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No consideration, no contract

February 10, 2023

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This article is written by Anvita Bhardwaj, a student pursuing B.A. LL.B. from Symbiosis Law School, NOIDA. In this article, the author has discussed consideration as an essential element of a valid contract, its types and nature, and landmark case laws. The rule of no consideration, no contract has been discussed along with all its exceptions.

it has been published by Rachit Garg.

Introduction

Do you remember the essentials of a valid contract? Let’s take a refresher. The following are the essentials of a valid contract:

Offer and acceptance: A contract is formed when one party makes an offer, and the other party accepts it. The offer must be clear and specific, and the acceptance must be unconditional and communicated to the offeror.
Capacity to contract: Both parties to a contract must have the legal capacity to enter into the agreement. Minors, persons of unsound minds, and disqualified individuals are not considered capable of entering into a contract.
Free consent: Both parties to a contract must give their consent freely, without any coercion, undue influence, or fraud.
Legal object: The purpose of the contract must be lawful and not against public policy.
Writing and registration: Certain types of contracts, such as contracts for the transfer of immovable property, must be in writing and registered with the appropriate authorities.
Not declared void: The contract should not be one of the contracts that is declared void as per the Act.
Consideration: There must be something of value that is given or promised by one party in exchange for something else.

Have you ever wondered why consideration in a contract is necessary? Be it one rupee or thousands, consideration forms a part of the majority of the contracts, and it is not always monetary.

Let’s say you want to sell your car to a friend for 8 lakh rupees. Your friend agrees to the price and writes you a check for the amount. In return, you hand over the keys to the car. This exchange of money for the car is the consideration in the contract, which shows that both parties have agreed to the terms and are receiving something of value in return. Without this consideration, the contract would not be enforceable, and either party could back out of the agreement without any consequences.

However, there are certain situations where consideration is not necessarily a part of the contract, and it is still valid and enforceable! Let’s see those exceptions in the light of the rule, “No consideration? No contract!”.

What is consideration

Section 2(d) of the Indian Contract Act, 1872, defines “consideration” as follows:

“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.”

Further, Pollock defined consideration as “the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

In simple terms, “consideration” refers to something of value that is given or promised in exchange for a promise. It is the quid pro quo or the exchange of something of value between the parties involved in a contract. For a contract to be considered valid, it must have consideration. In other words, there must be something that the parties are giving or promising in exchange for something else.

For example, if A promises to sell a car to B for a certain price, the price that B pays is the consideration for A’s promise to sell the car.

It’s worth noting that consideration can be either a benefit to the promisor or a detriment to the promisee. It doesn’t have to be monetary or tangible; it can also be a promise, an activity, or even an abstention from doing something.

Types of consideration

There are several types of considerations that can be used in contracts. They include:

Executed consideration

This type of consideration refers to something that has already been done or given by one party in exchange for a promise from the other party. For example, if A pays B Rs.100 for a book, the Rs. 100 is executed consideration for B’s promise to give A the book.

Executory consideration

This type of consideration refers to something that is promised to be done or given by one party in exchange for a promise from the other party. For example, if A promises to pay B Rs.100 for a book next month, the promise to pay Rs. 100 is executory consideration for B’s promise to give A the book.

Past consideration

This type of consideration refers to something that was done or given before the contract was made, and it cannot be used as valid consideration. For example, if A helped B move last week and B promised to give A $100 for it, the help A provided last week is past consideration and cannot be used as valid consideration.

Unlawful consideration

This type of consideration refers to a promise to do something that is barred/punishable by law. For example, if A promises to B that he will kill C by burning him alive in his house in exchange for $100, then the promise to do so is unlawful consideration.

Illusory consideration

This type of consideration refers to a promise that is not legally binding. For example, if A promises B that he will do something as long as he wants to, the promise is an illusory consideration.

Consideration can be expressed or implied. It is expressed when the parties agree explicitly on the consideration, and it is implied when it is inferred from the circumstances of the contract.

Nature of consideration

The nature of consideration refers to the characteristics or attributes of consideration that make it valid and enforceable in a contract. The Indian Contract Act, 1872, defines consideration as “something in return,” which means that for a contract to be valid, there must be an exchange of something of value between the parties.

The nature of consideration can be described as follows:

Consideration must be real

This means that the consideration must be something of value that is given or promised in exchange for a promise. It cannot be illusory, vague, or uncertain.

In the case of Chidambara Iyer v. P.S. Renga Iyer (1966), the Supreme Court of India dealt with the issue of consideration in contract law. In this case, Chidambara Iyer and P.S. Renga Iyer entered into an agreement for the sale of some property. However, the sale did not go through, and Chidambara Iyer sued Renga Iyer for breach of contract.

The Supreme Court held that consideration must have some value in the eyes of the law, but it need not necessarily be of commercial value. The Court found that the consideration offered by Renga Iyer (the promise to transfer the property) was sufficient and that Chidambara Iyer was entitled to recover the amount paid for the property.

This case is considered an important precedent in Indian contract law and clarifies the principle that consideration need not necessarily be of commercial value but must have some value in the eyes of the law. It has also been used to iterate that a promise made without consideration is not enforceable.

Consideration must be legal

This means that the consideration must be something that is not illegal or against public policy.

Consideration must be sufficient

This means that the consideration must be of a certain value or usefulness. It does not need to be equal. However, it should be reasonable and sufficient.

Consideration must be given at the request of the promisor

This means that the consideration must be something that is given or promised at the request of the promisor.

The case of Durga Prasad v. Baldeo (1879) dealt with the issue of consideration in a contract. In this case, Durga Prasad and Baldeo entered into an agreement where Baldeo agreed to pay Durga Prasad money in return for the transfer of some property. However, Baldeo failed to pay the agreed amount, and Durga Prasad sued him.

The Court held that consideration must have some value in the eyes of the law and must be something that the promisor (Baldeo) has received in exchange for his promise. In this case, the court found that the consideration offered by Baldeo (the promise to pay money) was sufficient, and he was bound by the contract. This case establishes the principle that consideration must have some monetary value and be something received by the promisor in exchange for his promise.

Consideration must move from the promisee

This means that the consideration must be something that is given or promised by the promisee or by any other person at the request of the promisor.

Principle of no consideration, no contract

The principle “no consideration, no contract” means that for a contract to be valid and enforceable, there must be an exchange of something of value between the parties involved. This exchange is known as “consideration.”

Consideration is an essential element of a contract, and it can take many forms. It can be money, goods, services, or a promise to do or not do something. Essentially, consideration is something that one party gives or promises to the other party in exchange for something else. Without consideration, there is no contract.

For example, if a person promises to paint a house for free without receiving anything in return, there is no contract because there is no consideration. However, if the same person agrees to paint the house in exchange for payment, a contract is formed because there is a consideration (the payment) exchanged between the parties.

It’s worth noting that consideration does not need to be of equal value between the parties, but it must be something of value. Also, past consideration or moral consideration is not valid in Indian Contract Law.

In short, consideration is an important element of a contract and is what makes a contract legally binding. Without consideration, there is no contract, and any promises made by the parties will not be enforceable in court.

Exceptions to the principle of no consideration, no contract

The principle “no consideration, no contract” is a fundamental principle of contract law, which states that for a contract to be valid and enforceable, there must be an exchange of something of value between the parties involved. However, there are a few exceptions to this principle. These have been discussed below.

Section 25

Section 25 of the Indian Contract Act, 1872, provides for the rule that “agreements without consideration are void unless they are in writing and registered, are a promise to compensate for something done, or are a promise to pay a debt barred by limitation law.”

This Section states that an agreement without consideration is void unless it satisfies certain conditions. For example, an agreement to compensate for something done in the past or an agreement to pay a debt that is barred by the Limitation Act are exceptions to the rule of no consideration, no contract.

Here are some examples of how Section 25 might apply:

A promises to pay B a sum of money that B lent to A 10 years ago. Even though the loan was made 10 years ago and is barred by the Limitation Act, A’s promise to pay is still enforceable under Section 25.
C, a shopkeeper, promises to pay D, a customer, for goods that D had bought from C’s shop a month ago. Even though the goods were bought a month ago and D has not done any act or provided any service in return, C’s promise is still enforceable under Section 25.

It’s worth noting that for an agreement without consideration to be enforceable under Section 25, it must be in writing and registered. This requirement is intended to ensure that there is a written record of the agreement, which can be used as evidence in case of a dispute.

In summary, Section 25 of the Indian Contract Act, 1872, states that an agreement without consideration is void unless it satisfies certain conditions, such as being in writing and registered, is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law.

Natural love and affection

The principle “no consideration, no contract” states that for a contract to be valid and enforceable, there must be an exchange of something of value between the parties involved. However, there are a few exceptions to this principle, one of them is “natural love and affection,” which is an exception to the rule of no consideration, no contract.

Natural love and affection refer to the emotional bond between family members, such as parents and children, siblings, and spouses. When a contract is entered into based on natural love and affection, it is considered binding even if there is no consideration.

For example, if A promises to transfer a piece of land to B, A’s child, as a gift based on natural love and affection, there is no consideration, but it is still a valid contract.

It’s worth noting that for an agreement based on natural love and affection to be enforceable, it must be in writing and registered. This requirement is intended to ensure that there is a written record of the agreement, which can be used as evidence in case of a dispute.

It’s also worth noting that the Indian Contract Act 1872, which governs contract law in India, does not specifically mention natural love and affection as an exception to the rule of no consideration, no contract. However, courts have recognised the exception in certain cases.

In conclusion, love and affection are exceptions to the rule that if there is no consideration, there is no contract. This means that agreements between family members can be binding even if there is no consideration. It’s important to note that the agreement should be in writing and registered for enforceability.

Promissory estoppel

This doctrine holds that a promise, although not supported by consideration, can be enforced if the promisor should reasonably expect the promisee to rely on the promise and if the promisee does, in fact, rely on the promise to his detriment. For example, if A promises to B that he will transfer a piece of land to B and B, in reliance on that promise, incurs expenses to improve the land, A may be estopped from denying the existence of consideration for the promise.

Contracts under seal

Contracts under seal, also known as formal contracts or speciality contracts, are contracts that are executed under seal and are considered binding without consideration. For example, a contract executed under seal between A and B would be considered binding even if there was no consideration.

Past voluntary services

Past voluntary services refer to services that were performed voluntarily and gratuitously in the past and for which a promise of compensation was made subsequently. When a contract is entered into based on past voluntary services, it is considered binding even if there was no consideration at the time the services were rendered.

For example, if A voluntarily takes care of B’s elderly parent for a year and B subsequently promises to pay A a sum of money as compensation, there was no consideration when the services were rendered, but the contract is still valid because of the promise to pay.

It’s worth noting that for an agreement based on past voluntary services to be enforceable, it must be in writing and registered. This requirement is intended to ensure that there is a written record of the agreement, which can be used as evidence in case of a dispute.

It’s also worth noting that the Indian Contract Act, 1872, which governs contract law in India, does not specifically mention past voluntary services as an exception to the rule of no consideration, no contract. However, courts have recognised the exception in certain cases.

Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly (1986) – dealt with the issue of past voluntary services and the principle of promissory estoppel. The Supreme Court held that past voluntary services can be a valid consideration for a contract and that the principle of promissory estoppel can be applied to hold the promisor to the terms of the contract.

Promise to pay a time-barred debt as an exception to no consideration, no contract

A time-barred debt refers to a debt that is past the statute of limitations set by the Limitation Act, 1963, and thus cannot be enforced through legal action. However, if the debtor voluntarily promises to pay such a debt, it can be enforceable.

For example, if A borrowed money from B 10 years ago and the statute of limitations for the debt has expired, B cannot legally enforce the debt. But if A voluntarily promises to pay the debt, a contract is formed even though there is no consideration.

Section 25 of the Indian Contract Act, 1872, provides for this exception and states that an agreement without consideration to pay a time-barred debt is not void but enforceable.

Creation of an agency

An agency is a relationship between two parties in which one party (the principal) authorises another party (the agent) to act on its behalf. In an agency agreement, the agent is appointed to perform certain tasks on behalf of the principal, and the principal is bound by the actions of the agent.

For example, A, the principal, appoints B, the agent, to sell A’s property. Even though there is no consideration when the agency agreement is made, the contract is still binding because the agent is authorised to act on the principal’s behalf, and the principal is bound by the actions of the agent.

It’s worth noting that for an agency agreement to be enforceable, it must be in writing and registered. This requirement is intended to ensure that there is a written record of the agreement, which can be used as evidence in case of a dispute.

Gift

A gift is a voluntary transfer of property from one person to another without any consideration. In other words, when a person makes a gift, they do so freely, without receiving anything in return. Even though there is no consideration, a gift is still considered a valid contract.

For example, if A gives B a car as a gift, there is no consideration, but it is still a valid contract.

It’s worth noting that for a gift to be enforceable, it must be made voluntarily and without any coercion or undue influence. Also, there must be an intention to make a gift, and the gift must be accepted by the donee.

It’s also worth noting that under the Indian Contract Act 1872, gifts are not considered contracts. However, gifts are considered a transfer of property and are governed by the Indian Transfer of Property Act, 1882.

Note: Gifts are governed by Section 122 of the Transfer of Property Act, 1882. This Section lays down the requirements and formalities for a valid gift of property. The Section requires that a gift be made voluntarily and without consideration and must be accepted by the donee. The gift must be in writing, signed by or on behalf of the donor, and attested by at least two witnesses. The Section also provides that a gift may be revoked by the donor at any time before the donee takes possession of the property.

Bailment

Bailment is the legal relationship created when one party (the bailee) is entrusted with the possession and control of property owned by another party (the bailor) for a specific purpose. In a bailment, there is no exchange of consideration, but it is still considered a valid contract.

For example, if A entrusts B with possession and control of A’s car for the purpose of repairing it, there is no consideration, but the contract is still valid.

It’s worth noting that for a bailment to be enforceable, it must be made voluntarily and without any coercion or undue influence. Also, there must be an intention to create a bailment, and the bailment must be accepted by the bailee.

It’s also worth noting that under the Indian Contract Act 1872, a bailment is considered a special contract and is governed by the Indian Contract Act 1872, under Sections 148 – 181.

Charity

Charity refers to the act of giving money, goods, or services to organisations or individuals in need without receiving anything in return. In other words, when a person makes a charitable donation, they do so freely, without receiving any consideration. Even though there is no consideration, a charitable donation is still considered a valid contract.

For example, if A gives money to a charitable organisation, there is no consideration, but it is still a valid contract.

It’s worth noting that for a charity to be enforceable, it must be made voluntarily and without any coercion or undue influence. Also, there must be an intention to make a charitable donation, and the donation must be accepted by the donee.

It’s also worth noting that under the Indian Contract Act 1872, charitable donations are not considered contracts. However, charitable donations are considered a form of gift and are governed by the Indian Transfer of Property Act, 1882.

Conclusion

Consideration is a key factor in ensuring the integrity of contracts and the legal certainty of contractual obligations. In conclusion, the rule of “no consideration, no contract” is a fundamental principle of contract law, which holds that a contract must have consideration in order to be legally enforceable. Consideration refers to something of value that is exchanged between the parties to a contract. The requirement of consideration ensures that both parties have given something of value in exchange for the contract and provides a legal foundation for the contract. The absence of consideration can render a contract void and unenforceable. However, there are exceptions to this rule, and those have already been elaborated on above.

Frequently Asked Questions (FAQs)

Why is consideration important in a contract?

Consideration provides the legal foundation for a contract, making it binding and enforceable. Consideration is a key factor in determining the validity of a contract. A contract without consideration is considered void and unenforceable, barring certain legal exceptions. It helps protect against unfair agreements by ensuring both parties have been given something of value in exchange for the contract. Consideration gives each party a legal obligation to perform their side of the contract. Without consideration, there may be no incentive for either party to perform their obligations.

References

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No consideration, no contract

Introduction

What is consideration