What is consideration?
Consideration is, in a sense, the price agreed to be paid by the promise for the obligation of the promisor. Consideration has, therefore, been defined in an English judgment as “some right, interest, profit or benefit accruing to one party (i.e. promisor) or forbearance, detriment, loss or responsibility given, suffered or undertaken by the other(i.e. the promise)’’ at the request of the promisor. Section 2(d) defines consideration as follows: 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 abstain from doing something, such an act or abstinence or promise is called a consideration for the promise”.
Consideration is an essential element of a contract. Having a double aspect of benefit to the promisor and a detriment to the promise, it has to be really understood in the sense of some detriment as envisaged by English Law. In this article, we shall examine the terms of Indian definition and try to understand the concept of consideration, and also the legal requirements regarding consideration.
Essential for consideration
1. Consideration must move at the desire of the promisor:
Consideration must be offered by the promisee or the third party at the desire or request of the promisor. An act done at the desire of a third party is not a consideration.
1. a) Consideration from promisee or any other person (Privity of Consideration):
In India, consideration may proceed from the promisee or any other person who is not a party to the contract. The definition of consideration as given in section 2(d) makes that proposition clear. According to the definition, when at the desire of the promisor, the or promisee or any other person does something such an act is a consideration. In other words, there can be a stranger to consideration but not a stranger to a contract.
1. b) Executed and Executory consideration:
A consideration which consists in the performance of an act is said to be executed. When it consists of a promise, it is said to be executory. The promise by one party may be the consideration for an act by some other party, and vice versa.
1. c) Past consideration:
The words “has done or abstained from doing” are recognize the doctrine of past consideration. In order to support a promise, a past consideration must be moved by a previous request. It is the general principle that consideration is given and accepted in exchange for the promise. The consideration, if past, maybe the motive but cannot be the real consideration of a subsequent promise. But in the event of the service being rendered in the past at the request or the desire of the promissory, the subsequent promise is regarded as an admission that the past consideration was not gratuitous.
1. d) Adequacy of consideration:
Consideration need not be any particular value. It need not be approximately equal value with the promise for which it is exchanged but it must be something which the law would regard as having some value. It may be noted in this context that Explanation 2 to section 25 states that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.
2. Consideration must not be unlawful, immoral, or opposed to public policy.
Suit by a third party on an agreement
Though under the Indian Contract Act the consideration for an agreement may proceed from a third party, the third party cannot sue on the agreement. Only a person who is a party to a contract can sue on it. The aforesaid principle is, however, subject to the following exceptions:
- In the case of a trust, a beneficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.
- In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of a family who originally had not been parties to the settlement may enforce the agreement.
- In the case of certain marriage contracts, a female member can enforce a provision for marriage expenses made on the partition of the Hindu undivided family.
- In the case of the assignment of a contract, when the beneficiary under a contract has been assigned, the assignee can enforce the contract.
- In the case of estoppels by the acknowledgement of liability or part performance thereof, that is when one admits the liability.
- In the case of a covenant running with the land, the person who purchases land with notice that the owner of the land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.
The validity of an agreement without consideration
The general rule is that an agreement made without consideration is very important. A contract may only be enforceable when adequate consideration is very important. However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration will be valid and enforceable.
Natural Love and Affection:
A written and registered agreement based on natural love and affection between the parties standing in near relation (e.g., husband and wife) to each other is enforceable even without consideration.
Compensation for past voluntary services:
A promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable under section 25(2). In order that a promise to pay for the past voluntarily services is binding, the following essential factors must exist:
- The services should have been rendered voluntarily.
- The services must have been rendered for the promisor.
- The promisor must be in existence at the time when services were rendered.
- The promisor must have intended to compensate for the promise.
Promise to pay time barred debt:
Where a promise in writing signed by the person making it or by his authorized agent, is made to pay a debt barred by limitation it is valid without consideration.[Section 25(3)].
According to Section 185 of the Indian Contract Act, no consideration is necessary to create an agency.
In the case of completed gifts, the rule no consideration, no contract does not apply. Explanation (1) to Section 25 states “nothing in this section shall affect the validity as between the donor and done, of any gift actually made”. Thus, gifts do not require any consideration.
A pays Rs. 500 to B and B promises to deliver to him a certain quantity of wheat within a month. In this case, A pays the amount, whereas the consideration promised by B is executor.
If L gives to M Rs 2000 to be given to N, and M informs N that he is holding the money for him, but afterward M refuses to pay the money N will be entitled to recover the same from the former.
X promises to landscape the garden of Y and Y agrees to pay X as long as the landscape plans are approved by Z, a third party. Y’s promise is a valid consideration for X’s promise.
X found Y’s purse on the road. He returns the same to Y who promises to give Rs 100 to X for his services. This is a valid contract.