ICAI Notes- Unit 2: Consideration | Business Laws for CA Foundation PDF Download

Overview

Consideration is an essential element of a valid contract without which no single promise will be enforceable. It is a term used in the sense of quid pro quo, i.e., ’something in return’. 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 try to understand the concept of consideration and also the legal requirements regarding consideration.

What is Consideration?

Consideration is the price agreed to be paid by the promisee for the obligation of the promisor. The word consideration was described in a very popular English case of Misa v. Currie as: “A valuable consideration in the sense of law may consist either in 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).” 

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. Consideration is an act- doing something. 
   Example 1: Ajay guarantees Bhuvan for payment of price of the goods which Bhuvan wanted to sell on one month credit to Chaitanya. Here selling of goods on credit by Bhuvan to Chaitanya is consideration for A’s promise.
   Example 2: A college promises students, who will score above 95% for the job in MNC. Consideration need not to be monetary. Here the promise for recruitment of candidate will be considered as consideration for the act of students scoring above 95%. 
2. Consideration is abstinence- abstain from doing something.
   Example 3: Abhishek promises Bharti not to file a suit against him if she (Bharti) would pay him (Abhishek) ₹ 1,00,000. Here abstinence on the part of Abhishek would constitute consideration against Bharti’s payment of ₹ 1,00,000 in favor of Abhishek.
   Example 4: ABC has a shop of electric items. XYZ wishes to open another electric shop next to his shop. ABC offers Rs 2,00,000 to XYZ for shifting the same away from 1 km of ABC’s shop. Here, consideration is given for abstaining XYZ from opening his shop nearby. 
3. Consideration must be at the desire of the promisor. 
4. Consideration may move from promisee or any other person. 
5. Consideration may be past, present or future.

Thus, from above it can be concluded that:
Consideration = Promise / Performance that parties exchange with each other.
Form of consideration = Some benefit, right or profit to one party / some detriment, loss, or forbearance to the other.

Legal Rules 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. This implies “return” element of consideration. Contract of marriage in consideration of promise of settlement is enforceable.
An act done at the desire of a third party is not a consideration.
In Durga Prasad v. Baldeo, D (defendant) promised to pay to P (plaintiff) a certain commission on articles which would be sold through their agency in a market. Market was constructed by P at the desire of the C (Collector), and not at the desire of the D. D was not bound to pay as it was without consideration and hence void. Example 5: R saves S’s goods from fire without being asked to do so. R cannot demand any reward for his services, as the act being done voluntary. 

(ii) Consideration may move 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.
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. 

(v) Consideration need not be adequate: Consideration need not to be of any particular value. It need not be approximately of equal value with the promise for which it is exchanged but it must be something which the law would regard as having some value. Something in return need not be equal to something given. It can be considered a bad bargain of the party. 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. But as an exception if it is shockingly less and the other party alleges that his consent was not free than this inadequate consideration can be taken as an evidence in support of this allegation.
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.

Suit By a Third Party to a Contract

Though under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third party, the third party cannot sue on contract. Only a person who is party to a contract can sue on it. Thus, the concept of stranger to consideration is a valid and is different from 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: 

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.
   Example 15: Two brothers X and Y agreed to pay an allowance of ₹ 20,000 to mother on partition of joint properties. But later they denied to abide by it. Held their mother although stranger to contract can require their sons for such allowance in the court of law. 
3. In the case of certain marriage contracts/arrangements, a provision may be made for the benefit of a person, he may file the suit though he is not a party to the agreement.
   Example 16: Mr. X’s wife deserted him for ill-treating her. Mr. X promised his wife’s father Mr. Puri that he will treat her properly or else pay her monthly allowance. But she was again ill-treated by her husband. Held, she has all right to sue Mr. X against the contract made between Mr. X and Mr. Puri even though she was stranger to contract. 
4. In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract but such assignment should not involve any personal skill.
   Example 17: Mr. Ankit Sharma has assigned his insurance policy to his son. Now son can claim even if he was not a party to contract. 
5. Acknowledgement or estoppel – where the promisor by his conduct acknowledges himself as an agent of the third party, it would result into a binding obligation towards third party.
   Example 18: If L gives to M ₹20,000 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 i.e. M. 
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.
   Example 19: One owner of the land having two land adjacent to each other. One was agricultural land. He sold the other land containing a condition that it can never be used for Industrial purpose so as to protect the other agricultural land from pollution. Such condition is attached with the land so who so ever is the successor of land has to abide by it. Such are called restrictive covenants and all successor are bind to it.
7. Contracts entered into through an agent: The principal can enforce the contracts entered by his agent where the agent has acted within the scope of his authority and in the name of the principal. Example 20: Prashant appoints Abhinav as his agent to sell his house. Abhinav sells house to Tarun. Now Prashant has right to recover the price from Tarun.

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 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.

Natural Love and Affection (Section 25(1)):

1. Conditions to be fulfilled:
   (i) Made out of natural love and affection between the parties.
   (ii) Parties must stand in a near relationship to each other.
   (iii) Must be in writing.
   (iv) Must be registered under the law.
2. A written and registered agreement based on natural love and affection between parties (e.g., husband and wife) is enforceable without consideration.
   • Example 21: Husband promises to pay his earnings to his wife, registered agreement held valid.
   • Example 22: Father promises a golden necklace to daughter-in-law; the agreement is valid.

Compensation for Past Voluntary Services (Section 25(2)):

1. Essential Factors:
   (i) Services rendered voluntarily.
   (ii) Services rendered for the promisor.
   (iii) Promisor in existence at the time of services.
   (iv) Promisor intended to compensate the promisee.
2. Example 23: Finder returns wallet, promisor promises ₹10,000; valid contract.
   • Example 24: Mr. X helps nephew win a case, nephew promises ₹10,000; valid contract.

Promise to Pay Time-Barred Debt (Section 25(3)):

1. A promise in writing to pay a debt barred by limitation is valid without consideration.
   • Example 25: A owes 60,000, debt barred by limitation, signs promise to pay 50,000 ; valid for ₹50,000.

Other Exceptions:

1. Agency (Section 185):

   • No consideration necessary to create an agency.

2. Completed Gift:

   • Rule "no consideration, no contract" does not apply.
   • Gifts do not require consideration.

3. Bailment (Section 148):

   • No consideration required for the contract of bailment.
   • Example 26: Goods delivered for a purpose, to be returned or disposed of without consideration.

4. Charity:

   • Promise to contribute to charity is a valid contract.
   • Example 27: Donor promises ₹1,00,000 for temple renovation; secretary incurs cost, can claim from donor.

Summary

• Consideration is the price for a promise, either 'benefit' or 'detriment.'
• Must move at the desire of the promisor.
• Can be executed or executory, but not something the promisor is already legally bound to do.
• Inadequacy of consideration is not relevant.
• Consideration must be legal.
• General rule: "No Consideration, No Contract."
• Exceptional cases exist where a contract without consideration is valid.
• A stranger to a contract can't sue, but some exceptional cases allow enforcement by a non-party.