This article is written by Arushi Chopra, a first-year student pursuing BBA.LLB from Symbiosis Law School, Noida. This article deals with the legal rules regarding consideration in the English law as well as the Indian Law and the debate around the doctrine of privity of contract.
Table of Contents
In English Law, a promise becomes an agreement when it is supported by some consideration. Agreements are not enforceable in the court of law if it is not backed by some consideration. Thus, consideration becomes an important element in the formation of contracts. However, it is not only the English law wherein consideration is a peculiar element. In some civil law countries, promises without consideration are not enforceable and binding in nature unless they are made in some special form. “Consideration means something which is of some value in the eyes of the law, moving from the plaintiff. Without consideration, the transaction is merely a voluntary gift.” It is based on the idea of reciprocity.
Consideration has been defined as:
“When, at the desire of the promisor, the promise 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 consideration of a promise.”
Essentials of a valid consideration
With the help of the above definition, we can identify the following essentials to be fulfilled to form a consideration that is valid in the eyes of law.
- Consideration should be done at the promisor’s desire. This is called Promissory Estoppel.
- Consideration should always be of some value in the eyes of law. So, if a party is already under a legal obligation towards another then the act done to fulfill that legal obligation would not be considered as a valid consideration to become a basis of the contract which is enforceable in the eyes of law.
- According to Indian law, the act of consideration can be done by the promisor or any other person. Therefore, it becomes immaterial who has furnished the consideration as long as there is a consideration. However, this is not the case in English law. In English law, the fundamental propositions state that the consideration should be furnished by the promisee only and not by any other person.
- There must be the performance of an act, abstinence or promise by the promisee.
Legal rules to the concept of consideration
1. Consideration must be at the promisor’s desire
The act or omission to do or not to do something should be at the desire of the promisor. An act done at the desire of the third party does not constitute consideration. In Durga Prasad v. Baldeo , a promise to pay the plaintiff commission on the articles sold not at the will of the defendant but through the agency is void as consideration does not move at the desire of the promisor.
2. Consideration can be from promisor or from any other person
In the Indian Contract Act, it has been clearly stated that the consideration can be provided by the promise himself or by any other person. According to this, it is not relevant who has furnished the consideration as long as consideration has provided. An important case to be taken into account here is Chinnaya v. Ramayya .
3. Consideration can be past, executed or executory.
According to Section 2(d) of the Indian Contract Act, 1872, the types of considerations for a contract are as follows:
Past consideration refers to the act that has been done before a promise is made. According to the Indian Law, this type of consideration is valid in the eyes of law, if all other conditions for a valid consideration is fulfilled. However, according to the English law, past consideration is not recognized as valid consideration for a contract. It is considered to be a form of a gift or gratitude.
When one party to the contract performs his part of the promise and has given his part of the consideration to the other party and now only the part of the promise on the side of the other party is left to be performed is referred to as an Executed consideration. It is also called present consideration.
Before the formation of a legally binding contract, when a person makes a promise after the other person has also promised then it is termed to be an executory consideration, wherein both the parties are yet to perform their part of the act. This is also called future consideration.
Consideration is not required to be adequate
It is not necessary for consideration to be in an adequate amount as per the promise. This is because it becomes difficult to establish what is adequate consideration for a given promise. It was provided in the landmark case of Bolton v. Madden  that “The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced.”
Performance of the legal obligations does not constitute a consideration
If a party is already under a legal obligation towards another then the act done to fulfill that legal obligation would not be considered as a valid consideration to become a basis of the contract which is enforceable in the eyes of law.
Consideration must be real and not unsubstantial.
According to the law, consideration should be real and not unsubstantial. For example, in the case of White v. Bluett , the father promised to his son that if he stopped complaining about the share of property given to him, he would release him of his debts. However, it was held by the court that the consideration was not a good consideration and hence the son was found to be liable for the debts.
Consideration must not be unlawful, immoral or opposed to public policy
According to Section 23 of the Indian Contract Act, in an agreement where consideration is unlawful, the agreement becomes void. Section 23 declares what considerations are unlawful and would render an agreement void. A consideration forbidden by law can be understood in two sense:
- The promise is of something which is considered unlawful in the eyes of law;
- Though the promise is not unlawful, the law will not enforce the promise keeping in mind the public policies.
Privity of Contract
The doctrine of privity of contract states that only the parties to the contract can enforce the contract or take action against it. A person who is not a party to the contract but perceives some benefits from the contracts is not entitled to take any enforcement action.
“The doctrine of privity means that a contract cannot, as a general rule confer rights or impose obligations arising under it on any person other than the parties to it.”
For example, if a party ‘A’ promised ‘B’ to pay Rs.100 to the third party ‘C’. Thus, ‘A’ and ‘B’ can sue each other in case of a breach of contract. However, ‘C’ cannot sue the parties. This is known as the privity of contract.
Different courts in India have different views regarding the concept of privity of contract. There have been cases where the third party is not able to sue in case of a default due to the operation of the rule of privity of contract while there are some cases where the rule of privity of contract is completely disregarded. Hence, the rule of privity of contract is a topic of great debate amongst scholars.
Privity of consideration states that only a person who has provided consideration can enforce the contract and take action against it. In the above case, ‘C’ cannot sue the parties as he has not provided any consideration for the contract.
Exceptions to the Doctrine of Privity of Contract
There are some exceptions to the doctrine of privity which makes the third party capable of enforcing the contract. These are as follows:
In case of a principal-agent relationship between the third party and the contracting party, wherein the third party i.e. the principal party has expressly consented that the other has to act on his behalf and the contracting party i.e. the agent consents to act in that manner, the third party, being the principal party, can also enforce the contract.
In case one party ‘A’ promises the other party ‘B’ for the benefit of ‘C’, although being the third party, ‘C’ can enforce the contract as ‘B’ is the trustee of ‘C’. ‘A’ person can become a trustee of the other person if he fulfills the following criterion:
- The party should have the intention of creating trust.
- This intention should be to benefit a particular third party and not all the third parties.
A landmark case for the defense of trust in the privity of contracts is Rana Uma Nath Baksh Singh v. Jang Bahadur. The facts of the case were that Rana Uma Nath Baksh Singh was given the possession of the entire estate by his father. In return, Rana Uma Nath Baksh Singh was required to pay a certain some of the money and a village to Jang Bahadur, the illegitimate child of his father. It was held in this case that a trust was created for the benefit of Jang Bahadur and hence he is entitled to enforce the contract.
3. Collateral contract
In case of a contract is accompanied by a collateral contract, then the party to the collateral contract can enforce the contract. For example, when a party ‘A’ purchases goods from ‘B’, there is a contract between A and the manufacturer of that good.
The doctrine of privity of contract is subject to various debates despite being accepted in many jurisdiction. In the case Debnarayan Dutt vs Chunilal Ghose “The Indian Contract Act is unlike the English Contract Act and the limits with which the doctrine of privity of contracts operates in English law cannot, with the same vigor be applicable to the Indian Contract Act.” As given in the definition of consideration in Section 2(d), as long as there is a consideration it does not matter who has furnished it.
Consideration is an essential feature of a valid contract without which, generally a contract is not enforceable in the court of law. Consideration has been defined under Section 2(d) of the Indian Contract Act, 1872. This article deals with the legal rules regarding consideration and the one of the most debatable aspects regarding a valid contract that is the concept of privity of contract.
Privity of contract is a legal rule which states that only parties to a contract can sue for breach of contract and this right to sue does not extend to the third party.
However, the above principle is not well established in India and is subject to a lot of debates and discussions among scholars and professionals. There have been Indian cases which have been discussed in this article, where in a given circumstance the rule of privity of contract was not applied while in other cases of similar nature and circumstances the rule of privity of contract is applied. The article also deals with the exceptions to the rule of privity of contract.
Also, the rule of privity of consideration is discussed briefly in this article. Unlike the rule of privity of contract, the rule of privity of consideration is well established and clear with a statutory backing. It has been explicitly mentioned in the definition of consideration provided under Section 2(d) that the consideration can be furnished by any person. The judicial interpretation as well as legislative enactments have also been provided.
- The Indian Contract Act, 1872 by Fredrick Dinshaw Mulla
- Contract and Specific Relief by Avatar Singh
- GH Treitel, The Law of Contract