This article is written by Manisha Singh, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
The word “consideration” in a contract refers to the value or amount of something which has been promised by one party to the other when making a contract. Consideration is an essential element which has to be included while enforcing any legal contract. In a contract, consideration is nothing but a value or price agreed by the promisee to pay to the promisor.
Consideration has been defined in Section 2(d) of the Indian Contract Act, 1872 as: When at the desire of the promisee, the promisor or any other person has done or refrain from doing something; does or refrain or promises to do, or to refrain from doing something. Such an act of doing or abstinence is consideration for the promise. It is an essential element to make a contract.
For example: Sale of a Motorbike. In a contract for sale of a motorbike, sale of a motorbike is a consideration for one party while the payment or the price is consideration for the other party.
Why do we need consideration clause
Consideration clause is the most important clause used in insurance policy contracts and it defines the amount which is due for coverage and when to pay the consideration. The consideration clause defines the payment which are to be made and the payment schedule.
A consideration clause is the payment in return of the promise of something of value. Like a service, property, a promise etc. Each and every party who enters into a contract and benefits from the contract must be given consideration. It is a value of something which is being exchanged for a bargain.
Is consideration always money
There are many writings and court judgments on what constitutes consideration. Most of the contracts use money as consideration but this does not mean that services and other objects are not accepted as consideration. The various judgments agree that there must be something of value which could vary from money to other items or objects.
Types of consideration
In the Contract Act 1872, Section 2(d), there are three kinds of Consideration. These are Past Consideration, Present Consideration and Future Consideration.
- Past Consideration
In the event of past consideration, the consideration is received by the promisor before the date of promise. This type of consideration is called Past Consideration.
Example: B was riding a bike and suddenly his bike stopped due to lack of petrol. B requested the owner of a petrol pump, A, to give him petrol and A gave petrol to B. Later B promised A to pay Rs.500 in consideration of his past consideration.
- Present Consideration
In the event of present consideration, one of the parties of the contract has performed his part of the promise made to the other party which fulfills the consideration for the promise by the other party. This is known as present consideration.
Example: A lost his motorbike and then he makes an offer of Rs. 1000 reward to anyone who will find him his lost motorbike. C finds his lost motorbike and delivers it to A. In this situation, A is bound to pay Rs. 1000 to the one who finds his motorbike. This situation is known as present consideration.
- Future Consideration
It is the event in which one party makes a promise in exchange for the promise by the other side of the performance of the obligation by each side to be made subsequent to the making of the contract. This is known as Future Consideration.
Example: A supplies 20 rice bags to B and B agrees to pay for those rice bags in the future date. This consideration happening in the future date is known as future consideration.
Elements of consideration
For a contract to be considered valid and enforceable, three elements must be met. If any of one of these elements is missing then the contract lacks the essential element to make the contract valid and it is deemed invalid by the court of law. The three essential elements of the consideration are:
- For both the parties of the contract, there must be something which is worth bargaining. The contract must include a bargain for the term of exchange.
- Mutual exchange must be done between the parties. All the parties in the contract must be benefitted from the contract.
- The exchange done in the contract must be something of value.
Beside these essential elements of consideration, there are other elements which are necessary for a contract for making it enforceable. These elements include:
- Intention of both the parties to enter into an agreement.
- The subject of the contract must be legal.
- One party must make an offer to the other party.
- The other party must accept the offer made by the party.
Consideration must include
In a valid contract, consideration is the exchange of anything of value by each party. Generally, services, goods or money is exchanged or promised in a contract, through consideration may be whatever the parties agree to.
Example: Money, Services, Personal Property, Real Property, Promise to act, Promise to withhold from acting.
Lack of consideration
A contract is said to be invalid in the court if it does not contain a recognizable consideration. Some events where a contract constitutes lack of consideration include:
- When the agreement is more of a promise of a gift and not a contract.
- Any one of the parties was already involved in a legally obligated to perform as specified by the contract.
- The bargained for promise cannot be an illusion which means that there cannot be a contract where the parties did not mutually agree for a contract or in a contract where only one party is required to perform the contract.
Gift in a contract
Gift is a transfer of property that has been voluntarily given to any person without taking any consideration. It is an exception in Indian Contract Act, 1872. Gift is defined in section 25 of the Indian Contract Act, 1872. Any contract entered without consideration is a void contract.
A’s father promises him to buy him a motorbike when he graduates in two years if he scores high grades, making a document which looks like an official document, which he signed. After graduation, A was disappointed that his father had decided not to buy him the motorbike as A started taking drugs and alcohol and his behavior was pathetic over the past couple of years.
A then files a civil lawsuit, claiming that he had a contract with his father that he must buy him a motorbike. However, because there was no mutual benefit and no consideration between both the parties, the court determines that the document was simply a promise of a future gift and is not an enforceable contract.
Illusory promise is the promise which is unreal or deceptive or vague in nature. A contract which contains a statement that gives the person making a promise with no actual obligation to fulfill the promise is an illusory promise.
A said to B that, “I will give you 1000 rupees if I feel like it”. This promise is purely illusory and it will not be enforced as a contract.
Bailment is defined under section 148 of the Indian Contract Act, 1872 as delivery of goods from one person to another for one purpose. Bailment is a legal relationship where the physical possession of the property is transferred from one person to another who has the possession of the property but not total ownership.
A delivers a piece of cloth to B (tailor) for stitching it into a suit. In this situation the tailor has the temporary possession of A’s cloth and till he has the cloth he is responsible for taking reasonable care of the cloth. This contract is a bailment.
In certain events, the consideration can be deferred in nature. This is done by giving the payment in installments instead of paying everything at a go.
For example: In a company, certain payment milestones can be linked to the performance. This is to ensure that the buyer receives the promised value they purchased.
- Durga Prasad vs. Baldeo: In this case, the plaintiff on his own expenses constructed some shops in the Bazaar on the order of the collector of the town. On the items which will be further sold on the construction of the shop, the defendants promised to pay commission on those sold items. In this case the consideration was not moved at the desire of the promise so the agreement was considered void agreement. This judgment concludes that the consideration has to be given at the desire of the promise.
- Chinmaya vs. Ramayya: In this case, there was an old lady who gave her immovable properties to her daughter through a registered deed. She also told her daughter to annually pay money to her aunt (sister of her mother). She also told her daughter to pay an annuity to Y (old woman’s sister). Her daughter entered into an agreement with the aunty to pay her the amount, on the same day. The aunt filed a case against the daughter when she failed to pay the money annually. The daughter took a plea that the consideration did not move from the old lady to her daughter and hence it is not a valid contract. The court held that, ‘the promise or any other person’ proves that the consideration does not have to move from the promise and hence a suit for recovery should be maintained by the aunt.
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