ICAI Notes 1.2 - Consideration - CA Foundation PDF Download

Learning objectives

• Understand the concept of consideration, its importance for a contract and its double aspect.
• Clearly understand how consideration may move from a third party and how this makes the contract valid.
• Learn about the peculiar circumstances when a contract is valid even without consideration.
• Be aware of the rule ‘A stranger to a contract cannot sue’ and exceptions thereof.

Consideration is an essential element of a contract without which no single promise will be enforceable. Having a double aspect of a benefit to the promisor and a detriment to the promisee, it has to be really understood in the sense of some detriment as envisaged by English Law. In this Unit we shall examine the terms of the Indian definition and try to understand the concept of consideration, and also the legal requirements regarding consideration.

1.9 WHAT IS CONSIDERATION ?

Consideration is, in a sense, the price agreed to be paid by the promisee 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 promisee)” at the request of the promisor. Section 2(d) 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 abstain from doing something, such an act or abstinence or promise is called consideration for the promise”.
(1) That is to say, consideration is the doing or not doing of something which the promisor desires to be done or not done.
(2) Consideration must be at the desire of the promisor.
(3) Consideration may move from promisee or any other person.
(4) Consideration may be past, present or future.
(5) Consideration need not be adequate, but should be real.
For example, A promises to carry B’s goods free of charge, and B allows A to carry the same. Here A will be the promisor and B will be the promisee. The question that arises in this case is does B offer any consideration as against A’s promise to carry his goods ? The answer must be in the affirmative, because the detriment or the disadvantage which B suffers in parting with the goods so that goods may be carried by A is sufficient consideration as against A’ promise to carry. So the essence of consideration is detriment suffered or burden taken by the promisor. The promisor may or may not derive any benefit from the consideration given by the promisee. But in most cases, the promisor derives some benefit from the consideration which may be said to be quid pro quid from the promise of the promisor.

1.10 LEGAL REQUIREMENTS REGARDING CONSIDERATION

(i) 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.

(ii) Consideration from promisee or any other person : 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 promisee or any other person does something such an act is consideration. In other words, there can be a stranger to a consideration but not stranger to a contract.

(iii) Executed and executory consideration : A consideration which consists in the performance of an act is said to be executed : When it consist 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. For example, A pays Rs. 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) Past Consideration : 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 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, 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.

(v) 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.

(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. But where a person promises to do more that he is legally bound to do, such a promise provided it is not opposed to public policy, is a good consideration.

(vii) Consideration must not be unlawful, immoral, or opposed to public policy 

1.11 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 agreement. Only a person who is party to a contract can sue on it. The aforesaid rule is, however, subject to the following exceptions:
(1) In the case of 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.
(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of family who originally had not been parties to the settlement may enforce the agreement.
(3) 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.
(4) In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract.
(5) In the case of an estoppel by acknowledgement of liability or part performance thereof, that is when, one admits the liability. For example, if L gives to M Rs. 2,000 to be given to N, and M informs N that he is holding the money for him, but afterwards M refuses to pay the money N will be entitled to recover the same from the former.
(6) In the case of covenant running with the land, the person who purchases land with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.

1.12 VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATION

The general rule is that an agreement made without consideration is void (Section 25). In every valid contract consideration is very important. A contract may only be enforceable when an adequate consideration is there. 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.

1. 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.

2. 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 Sec. 25(2). In order that a promise to pay for the past voluntary services is binding,
the following essential factors must exist :
(i) The services should have been rendered voluntarily.
(ii) The services must have been rendered for the promisor.
(iii) The promisor must be in existence at the time when services were rendered
(iv) The promisor must have intended to compensate the promisee.

3. Promise to pay time barred debt : Where a promise in writing signed by the person making it or by his authorised agent, is made to pay a debt barred by limitation it is valid without consideration [Section 25(3)].

4. Agency : According to Section 185 of the Indian Contract Act, no consideration is necessary to create an agency.

5. Completed gift : In 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 donee, of any gift actually made.” Thus, gifts do not require any consideration.

1.13 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) In some exceptional cases the contract may be enforced by a person who is not a party to the contract.