Consideration - 1 | Law of Contracts - CLAT PG PDF Download

Introduction 

• According to  Section 25  of the Indian Contract Act, an agreement made without consideration is generally considered void. However, there are certain exceptions where such agreements can be deemed valid.
• Consideration refers to something given in return for a promise. It can involve a benefit conferred on one party or a detriment suffered by the other. Essentially, it represents the price of the promise for each party involved in the agreement. 

Definition of Consideration

• Consideration, as defined in Section 2(d) of the Indian Contract Act, 1872, refers to an act, abstinence, or promise that is given at the desire of the promisor in a contractual agreement. 
•  The key components of consideration include: 
•  Desire of the Promisor:  Consideration must be given at the request or desire of the promisor. 
•  Parties Involved:  Consideration can be provided by the promisee or any other person. 
•  Timing of Consideration:  Consideration can be past, present, or future, as long as it involves an act, abstinence, or promise. 
•  Act or Abstinence:  There must be some act, abstinence, or promise by the promisee that constitutes consideration for the promise. 
•  Blackstone:  Consideration is seen as the recompense given by one party to the other in a contract. 
•  Cheshire and Fifoot:  Consideration is viewed as a price paid for the promise. 
•  Sir Frederick Pollock:  Consideration is the price for which the promise is bought, making the promise enforceable. 
•  Patterson:  Consideration is something of legal value, which may involve benefit to the plaintiff and detriment to the defendant. 

Consideration at the Desire of the Promisor 

• Consideration must be given at the  desire of the promisor  , not voluntarily or at the instance of a third party.
•  Example  : If A saves B's goods from a fire without being asked, A cannot demand payment for the service.
• In the case of  Durga Prasad vs. Baldeo  , the plaintiff built shops in a market at the request of the local collector. The defendant occupied one of the shops and promised to pay the plaintiff a commission on the articles sold in the market.
• The defendant failed to pay the promised commission. The court held that the consideration for the promise was not at the defendant's desire but at the order of the collector.
• Since the consideration did not move at the defendant's desire, they were not liable for the promise made.

Subscription for Charitable Purpose

• A promise to contribute a specific amount for a charitable purpose may not be legally enforceable because it could lack consideration. However, a promise to pay a subscription becomes enforceable when concrete actions have been taken based on that promised subscription.
•  In the case of Kedarnath v. Gorie Mohammed:  There was a proposal to construct a Town Hall in Howrah, contingent upon gathering sufficient funds through subscriptions. The defendant was among the subscribers, having pledged to pay a certain amount by signing the subscription book.
• The plaintiff, relying on the promised subscriptions, hired a contractor and initiated construction work.
• The defendant later refused to fulfill his subscription, arguing that he was not legally obligated due to the absence of consideration.
•  Ruling:  The court determined that hiring a contractor and commencing construction based on the promise constituted adequate consideration to enforce the subscription. Consequently, the defendant was legally bound to honor his commitment.

Consideration by Promisee or Any Other Person 

• In Indian law, consideration for a promise can be provided by the promisee or by any other person. It is not necessary for the consideration to come solely from the promisee, as long as there is some consideration involved.
• This differs from English law, where consideration must come from the promisee only. In India, even if a third party who is not a party to the contract provides the consideration, it is still valid.
• A case that illustrates this principle is  Chinnaya vs. Ramaya  . In this case, an old lady (A) granted an estate to her daughter (the defendant) with the condition that the daughter would pay an annuity to A's brother (the plaintiff). The defendant promised to pay the annuity to the plaintiff as directed by A.
• When the defendant failed to make the payment, the plaintiff sued her. The defendant argued that since the plaintiff did not provide any consideration, the agreement was not valid.
• However, the Madras High Court ruled that the consideration in the agreement between the defendant and the plaintiff came from A, the mother, and this was sufficient to enforce the promise.

Privity of Contract

 Doctrine of Privity of Contract 

• The doctrine of privity of contract states that only the parties involved in a contract have the right to enforce it. A person who is not a party to the contract cannot enforce it, even if the contract was made for their benefit.
• For example, if A and B enter into a contract that benefits X, X cannot sue to enforce the contract because A and B are the only parties involved.
• In India, a person who is a party to the contract can enforce it even if they did not provide any consideration. This is because, under Indian law, consideration can be provided by the promisee or a third party. However, this does not change the rule of privity of contract.

 Dutton vs. Poole 

• A father (A) planned to sell his wood to cover his daughter's marriage expenses.
• A son (the defendant) asked his father not to sell the wood and promised to pay 1,000 pounds for his sister's marriage.
• The father agreed and did not sell the wood, but the son failed to keep his promise.
• The court held that even though the son made a promise to his father and the father provided consideration, the daughter (the plaintiff) was not part of the contract.
• However, the court ruled that the agreement aimed to benefit the daughter, and it would be unfair to deny her the promised portion.
• Therefore, the son was held liable.
• This case established that a person who is not a party to a contract but is intended to benefit from it has the right to take legal action, especially if they are closely related to the promisee.

 Tweddle vs. Atkinson 

• After the plaintiff's marriage, a written contract between the plaintiff's father and the girl's father stipulated that each would pay a certain sum of money to the plaintiff.
• The plaintiff had the right to sue for these sums.
• When the plaintiff attempted to sue the girl's father to recover the promised amount, the court ruled against the plaintiff.
• The court determined that the plaintiff was a stranger to both the contract and the consideration, and therefore could not enforce the claim.
• This case laid the groundwork for the doctrine of "privity of contract," which means that a contract is only between the parties involved, and no third party can sue on it, even if the contract is made for their benefit.

 Two Fundamental Principles 

• Consideration must come from the  promisee only  . If it comes from someone else, the promisee becomes a stranger to the contract and cannot enforce it.
•  A person who is not a party to the contract  cannot enforce it, even if it is made for their benefit. They are considered a stranger to the contract and have no rights under it.

 Privity of Contract in Indian Law 

• Privity of contract is a legal principle that holds that only parties to a contract can enforce its terms and take legal action based on it.
• In India, as in England, this principle is upheld, meaning that a stranger to the contract cannot bring a lawsuit to enforce its terms.
• The Indian Contract Act has a broader definition of consideration compared to English law. However, the common law principle of privity remains applicable in India.
• An example of privity of contract in action is seen in the case of Jamnadas vs. Ramavtar. In this case:
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  • A mortgaged property to X.
  • A then sold this property to B, with an agreement that B would pay off the mortgage debt to X.
  • X attempted to sue B to recover the mortgage money.
• The Privy Council ruled that X could not enforce the contract against B because there was no direct contract between them. This illustrates the principle of privity of contract, where only parties to the contract have the right to enforce its terms.

Exceptions to Privity of Contract

 Trust or Charge 

• A party to a contract has the right to sue on it, while a third party generally does not have this right. However, a third party can be given the right to enforce a contract through a mechanism like a trust.
• The basis for a third party's action is not the contract itself, but the right granted to them by the contract, often in the form of a trust. For instance, in a contract between A and B, a beneficial right to some property may be created in favor of C. In this case, C can enforce their claim based on the right conferred upon them.
• In the case of  Khwaja Muhammad Khan vs. Husaini Begum  , an agreement was made between the fathers of a boy and a girl. This agreement stipulated that if the girl married a particular boy, the boy's father would pay a personal allowance to the plaintiff known as Kharch-i-pandan (betel-box expense) or pin money. The agreement also mentioned that a specific property had been set aside by the defendant, and the allowance would be paid from the income of that property.
• The plaintiff married the defendant's son, but the defendant failed to pay the agreed allowance. As a result, the plaintiff took legal action against the defendant. The court held that the basis of the plaintiff's claim was a specific charge on the immovable property in her favor. Therefore, she was entitled to claim the allowance as a beneficiary, and the common law rule of privity did not apply in this case.

 Conduct, Acknowledgment, or Admission 

• A party may be held liable based on estoppel if their conduct, acknowledgment, or admission recognizes another party's right to sue them.
• In the case of  Narayani Devi vs. Tagore Commercial Corporation Ltd.  , a contract was established between the plaintiff's husband and the defendant. The defendant agreed to make certain payments to the plaintiff's husband during his lifetime and then to the plaintiff for her lifetime after her husband's death.
• After the plaintiff's husband died, the defendant:
  • Made several payments to the plaintiff as per the agreement.
  • Requested an extension of time to complete the payments.
  • Asked the plaintiff to sign certain documents related to these payments.
• When the plaintiff sued the defendant for recovery of the payments, the defendant claimed there was no privity of contract with the plaintiff.
• The court held that the defendant had established privity with the plaintiff through their conduct, acknowledgment, and admission. Therefore, the plaintiff was entitled to her claim despite the lack of direct privity of contract between her and the defendant.

 Marriage Settlement, Partition, or Family Arrangement 

•  A family arrangement is a legal agreement within a family that involves the distribution of assets or responsibilities. When the arrangement is designed to benefit a third party, that third party has the right to sue as a beneficiary. For example, in the division of joint family property among male members, if there is a provision for the maintenance of female family members, those female members can enforce the agreement. 
•  Examples of family arrangements include: 
  •  A father agreeing to a marriage settlement for his daughter. 
  •  Two brothers deciding to invest money for the benefit of their mother. 
  •  A daughter and her husband promising her father to provide maintenance for her mother in exchange for property. 
  •  A husband promising his wife's father to take care of her and provide a separate home in case of a breach of this promise. 

 Covenants Running with the Land 

• The rule of privity is adjusted by the principles governing the transfer of immovable property. 
•  A person buying land with the awareness that the landowner is obligated by certain duties established through an agreement concerning the land will be bound by these duties, even if they were not a party to the agreement. 
•  In the case of  Smith & Snips Hall Farm Ltd. v. River Douglas Catchment Board  , the defendant made an agreement with certain landowners adjacent to a stream to improve and maintain the banks of the stream. The landowners covered the costs, and later one of the landowners sold the land to the plaintiff. However, the board failed to maintain the banks properly, leading to a burst and flooding of the plaintiff's land. The court ruled that the board was liable because the entire arrangement was intended to benefit the lands, regardless of the ownership.

Types of Consideration under the Indian Contract Act 

•  Past Consideration:  This occurs when the promise is made in response to actions that have already been taken, either by doing something or by refraining from doing something, at the request of the promisor. 
•  Executed Consideration:  This type of consideration is present and involves actions performed or refrained from at the time of the promise. 
•  Executory Consideration:  This involves a promise to perform or refrain from an action in the future. 

Past Consideration 

•  Past consideration refers to a situation where the consideration for a promise was provided before the promise was made. 
•  When the act constituting consideration was performed, it must have been done at the request or desire of the promisor. 
•  For example, if I ask you to find my lost dog and after you successfully do so, I promise to pay you Rs. 100 for your efforts, this is a case of past consideration. 
•  In this scenario, your efforts in finding the dog constitute the consideration for my promise to pay you Rs. 100, and these efforts were made before I made the promise. 
•  The consideration is valid because it was given at my request, as I specifically asked you to find the dog. 

Past Services Voluntarily Rendered 

• The Indian Contract Act acknowledges consideration only when it is given at the request of the promisor, not when it is offered voluntarily.
• If consideration is provided voluntarily, it does not qualify as consideration.
• For instance, if my dog goes missing and you find and return him to me without any request from my side, this is an example of past services rendered voluntarily.
• If I promise to pay you a certain amount after you have provided these services, can such an agreement be enforced? Yes, it falls under an exception.

Types of Consideration: Executed vs. Present

•  Executed Consideration  occurs when one party has fulfilled their part of the promise, constituting the consideration for the promise made by the other party.
• For example, if A offers a reward of Rs. 100/- for the return of his lost dog and B finds and returns the dog, B's action represents executed consideration.
• In this scenario, B's actions signify acceptance of the offer, leading to a binding contract where A is obligated to pay Rs. 100/- to B.
• Executed consideration differs from past consideration. While executed consideration occurs simultaneously with the formation of the contract, past consideration involves situations where the consideration is provided after the contract is already in place.
• In cases of past consideration, the promise is not valid at the time of providing the consideration.