Consideration of Contract & Legality of Object - Contract, Business Law | Business Law - B Com PDF Download

CONSIDERATION

Consideration is an essential element of a valid contract. A promise without consideration cannot be enforced by law except under certain circumstances. Consideration is the necessary evidence by law of the intention of the parties to effect their legal relations. Consideration, broadly speaking, is the price paid by the promisee for the obligation of the promisor. The term ‘consideration’ is used in the sense of “something in return”, i.e. quid pro quo. An agreement without consideration is a bare promise and exnudo pacto non aritio actio, i.e., cannot be held to binding on the parties.

Definition of Consideration

Sir Frederick Pollock has defined consideration, “It is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

In the case, Curie v. Misa the term was defined, “A valuable consideration in the sense of the law may consist either in some right, interest, forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.”

Section 2(d) of the Indian Contact Act defines consideration thus: “when at the desire of the promisor, 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.”

Example: A offers to sell his house to B for a sum of Rs.50,000. B accepts the offer. In this contract, for A’s promise, the consideration is a sum of Rs.50,000 while for B’s promise consideration is the house.

Essential Elements of Consideration

1.    Consideration must proceed at the desire of the Promisor. The act constituting the consideration must have been at the desire or request of the promisor. An act done at the desire of a third party is not a consideration. Voluntary acts also would not constitute good consideration in the eyes of law. If A rushes to B’s help whose house is on fire, there is no consideration here. It is a valuntary act of A. But if A goes to B’s help at B’s request who promises, to give a reward for the help then there is consideration. It is not necessary that the promisor himself should be benefited by consideration. It is sufficient if the act or forbearance constituting consideration was done or given at the promisor’s requrest.

The promise to pay subscription to a charitable trust of relgious organisation would have been without consideration if no liability had been incurred and nothing substantial had been done by the trust or the organisation on the faith of the subscriber’s promise.

Example: (a) Mohamedan promised to subscribe Rs. 500/- to a fund to rebuild a mosque and no steps were taken to rebuild the mosque, it was held that the promise was without consideration and that the subscriber was not liable (Abdul Aziz V. Masum Ali) (1914).

(b)   In another case of similar nature, where the Secretary had acted on the faith of the promise and incurred a liability, the court enforced the claim for the recovery of the amount to the extent of the liability incurred by the promise. (Kedar Nath V. Gauri Mohamed) (1886).

Thus, mere willingness to utilise a donation for the purpose of a trust which was proposed to be set up for promoting technical or business knowledge including knowledge of insurance cannot be regarded as consideration within the definition of Sec. 2(d). (Dr. Lakshmanswami Mudaliar V. LIC 1963).

2.    Consideration may move from the promisee or any other person: In English Law consideration must move from the promisee. Under the Indian Contract Act, consideration may proceed from the promisee or any person. Thus, consideration furnished by a third party will also be valid if it has been done at the desire of the promisor. But it does not follow that the third party can sue on the agreement.

Leading case

Chinaya V. Ramayya (1881) : In this case, A, by a deed of gift, made over certain property to her daughter, with a direction that the daughter should pay an annuity to A’s brother, as had been done by A. On the same day the daughter executed a writing in favour of the brother agreeting to pay the annuity. The daughter declined to fulfil her promise and the brother sued to recover the amount. The defendent (sister) contended that no consideration from the brother, and that he being the stranger to the consideration had no right to sue. Held, it is not necessary that consideration must move from the promised himself. A contract can be supported can be supported even by a consideration from a person other than the promised. Therefore, the brother was entitled to maintain the suit.

3.    Privity of Contract: The general rule is that only the person entitled to the benefits or bound by the obligations of a contract are entitled to sue or be used upon it. Thus, a stranger to contract, cannot file a suit to enforce any of the rights arising out of the contract. Therefore, if A for good consideration agrees with B that he will not sue for C’s negligense, the latter will not be able to set up the promisee of A to be as defence.

Example: (a) Tweddle V. Atkinson (1861): In this case, the father of a boy and the father of the girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy, and after marriage the husband should have full power to sue for such sums. After the death of both the contracting parties the husband sued the executors of the wife’s father upon the above agreement, but the action was held not to be maintainable because the husband was not a party to the contract.

(b)   Dunlop Tyre Co. V. Selfridge Ltd. (1915): In this case, D supplied tyres to a wholeseller X, on the condition that any retailer to whom X resupplied the tyre should promise X, not to sell to the public below D’s list price. X supplied the tyres to S, a sub-dealer, S sold two tyres at less than the list price, and thereupon, the Dunlop Co., sued him for breach of the contract. Held, Dunlop Co., could not claim the benefit of the contract as against S, a sub-dealer, There was no privity of contract between the two.

Exceptions to the doctrine of privity of contract

(a)   Beneficiaries in the case of trust: A beneficiary under an agreement to create a trust can sue upon the agreement, though he was not a party to the contract between the settler and the trustees.

Example: A creates a trust for the benefit of B, and appoints X, Y and Z as trustees. B can sue for benefits available to him under the trust though he is not a party to the contract.

(b)   In case of provision in marriage settlement of minors: A child in a contract of marriage is treated as a party who has given consideration, and he is entitled to enforce any contract to settle property, which a marriage settlement may contain.

In Khwaja Muhammad V. Hussaini Begum (1910), it was held that where a lady sued her father. in-law to recover the arrears of allowance payable to her by him under an agreement between his and he father in consideration of her marriage, she could enforce the promise in her favour though she was a stranger to the contract. The Privy Council observed that it might occasion serious injustice to apply the common law doctrine of privity of contract in a country like India where marriages are contracted for minors by parents or guardians.

(c)   In case provision is made for the marriage or maintenance of a female member of the family on the partition of Hindu Undivided family: The female members though not parties to the contract, possess an actual beneficial right which places them in the position of beneficiaries under the contract, and can, therefore, enforce the promise.

(d)   Assignee of a contract: An assignee under an assignment made by the parties, or by the operation of law, e.g., in case of death or insolvency, can sue upon the contract for the enforcement of his rights and interests. A debt can be assigned by a creditor to a third person without the consent of the debtor. But a mere nominee cannot sue e.g. the person for whose benefit another has insured his own life cannot sue.

(e)   Where a charge is created on certain specific immovable property in favour of certain person: Such charge is enforceable at the instance of the beneficiary entitled, though he may be a stranger to the document creating the charge.

(f)    Estoppel: Where one party has by his words or conduct made to the other a promise or assurance which was intended to affect the legal relations between them, then once the other party has taken him on his words and acted upon them, the party who gave the promise shall be estopped from denying his liability arising from the promise.

(g)   Contracts which are entered into through an agent, can be enforced by the principal.

4. Consideration may be a promise to do something or abstain from doing something: Example: A is indebted to B to the extent of Rs. 1000. The debt falls due and A fails to pay.

C promises to stand surety to the debt if B does not file a suit against A, to which B agrees. B’s promise regarding forbearance to sue A is a good consideration for C’s standing as a surety. Mutual agreements to avoid further litigations are held to be supported by valid consideration. Consideration, therefore may be an act or an abstinence.

5. Consideration may be past, present or future

Past consideration: Where the promisor had received the consideration before the date of the promise, the consideration is termed as “Past consderation.”

Example: A teaches the child of B at B’s request. After six months B agrees to pay A a sum of Rs.600/- for his teaching. For B’s promise the services of A will be taken as past consideration.

Present consideration: When the promisor receives consideration simultaneously with his promise, the consideration is termed as Present Consideration.

Example: A purchased goods from a shopkeeper of the worth of Rs.100/- A pays money to the shopkeeper. Consideration will be taken as “Prosent”.

Future consideration: Where the promisor has receive consideration in future for his promise, the consideration is said to be “future”.

Example: A promises to sell his house to B for a sum of Rs. 15,000/- after a week. B also promises to pay A Rs. 15,000/- after a week on Tuesday. Consideration is future for both the parties.

6. There must be independent consideraton to support each independent promise

There must be as many consideration as the number of contracts. A single consideration cannot support two agreements between the same parties.

7. Consideration must have some value in the eyes of Law though it need not be adequate

Inadequacy of consderation will not invalidate a contract. It is open to the parties to fix their own price. For example if A vountarily agreed to sell his car for Rs. 500/- to B, it will be a valid contract despite the inadequacy of the consideration. It is to be noted here that though inadequacy of consideration will not invalidate a contract but may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

8. Consideration must be real and not illusory, impossible uncertain, ambigious, fraudulent, immoral or opposed to public policy.

Consideration is always given in exchange of some benefit accruing or to make good injury caused to the other party. Consideration should not be fraudulent, forbidden by law or immoral or opposed to public policy. It should not cause injry to any person or property if allowed to be exchanged.

Further, consideration must be something more than the mere promise to do an act for which the promise is already bount to do for the promisor. Thus, an agreement to perform an existing obligation made with the person to whom the obligation is already owed is not made for consideration. For example, if promise to pay an existing debt punctually if the credtior gives a discount is without consideration and the discount cannot be enforced or an agreement by a client to pay his lawyer after the latter has been engaged, a certain sum of money over and above the fee, in the event of success of the case would be void, being without consideration, (Ram Chandra Chintaman V. Kalu Raju) (1879). But a person promises to do more than what he is legally bound to do, such a promise, if not opposed to public policy, shall be good and a valid consideration. Thus, where police was requested to arrange for stationery guard for the safety of some property on payment of reasonable remuneration in a case where police had though surveillance by a mobile force to be sufficient, the promise to pay the remuneration shall not be without consideration because the acceptance by the police to provide more protection than what was deemed to be necessary is a good consideration for the promise to pay remuneration.

When no consideration is necessary

The general rule is that contracts made wihtout consideration are void. But Section 25 of the Contract Act lays down the undermentioned exceptions which make a promise without consideration valid and binding.

1. Promise made on account of natural love and affection

(i)    When a contract is made on account of naturla love and affection between the parties. 

(ii)   The parties are standing in a near relation to each other, and

(iii)  The contract is in writing and registered under the law for the time being in force for the registration of documents.

(a)   Examples: A, out of his love and affection, promises to give his wife, Rs.10,000. This promise is put into writing and is registered. It will be a valid contract without consideration.

(b) After persistent quarrels and disagreement between husband and his wife, the husband promised in writing to pay his wife, a sum of money for her maintenance and separate residence. The agreement was also registered. It was held that the promise was not enforceable because it was not entered out of natural love and affection. (Rajlusmi Dabee v. Bhootnath) (1900).

2. Promise to compensate for voluntary services: When a contract is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally compellable to do. Here two conditions must be fulfilled. First, the act must have been done voluntarily and for the benefit of the promisor, secondly, the intention of promisor must have been to compensate the promisee. This contract may be oral or written. Thus, services voluntarily rendered but not with gratuitous intention can form valid consideration for a promise given to compensate him.

3. Promise to pay a time barred debt: According to section 25(30, a promise by a debtor to pay a time barred debt is enforceable it is made in writing and is signed by the debtor or by his agent generally or specially authorised in that behalf. The promise may be to pay the whole or any part of the debt. The debt must be such, of which the creditor might have enforced payment but for the limitation of suits.

For example, A owes B Rs. 2,000 but the debt is barred by the Law of Limitation. A sign written promise to pay B Rs. 1,000 on account of the debt. This is a contract.

4. Agency:- Consideration is not necessary to create an agency.

5. Complete gift:- The rule ‘no consideration, no contract’ does not apply to completed gifts. According to explanation to section 25, nothing shall affect the validity, as between the donor and donee of any gift actually made.

Stranger to Contract:

According to general rule of law only parties to a contract my sue and may be sued on the contract. This rule is based on the doctrine of the privity of contract. This means relationship subsisting between the parties to a contract. It means mutually of will and creates a legal bond or tie between the parties to a contract. The consequences of the doctrine of privity of contract are:

(1)   Any person who is not a party to a contract cannot sue upon it even though the contract is for his benefit and he supplied consideration.

(2)   A contract cannot give rights or impose obligations arising under the contract on any person other than the parties to it.

But there are certain exceptions to the rule that a stranger can sue, i.e. a stranger can sue in certain cases. This is possible in cases of trust or charge. Similarly, a stranger may sue in case of marriage settlement, partition or other family arrangements. A stranger can also be sued in case of acknowledgement or estoppel. Where the promisor by his conduct, acknowledge or otherwise constitutes himself as an agent of the Third party, a binding obligation is thereby incurred towards him. Similarly, in case of assignment of a contract, the assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties. 

Legality of Object

Section 23 of the Indian Contract Act has specified certain considerations and objects as unlawful. The consideration or objects of an agreement is lawful, unless- it is forbidden by law; is of such a nature that, if permitted, it would defeat the provision of any law; or is fraudulent; or involves injury to the person or property of another; or the court regards it as immoral or opposed to public policy.
In each of the above mentioned cases the consideration or object of an agreement is deemed to be unlawful. Every agreement in which the object or consideration is unlawful is void.

Some examples 

X promises to obtain for Y an employment in the public service, and Y promises to pay X Rs. 1000 for that. This agreement is void as the consideration in this case is unlawful.

X agrees to let her daughter to hire to Y as a concubine. This agreement is void as it is immoral and as a result opposed to law.

The following agreements are considered to be against public policy:

• Trade with the enemy:
• An agreement between the citizens of two countries at war with each other is void and hence inoperative.
• Agreement in interference with the course of justice:
• All agreements which interfere with the normal course of law and justice are deemed to be opposed to public policy and hence are void.
• Agreements which injure the public services are considered to be void.
• Agreements infringing personal freedom
• Agreements hindering parental duties.
• Agreements hindering marital duties