Consideration - 2 | Law of Contracts - CLAT PG PDF Download

Executory or Future Consideration

• When one person makes a promise in exchange for a promise from the other party, and both parties are set to fulfill their obligations after the contract is made, the consideration is referred to as Executory.
• For instance, if A agrees to supply certain goods to B, and B agrees to pay for those goods at a later date, this scenario exemplifies executory consideration.

Contract Validity and Consideration 

Consideration is a crucial element in determining the validity of a contract. While it is not necessary for consideration to be adequate, it must be real and of some value. The following points elaborate on the concepts of consideration and its impact on contract validity:

 Contract Validity with Inadequate Consideration 

• A contract supported by consideration is considered valid even if the consideration is inadequate.
• According to Explanation 11 to section 25, an agreement is not void solely because the consideration is insufficient. However, the inadequacy of consideration may be considered by the court to determine whether the promisor's consent was freely given.
• The burden of proving the absence of free consent lies with the party making the claim. Inadequacy of consideration alone does not make the contract invalid, but it can be a factor in assessing free consent.
• For example, if Party A agrees to sell a horse worth Rs. 1,000 for Rs. 10, and later claims that their consent was not freely given, the court will consider the inadequacy of consideration when evaluating Party A's consent.

 Real and Substantial Consideration 

• While consideration does not need to be adequate, it must be real and not unsubstantial. Consideration should have some value and be tangible.
• In the case of  White v. Bluett  , a son complained to his father about the unequal distribution of property among siblings. The father promised to release the son from a debt in exchange for the son's promise to stop complaining. After the father's death, the executors sought to recover the debt. The son argued that the father had made a contract to release him from the debt in consideration for his promise not to annoy the father.
• The court held that the son's promise not to annoy the father did not constitute valid consideration for the father's promise to release him from the debt. As a result, the son remained liable for the debt.
• A promise not to annoy the promisor is insufficient to constitute consideration in a contract. Consideration must have real value and not be trivial.

 Performance of an Existing Duty is Not Consideration 

• Consideration refers to a promise to do something beyond what a person is already obligated to do.
• When someone is merely fulfilling a legal obligation, it does not constitute valid consideration.

 Performance of Legal Duty 

 Collins v. Godefroy 

• In this case, the plaintiff was summoned to provide evidence in a legal case. Subsequently, the defendant promised to compensate the plaintiff for the effort involved in appearing as a witness. However, the plaintiff sued the defendant to claim the promised amount.
• The court ruled in favor of the defendant, stating that the plaintiff was already legally obligated to give evidence due to the summons. Therefore, the defendant's promise to pay did not constitute valid consideration for the agreement.

 Performance of Contractual Duty 

Performance of a contractual duty can vary depending on whether the duty is owed to the promisor or a third party. Let's explore the key aspects:

 a) Pre-existing Contract with the Promisor 

When the promisee is already obligated to perform a specific duty under a contract with the promisor, any additional promise to pay for the same duty lacks consideration. This means that the promise to pay more for the same task cannot be enforced.

 b) Pre-existing Contract with Third Parties 

If the promisee is bound by a contract with a third party to perform a specific duty, any promise to pay extra for the same performance does not constitute valid consideration.

Performance of Existing Contractual Duty 

When a plaintiff is already obligated to fulfill a contractual duty towards the defendant, any promise to offer something extra for the same duty does not qualify as consideration. This principle is illustrated in the case of Stilk v. Myrick.

 Stilk v. Myrick 

• In this case, two sailors deserted during a voyage, and the captain promised to divide the wages of the deserted sailors among the remaining crew members if they agreed to take the ship back home.
• However, since the crew members were already contractually bound to complete the voyage, the promise of additional wages lacked consideration. As a result, the captain's offer could not be enforced.

Performance of an Existing Duty Owed to a Third Party

In the case of Shadwell v. Shadwell  , the plaintiff had made a promise to marry Ms. Nicholl. The plaintiff's uncle wrote a letter to him expressing his support for the marriage and offering to pay him 150 pounds annually during his lifetime or until his income as a Chancery barrister reached six thousand guineas. After marrying Miss Nicholl, the plaintiff was unable to earn the required income, and his uncle did not pay the promised annuity. Following his uncle's death, the plaintiff sued his uncle's executors to recover the amount promised. The court, by a majority decision, ruled that the promise was enforceable because it was supported by consideration. In this context, consideration involved a benefit to the uncle, as the marriage of a close relative could be of interest to him, and a detriment to the plaintiff, who may have incurred financial obligations based on the promise.

Promise to Pay Less Amount than Due - The Rule in Pinnel's Case

Under English law established in Pinnel's case, an agreement to pay a smaller sum in place of a larger sum is not legally binding because it lacks consideration. This means that even if there is a promise to pay and accept a lesser amount than what is owed, the person making the promise can still claim the full amount due.

Exceptions to the Rule in Pinnel's Case

1. Payment in Kind

According to the principle established in Pinnel's case, the  gift of a horse, hawk, robe, or other valuable items in lieu of money is considered valid and effective.  This is because such items may hold greater value or benefit to the plaintiff due to specific circumstances. The acceptance of these gifts in satisfaction of a monetary claim implies that the plaintiff finds them more advantageous than the cash payment.

2. Payment Before Due Date

In situations where a smaller sum of money is paid and accepted as full satisfaction of a debt before the due date, it is deemed valid under the principle of Pinnel's case. This is because the  early payment may be considered more beneficial to the creditor than receiving the full amount on the scheduled date.  Thus, the act of paying a lesser amount in advance constitutes sufficient consideration to discharge a portion of the debt.

3. Part Payment by a Third Party

When a third party makes a partial payment towards a debt, it is recognized as sufficient to discharge the entire obligation if the creditor accepts the part payment from the third party. This means that if a creditor agrees to a partial payment from someone other than the debtor, they cannot later pursue the debtor for the remaining balance of the debt.

4. Composition with Creditors

An agreement between a debtor and a single creditor to settle for a lesser amount than what is owed falls under the prohibition in Pinnel's case. However, when a debtor reaches an agreement with multiple creditors to pay a reduced amount collectively, this arrangement is considered an exception to the rule.

5. Doctrine of Promissory Estoppel

The doctrine of  promissory estoppel  serves as an equitable principle that prevents an individual from reneging on a promise or representation made earlier. When a person makes a commitment or promise, they become legally bound by it if another party relies on that promise and takes action based on it. Even in the absence of consideration for the promise, the promisee can enforce the commitment, ensuring that the person making the representation is held accountable for their words.

Understanding the Promisee's Right to Accept Lesser Amounts in India

In Indian law, there are specific provisions that govern the rights of a promisee when it comes to accepting payments in satisfaction of a debt. According to Section 63 of the Indian Contract Act, a promisee has the flexibility to either waive or reduce the performance of a promise, extend the time for its fulfillment, or accept any form of satisfaction that they deem appropriate.

 Key Points: 

•  Acceptance of Lesser Amounts:  The promisee has the right to accept a lesser amount than the agreed-upon debt in full satisfaction of the debt.
•  No Consideration Required:  The acceptance of a lesser amount does not require any additional consideration from the promisee.
•  Flexibility in Performance:  The promisee can choose to remit or modify the terms of the promise, including accepting alternative forms of satisfaction.

 Illustration: 

In a scenario where A owes B a sum of 5,000 rupees, if A makes payment to B and B agrees to accept the amount paid at the specific time and place where the 5,000 rupees were due, the entire debt is considered discharged.

Forbearance to Sue as Consideration 

• Forbearance to sue or refraining from enforcing a claim can be considered good consideration when it comes to a promise of payment or other actions. 
• When forbearance to sue is seen as beneficial to the party being sued, it becomes a valid form of consideration.
• Forbearance can be implied and may not necessarily have a specific timeframe attached to it.

 Case Example: Callisher v Bischoffsheim 

• In the case of Callisher v Bischoffsheim, a situation arose where a person agreed not to sue for a certain period, contingent upon the delivery of bonds.
• When the bonds were not delivered, the individual sought damages for the breach of the agreement.
• The other party argued that since the money was not originally due, they could not enforce the bond delivery.
• The court's perspective was that if the claim of the defendant was accepted, it would undermine the enforceability of agreements meant to settle uncertain claims.

 Key Points from the Case 

• If a party genuinely believes in the possibility of success in a claim, even if the validity is questionable, forbearance to sue remains valid consideration.
• The party agreeing to forbear gains the advantage of not having to defend against a lawsuit.
• Forbearance to sue is considered good consideration even when the claim's validity is in doubt, as long as the plaintiff believes in their cause of action.
• Attempting to gain an advantage through compromise when aware of the claim's lack of foundation would be deemed fraudulent.
• It is crucial to recognize the existence of two contracts: the initial contract in dispute and the second contract aimed at resolving the dispute from the first.
• The focus is on whether there is consideration for the second contract and its implications on the obligations arising from the first.

No Consideration, No Contract - Exceptions

 Promise due to Natural Love and Affection 

A promise made in favor of a close relative out of  natural love and affection  is considered valid, even without any consideration. However, certain conditions must be met:

•  Close Relationship:  The parties involved must be closely related to each other.
•  Natural Love and Affection:  The promise should stem from genuine love and affection between the parties.
•  Written Agreement:  The promise must be documented in writing.
•  Registration:  The agreement needs to be registered.

The term  "near relation"  is not explicitly defined in the law or judicial rulings. However, from various legal cases, it seems to include blood relations and those related by marriage, excluding distant relations who are only remotely entitled to inherit. While  natural love and affection  is essential between closely related parties,  "near relation"  does not necessarily imply this affection. For instance, in the case of  Rajlucky Dabee vs. Bhootnath Mookerjee,  a registered document executed by a Hindu husband in favor of his wife, agreeing to provide for her separate residence and maintenance due to their  disagreements  , was deemed invalid as it lacked genuine  love and affection  .

Compensation for Past Voluntary Services 

When a service is rendered at the  desire of the promisor  , it constitutes valid consideration for a subsequent promise of compensation. The second exception to Section 25 addresses situations where a person, without the promisor's knowledge or at their request, performs a service and the promisor agrees to compensate them. This promise, despite lacking consideration, is binding due to this exception.

The exception encompasses scenarios where the promise involves voluntary actions that the promisor was legally obligated to do. For instance, if A finds B's purse and returns it, and B promises to pay A Rs.50, or if A takes care of B's infant son and B promises to cover A's expenses, a valid contract exists even though A's actions were voluntary. This exception applies when the service is rendered voluntarily and without the promisor's knowledge, and it is crucial that the service is directed towards the promisor and not anyone else.

Promise to Pay a Time-Barred Debt

When it comes to the validity of a contract, there are specific situations where an agreement can hold even in the absence of consideration. One such scenario is when a promise is made to pay a time-barred debt.

According to Section 25 (3) of the Indian Contract Act, certain essentials must be met for a promise to pay a time-barred debt to be considered valid:

1.  Nature of the Debt:  The promise must pertain to the payment, either in full or in part, of a time-barred debt. A time-barred debt is one that the creditor could have enforced through legal means but is unable to do so due to the limitations set by the law regarding the period within which a suit can be filed.
2.  Written and Signed:  The promise must be documented in writing and signed by the individual who is to be held accountable for the payment, or by their duly authorized agent.
3.  Enforceability of Debt:  It is crucial that the debt in question is one that the creditor could have enforced if not for the limitation laws. Debts that are unenforceable for reasons other than the limitation period do not fall under this category. For instance, if a debtor has been released from the obligation to pay due to insolvency laws, a later promise to repay that debt cannot be enforced without fresh consideration. Similarly, if a debt was incurred by a minor, the promise to repay it upon reaching adulthood is also unenforceable, as a minor's agreement is void and cannot be validated by ratification.

 Agency 

• According to Section 185 of the Indian Contract Act, 1872, creating an agency does not require consideration.

 Gifts 

• The principle of "no consideration, no contract" does not apply to gifts. According to Explanation (1) to Section 25 of the Indian Contract Act, 1872, an agreement without consideration is not void when it comes to gifts made by a donor and accepted by a donee.

Unlawful Consideration and its effect

Consideration and Object in Contracts 

• Consideration in a contract refers to the reciprocal price or benefit exchanged between parties. It represents the worth of a promise and can take various forms, such as monetary compensation, services, or goods. For a contract to be legitimate, both the consideration and object must be lawful.
• The object of a contract refers to its purpose or aim, while consideration signifies the value attached to the promise. It is crucial that both elements adhere to legal standards to ensure the validity of the agreement.

 Lawful Consideration and Object 

Consideration and object are considered unlawful in the following situations:

• If they are explicitly forbidden by law.
• If they undermine legal provisions if permitted.
• If they involve fraud.
• If they cause harm to another person's or entity's property or well-being.
• If deemed immoral or against public policy by the court.

Any agreement with an unlawful consideration or object is deemed void and unenforceable.

Forbidden by Law 

When the purpose or consideration of an agreement involves performing an act that is prohibited by law, the agreement is considered invalid. Actions or commitments that are forbidden by law include those punishable under any statute, as well as those explicitly or implicitly prohibited by special legislation enacted by Parliament or state legislatures. For instance, the assembly or sale of goods subject to excise duties is prohibited under the Excise Act unless conducted under a government license. Selling liquor without a license is illegal under the Excise Act, rendering such contracts void. Any contract entered into in violation of a statutory prohibition is null and void, regardless of whether the prohibition is express or implied.

Defeat the Purpose of Legal Provisions 

• Even if the object or consideration of an agreement is indirectly forbidden by law, it becomes illegal if it undermines the purpose of legal provisions. An agreement with such an object or consideration is void. When a legislative enactment imposes a penalty for a particular act or promise, fulfilling such an act or promise would defeat the intention of the enactment, as it implicitly seeks to prohibit that act.
• In the case of  Rajat Kumar Rath v. Government of India  , the Orissa High Court clarified the difference between void and illegal contracts. A void contract has no legal effect, while an illegal contract, though similarly having no legal effect between the immediate parties, also taints collateral transactions with illegality, making them unenforceable in certain circumstances. If an agreement is merely collateral to another or facilitates the execution of a void agreement not prohibited by law, it may be enforced as a collateral agreement. Conversely, if it forms part of a mechanism to execute a legally prohibited agreement, it cannot be enforced due to the illegality of the intended object. If a person entering an illegal contract assures the other party, who is innocent of wrongdoing, that the contract is valid, such a promise constitutes a collateral agreement, allowing the innocent party to sue for damages.