Meaning and Nature of Consideration | Civil Law for Judiciary Exams PDF Download

Introduction

• According to Section 10 of the Indian Contract Act, 1872, all agreements turn into contracts if they are made by the free consent of the parties, competent to contract, for lawful consideration, with a lawful object, and not expressly declared void.
• Lawful consideration is an essential component for contract formation. Blackstone defined consideration as the recompense exchanged by the parties contracting each other.

Understanding Consideration

• Consideration, as defined in Section 2(d) of the Indian Contract Act, 1872, involves actions taken or refrained from at the desire of the promisor, forming the basis of the promise.
• Consideration acts as the price paid for fulfilling promises between the promisor (making the proposal) and the promisee (accepting the proposal).

Reciprocal Promises

• Reciprocal promises, as per Section 2(f) of the Indian Contract Act, 1872, are promises that constitute or contribute to each other's consideration.

Carlill v. Carbolic Smoke Ball Co.

In a notable case, a defendant advertised a product promising it would prevent influenza if used as directed. A plaintiff, relying on this claim, purchased the product and fell ill with influenza. The court ruled in favor of the plaintiff, recognizing the express consideration in the transaction.

Nature of Consideration

• Unilateral Consideration: In a unilateral contract, the consideration moves in only one direction after the contract is formed. This means that one party is legally obligated to provide something in exchange for a promise from the other party. An example of unilateral consideration is a reward offer where a person promises to pay anyone who finds their lost pet. Only the person who finds the pet and performs the act specified in the contract is entitled to the reward.
• Bilateral Consideration: In a bilateral contract, the consideration moves in either direction after the contract is formed. This type of consideration involves a mutual exchange of promises where each party is both a promisor and a promisee. An example of bilateral consideration is a typical sales contract where one party promises to deliver goods, and the other party promises to pay for those goods. Both parties are bound to perform their respective obligations to each other.

Understanding Lawful Consideration under the Indian Contract Act

Section 23 of The Indian Contract Act, 1872 outlines the principles regarding lawful and unlawful considerations in agreements:

• Forbidden by law: Actions prohibited by law are considered unlawful.
• Contravening legal provisions: Any action that goes against established laws and regulations is deemed unlawful.
• Fraudulent activities: Involvement of fraud renders the consideration unlawful.
• Injury to persons or property: Any act causing harm to individuals or their belongings is considered unlawful.
• Immorality and public policy: Actions deemed immoral by courts or against public policy are also unlawful.

These conditions specify what makes a consideration unlawful, with any other conditions being regarded as lawful for agreements.

Section 24 of The Indian Contract Act, 1872 details the consequences of unlawful considerations. It states that if any part of a consideration for one or more objects is unlawful, the entire agreement becomes void.

The Concept of Nudum Pactum

• Nudum Pactum, a Latin term meaning 'Naked Agreement,' refers to an agreement lacking essential consideration and is therefore unenforceable by law, leading to its classification as a void agreement.
• For instance, a scenario where a party offers to sell an item without specifying the price constitutes a nudum pactum due to the absence of a crucial element in the agreement.

The Concept of Consideration in the Indian Contract Act

• Consideration is a fundamental principle in contract law requiring that there must be something of value exchanged between parties to support an agreement.
• For a contract to be valid, both parties must make a promise and agree to it.

Exceptions to Consideration in the Indian Contract Act

• Section 25 of The Indian Contract Act, 1872 outlines exceptions to the consideration requirement in certain cases:
• Agreements made in writing and registered, based on natural love and affection between closely related parties, are valid without consideration.

Rajlukhy Dabee v. Bhootnath Mookherjee

• In this case, the court ruled in favor of the defendant who promised maintenance to his wife, as there was no natural affection between them, making the promise void.

Sindha Shri Ganpatsingji Himatsingji v. Abraham Alias Vajir Mahomed Akuji

• Here, the court decided that a minor who received voluntary services is not liable for compensation when they become an adult, as the services were provided voluntarily.
• Another exception to consideration is when there is a written promise to pay a debt that is legally unenforceable due to the statute of limitations.
• Promissory Estoppel is a legal principle where a promise made without formal consideration becomes enforceable if the promisee relies on it to their detriment.

By understanding these exceptions, individuals can navigate the complexities of contract law and ensure the validity of their agreements.

Essentials of Consideration under the Indian Contract Act

• Consideration should be made at the desire of the promisor: It must be made at the request of the promisor and the parties involved in the agreement. It should not be at the desire of a third party.
• Consideration can come from the promisee or another person: In Indian law, the consideration can come from the promisee or any other person involved in the contract. For instance, in the case of Chinnayya v. Ramayya, a property was transferred by A to B with the condition that B pays an annuity to A's brother C. When B refused to fulfill this promise, the court ruled in favor of C due to lack of consideration.
• Consideration must be real, not illusory: The consideration in a contract must be genuine and have legal value. It should be legally and physically possible, as well as certain in nature.
• Consideration can be past, present, or future:
  • Past consideration: Given before the promise, such as when goods were provided before a promise of compensation.
  • Present consideration: Given at the same time as the promise, like paying for a product upon purchase.
  • Future consideration: Agreed to pass in the future, such as promising to deliver a car next week in exchange for payment after two days.
• Consideration must be lawful: According to the Indian Contract Act, consideration must be lawful. Unlawful consideration can render the contract void unless exceptions under Section 25 apply.
• Consideration need not be adequate: While consideration should be fair, Indian law does not require it to be of equal value. Courts generally do not interfere in determining what constitutes a fair price in a contract.

Understanding these essentials is crucial in comprehending the concept of consideration under the Indian Contract Act. By ensuring that consideration meets these criteria, parties can enter into legally binding agreements with clarity and enforceability.

The Doctrine of Privity to Contract

• The doctrine of privity in law is a rule that prevents a third party, who is not a direct participant in a contract, from either suing or being sued under that contract.
• For instance, if Person A borrows money from Person B and then sells a car to Person C with the agreement that the payment will go back to A, A cannot legally compel C to pay B because C is not a party to the original contract.
• An important case, Tweddle v. Atkinson, established and enforced the doctrine of privity, emphasizing the intentions of the contractual parties. However, there are exceptions to this rule based on common law principles such as agency and negligence.

Exceptions to the Doctrine of Privity to Contract

• Trust: If a contract is made between a trustee of a trust and another party, the beneficiary of the trust can take legal action to uphold their rights under the trust.
• Family Settlement: In the case of a contract within a family, any family member can sue if they are part of the family agreement.
• Contract through an Agent: If an agent acts within their authority to form a contract, they can be held accountable under that contract.
• Assignment of a Contract: If a contract is designed for the benefit of a third party, that third party can legally pursue the involved parties, even if they are not direct participants.
• Acknowledgement or Estoppel: If a contract stipulates a party must pay a certain amount to a third party, the third party can legally enforce this obligation as a beneficiary.
• A Covenant Running with the Land: In a land contract where a buyer is made aware that the previous owner remains responsible for duties and liabilities, the buyer can sue the previous owner and settler, despite not being part of the original agreement.