ICAI Notes- Unit 2: Consideration- 2 - CA Foundation PDF Download

SUMMARY:

The students may note that:
(a) Consideration is a price for the promise of the other party and it may either be in the form of ‘benefit’ or some ‘detriment’ to the parties.
(b) Consideration must move at the desire of the promisor.
(c) It may be executed or executory.
(d) Past consideration is valid provided it moved at the previous request of the promisor.
(e) It must not be something which the promisor is already legally bound to do.
(f) It may move from the promisee or any third party.
(g) Inadequacy of consideration is not relevant.
(h) Consideration must be legal.
(i) The general rule of law is “No Consideration, No Contract” but there are a few exceptional cases where a contract, even though without consideration is valid.
(j) “Stranger to a contract can’t sue but in some exceptional cases the contract may be enforced by a person who is not a party to the contract.

TEST YOUR KNOWLEDGE:

Multiple Choice Questions
1. Which of the following statement is false? Consideration:
(a) Must move at the desire of the promisor
(b) May move from any person
(c) Must be illusory
(d) Must be of some value
2. Consideration must move at the desire of
(a) Promisor
(b) Promisee
(c) Any other person
(d) Any of these
3. Consideration may be
(a) Past
(b) Present
(c) Future
(d) All of the above
4. Consideration in simple term means:
(a) Any this in return
(b) Something in return
(c) Everything in return
(d) Nothing in return
5.  Which of the following is not an exception to the rule - No consideration, No Contract
(a) Compensation for involuntary services
(b)  Love & Affection
(c)  Contract of Agency
(d) Gift
Answers to MCQs
1 (c)

2 (a)

3 (d)

4 (b)

5 (a)

Theoretical Questions
Question 1 : Define consideration. State the characteristics of a valid consideration.

Question 2 : “No consideration, no contract” Comment.
Question 3 : “To form a valid contract, consideration must be adequate”. Comment. Answers to the Theoretical Questions
1. Definition of Consideration-Section 2(d): “When at the desire of the promisor, the promise or any other person has done, or does or abstains from doing of promises to do or abstain from doing something, such an act or abstinence or promise is called consideration for the promise” The essential characteristics of a valid consideration are as follows:
(1) Consideration must move at the desire of the promisor.
(2) It may proceed from the promisee or any other person on his behalf.
(3) It may be executed or executory. It may be past, present or future.
(4) It must be real and have some value in the eyes of law.
(5) It must not be something which the promisor is already legally bound to do.
(6) It must not be unlawful, immoral or opposed to public policy.
(7) Inadequacy of consideration does not invalidate the contract. Thus, it need not be proportionate to the value of the promise of the other.
(8) It may comprise of some benefit, profit, right or interest accruing to one or some loss, detriment, obligation or responsibility undertaken by the other.
2. No consideration, no contract: Every agreement, to be enforceable by law must be supported by valid consideration. An agreement made without any consideration is void. A gratuitous promise may form a subject of a moral obligation and may be binding in honour but it does not cause a legal responsibility.
For example: A promises to pay Rs. 100 to B. This promise cannot be enforced by B because he is not giving anything to A for this promise. No consideration, no contract is a general rule. However Section 25 of the Indian Contract Act provides some exceptions to this rule, where an agreement without consideration will be valid and binding. These exceptions are as follows:
(i) Agreement made on account of natural love and affection: Section 25 (1) provides that if an agreement is

(i) in writing
(ii) registered under the law and

(iii) made on account of natural love and affection

(iv) between the parties standing in a near relation to each other,

it will be enforceable at law even if there is no consideration.

Thus, where A, for natural love and affection, promises to give his son, B, Rs. 10,000 in writing and registers it. This is a valid contract.
(ii) Compensation for services voluntarily rendered: Section 25(2) provides that something which the promisor was legally compelled to do;

(iii) and the promisor was in existence at the time when the act was done whether he was competent to contract or not

(iv) the promisor must agree now to compensate the promise.

Thus when A finds B’s purse and gives it to him and B promises to give A Rs. 50, this is a valid contract.
(iii)  Promise to pay time-barred debts (Section. 25 (3)): Where there is an agreement, made in writing and signed by the debtor or by his agent, to pay wholly or in part a time barred debt, the agreement is valid and binding even though there is no consideration. If A owes B Rs. 1,000 but the debt is lapsed due to time-bar and A further makes a written promise to pay Rs. 500 on account of this debt, it constitutes a valid contract.
(iv)  Contract of agency (Section. 185): No consideration is necessary to create an agency.
(v)  Completed gift (Explanation 1 to Section 25): A completed gift needs no consideration. Thus if a person transfers some property by a duly written and registered deed as a gift he cannot claim back the properly subsequently on the ground of lack of consideration.
3. The law provides that a contract should be supported by consideration. So long as consideration exists, the Courts are not concerned to its adequacy, provided it is of some value. 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 (Bolton v. Modden).  Consideration must however, be something to which the law attaches value though it need not be equivalent in value to the promise made.
According to Explanation 2 to Section 25 of the Indian Contract Act, 1872, an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.