Table of contents | |
Overview | |
Introduction | |
What is Consideration? | |
Legal Rules Regarding Consideration | |
Suit By a Third Party to a Contract | |
Validity of an Agreement Without Consideration | |
Summary |
Consideration is a crucial component of a valid contract. Without it, no promise can be enforced. The term "consideration" refers to the idea of "quid pro quo," meaning "something in return." Consideration has two aspects: a benefit to the promisor and a detriment to the promisee. However, it is important to understand consideration in terms of some detriment, as per English law. In this unit, we will explore the concept of consideration and the legal requirements associated with it.
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Consideration refers to the price agreed upon by the promisee for the promisor's obligation. In the case of Misa v. Currie, consideration was described as a valuable element that could involve a right, interest, profit, or benefit to one party (the promisor) or forbearance, detriment, loss, or responsibility by the other party (the promisee).
Legal Definition of Consideration
Consideration, as defined in Section 2(d) of the relevant legal framework, involves an act, abstinence, or promise made at the desire of the promisor by the promisee or another person. This could include doing something, refraining from doing something, or promising to do or not do something.
Types of Consideration
Conclusion
(i) Consideration must move at the desire of the promisor: Consideration should be offered by the promisee or a third party at the request of the promisor, indicating the “return” element of consideration. A marriage contract in exchange for a settlement promise is enforceable. An act performed at the request of a third party does not count as consideration. In the case of Durga Prasad v. Baldeo, D (defendant) agreed to pay P (plaintiff) a commission for articles sold through their agency in a market constructed by P at the request of C (Collector), not D. Thus, D was not obligated to pay as it lacked consideration and was void. For example, if R saves S’s goods from a fire without being asked, R cannot claim a reward as the action was voluntary.
(ii) Consideration may move from promisee or any other person: In India, consideration can arise from the promisee or from any other individual who is not a party to the contract. This is clarified in the definition of consideration found in Section 2(d). The definition states that if the promisee or someone else acts at the request of the promisor, that act qualifies as consideration. Thus, while there may be a stranger to the consideration, there cannot be a stranger to the contract.
Example 6: An old lady made a gift of her property to her daughter with a direction to pay a certain sum of money to the maternal uncle by way of annuity. On the same day, the daughter executed a writing in favour of the brother agreeing to pay annuity. The daughter did not, however, pay the annuity and the uncle sued to recover it. It was held that there was sufficient consideration for the uncle to recover the money from the daughter. [Chinnayya vs. Ramayya (1882)]
(iii) Executed and executory consideration: A consideration which consists in the performance of an act is said to be executed. When it consists in 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.
Example 7: A pays ₹ 5,000 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 B merely makes a promise. Therefore, the consideration paid by A is executed, whereas the consideration promised by B is executory.
(iv) Consideration may be past, present or future: The words “has done or abstained from doing” [as contained in Section 2(d)] are a recognition of the doctrine of past consideration. In order to support a promise, a past consideration must move by a previous request. It is a general principle that consideration is given and accepted in exchange for the promise. The consideration, if past, may be the motive but cannot be the real consideration of a subsequent promise. But in the event of the services being rendered in the past at the request or the desire of the promisor, the subsequent promise is regarded as an admission that the past consideration was not gratuitous. Example 8: ’A’ performed some services to ‘B’ at his desire. After a week, ‘B’ promises to compensate ‘A’ for the work done by him. It is said to be past consideration and A can sue B for recovering the promised money. Example 9: A cash sale of goods is an example of present consideration. The consideration is immediately made against delivery of goods.
Consideration need not be adequate: Consideration does not have to possess any specific value. It does not need to be approximately equal in value to the promise it is exchanged for, but it must be something that the law recognizes as having some value. The return does not have to equal what is given; it may represent a poor bargain for one party. It is important to note that Explanation 2 to Section 25 states that an agreement where the promisor's consent is freely given is not void simply because the consideration is inadequate. However, if the consideration is shockingly low and the other party claims their consent was not freely given, this inadequate consideration can serve as evidence to support that claim.
Example 10: X promises to sell a house worth ₹60 lacs for ₹10 lacs only, the adequacy of the price in itself shall not render the transaction void, unless the party pleads that transaction takes place under coercion, undue influence or fraud.
(vi) Performance of what one is legally bound to perform: The performance of an act by a person who is legally bound to perform the same cannot be consideration for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration. Hence, such a contract is void for want of consideration. Similarly, an agreement by a client to pay to his counsel after the latter has been engaged, a certain sum over and above the fee, in the event of success of the case would be void, since it is without consideration.
Example 11: A promise to pay ₹ 2,000 to a doctor over the fees is invalid as it is the duty of a doctor to give a treatment for his normal fees. But where a person promises to do more that he is legally bound to do or such a promise provided it is not opposed to public policy, is a good consideration. It should not be vague or uncertain.
(vii) Consideration must be real and not illusory: Consideration must be real and must not be illusory. It must be something to which the law attaches some value. If it is legally or physically impossible it is not considered valid consideration.
Examples 12: A man promises to discover treasure by magic, bringing the dead person to live again. This transaction can be said to be void as it is illusory.
(viii) Consideration must not be unlawful, immoral, or opposed to public policy. Only presence of consideration is not sufficient it must be lawful. Anything which is immoral or opposed to public policy also cannot be valued as valid consideration.
Example 13: ABC Ltd. promises to give job to Mr. X in a Government bank against payment of ₹ 50,000 is void as the promise is opposed to public policy.
Under the Indian Contract Act, 1872, while consideration for an agreement can come from a third party, that third party cannot initiate a lawsuit based on the contract. Legal action can only be taken by individuals who are parties to the contract. Therefore, the idea of a stranger to consideration is valid and distinct from that of a stranger to a contract.
Example 14: P who is indebted to Q, sells his property to R and R promises to pay off the debt amount to Q. If R fails to pay, then in such situation Q has no right to sue, as R is a stranger to contract.
The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of contract”, is however, subject to certain exceptions. In other words, even a stranger to a contract may enforce a claim in the following cases:
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Chapter Notes- Unit 2: Consideration
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The basic principle is that an agreement lacking consideration is void (Section 25). Consideration is crucial for a valid contract. A contract is enforceable only when consideration exists. However, the Indian Contract Act specifies certain exceptions to this principle. In the following circumstances, an agreement made without consideration will still be valid and enforceable.
Agency (Section 185):
Completed Gift:
Bailment (Section 148):
Charity:
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1. What is the definition of consideration in contract law? |
2. Are there any legal rules that govern consideration? |
3. Can a third party sue for a contract in which they are not a party? |
4. Is an agreement valid if it lacks consideration? |
5. How does the concept of consideration affect the enforceability of a contract? |
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