but the defences of the party to the contract must also be considered. It is also proposed that the parties cannot alter the terms of the contract once the third party takes over the contract.
Pre-existing contract with the third party
A promise to perform a pre-existing contractual obligation with a third party can be a valid consideration for another contract. The point of conflict in these kinds of arrangements is regarding the presence of consideration for the promisor. This conflict was settled in the case of Shadwell vs Shadwell, where the plaintiff got engaged and his uncle wrote him a letter promising him to pay 150 pounds throughout his lifetime.
The jurists in the above case held that there was adequate consideration for the contract as it could be construed from the fact that it was made because of the engagement of his nephew. Moreover, marriage is of great interest to the near relatives. Also, the contract is binding on the uncle as it is possible that the plaintiff has undertaken many liabilities on account of the promise given by the uncle and if the payment is withheld then the plaintiff could face a lot of embarrassment.
Under these provisions, the person should be safeguarded from any further payment which is not enforceable as per the contract. Like in the case of Syros Shipping vs Elaghil Trading co. a vessel which was prepaid had to deliver tractors to Yemen. The charters defaulted their payment to the shipowner because of the congestion in the ports. During this period the shipowner asked for extra payment, the consignees agreed to pay but later refused. The court held that since there was no consideration for the promise, moreover no estoppel was created hence the contract is not enforceable.
Consideration and motive
Consideration is not the same thing as motive or a mere desire. The requirement of consideration is vital and the contract could not be satisfied with just a moral obligation. Consideration for a promise is always a motive for the promise, unless it is nominal or invented, while a motive for a promise may not always be a consideration for it. Motive induces a promise to be given. Similar holding was given in the case of Dwarampudi Nagarathnamma vs Kuruku Ramayya, where the Karta of a Hindu Undivided Family gifted his concubine a portion of the property beyond the cohabitation was a motive and not a consideration, and it should be considered as invalid because it was motivated by the desire to compensate for his past services.
Absence of consideration
If the promissory note is neither genuine nor fraud then it is recoverable under the provision of this code, with interest. The court said that mere denial of the passing of consideration does not make any defence. Something which is probable has to be brought on record.
Exceptions under Section 25, Indian Contract Act
In English law, a contract which is under the seal is enforceable without consideration. In Indian law, there are no such provisions but still, The general rule is the ex nudo pacto non-oritur action, which means that no right of action arises from the contract which is entered into without any consideration. Still, under Section 25 of the Indian Contract Act,1872.it provides certain exceptions under Section 25 of the Indian Contract Act.
In case of a contract entered into between the relatives or on account of natural love and affection is enforceable without consideration. The meaning of love and affection is not judicially construed but parties who are nearly related would have instinctive love and affection. However, this could be overruled with regards to some external circumstances, like between the wife and husband who are compelled to live separately because of quarrelling. But a settlement to be given to a man by the wife by way of maintenance could be enforced without any consideration because it will result in peace and family harmony.
The term “family” (in this context) should be understood as a group of people living together and possessing a right of succession, inheritance etc., but the family could be construed as a people who are bonded by natural love and affection.
Past voluntary services
A promise to compensate the person who has done something voluntary in the past for the promisor is enforceable. This exception is attracted in the cases when the services are rendered voluntarily. Thus where a service is rendered on behalf of a company which is not in existence, a subsequent promise to pay would not attract this provision. Even where the promisee has done something for the promisor, which he had to do legally, then it will also be covered under this exception.
In Case of a Minor
In Karam Chand vs Basant Kaur, the court held that even where the promisor after attaining majority, promises to pay for the goods attained in minority will also fall under this provision. The court said that although the promise made by a minority is void but is the promise is made by a person of full age to the promisee who has done something for him voluntarily when the promisor was a minor, then it will also attract this exception.
Time barred debt
A promise to pay a time-barred debt is enforceable and it should be signed by the person or his agent. It could be to pay for the whole debt or in part. The debt to be enforced could be paid except for the law of limitation. However, the person who is under no obligation to pay to another person is under no obligation under this clause.
The promise to pay the debt must be expressed, it is not sufficient if the intention to pay could not be gathered from the circumstances.
Acknowledgement of the debt is different from the promise to pay the debt. The acknowledgement of the person should be done before the period of limitation. Promise to pay a time-barred debt is a new contract. It is not just merely an acknowledgement of the existing liability.
Gift actually made
The provisions of “Consideration” do not affect the gift actually made. Under this Section, gift is defined as:
- The gift is of movables then it should be accompanied by its delivery.
- The gift is of immovables then should be along with registration.
If the above conditions of gifts are fulfilled then lack of consideration would not affect the validity of these gifts. However, apart from the consideration, they could be questioned otherwise.
Where the gift of the property was made by a registered deed and is attested by two witnesses, it was not allowed to be questioned on the ground that she was the victim of fraud, moreover, she was not able to establish it.
Inadequacy of consideration
Adequacy of the consideration means that the consideration which is paid is equal in value to the value for which it is paid. Consideration can be terms of money, property etc. inadequate consideration is not void but it renders the contract unenforceable because of the improper bargaining or by itself.
Inadequate consideration must be distinguished from nominal consideration. Nominal consideration is deliberately given to make the contract effective but inadequate consideration is less than the amount promised. Although the act does not make any distinction between the nominal and inadequate consideration but it was made in the case of Midland Bank trust vs Green.
Consideration is defined under Section 2d of the Indian Contract Act,1872. It could be past, present or future, and must only concern the parties to the contract and not any third party. But there are various exceptions present under Section 25 of the Act, these exceptions are made keeping in view various circumstances, so that the interest of the parties of the contract or even the third party is not compromised. Moreover the consideration need not be adequate, however it should be valuable according to the parties of the contract.
- Pollock and Mulla Indian Contract Act, 1872
- Avtar Singh Law of Contract
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