Consideration - Commerce PDF Download

Introduction

In today’s corporate world, where business operations have become increasingly complex, there has been a rise in the number of organizations and individuals entering into contractual relationships. The legal framework governing contracts in India is the Indian Contract Act, 1872. According to Section 2(h) of this Act, a contract is defined as “an agreement enforceable by law.” For a contract to be valid, certain essential elements must be present, and one of the most crucial among these is “consideration.”

Consideration, in simple terms, means “something in return.” It is a fundamental requirement for both parties in a contract. To illustrate this, consider the example of Mr. A buying a house from Mr. B. In this scenario, when Mr. A pays Rs. 50,00,000 to Mr. B, the money represents the consideration for Mr. B. Conversely, for Mr. A, the house he purchases is the consideration. Now that we have a basic understanding of consideration in a contract, let’s delve deeper into its legal aspects.

Consideration in Contracts

Consideration in a contract refers to the idea of "something for something." It means that each party involved in the contract should offer something to the other party. In Indian law, as per the Indian Contract Act of 1872, the concept of consideration is more flexible compared to English law.

Definition of Consideration in Indian Law

• According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined as an act, abstinence, or promise that is done or agreed to at the desire of the promisor.
• Promisor: The party making the promise.
• Promisee: The party to whom the promise is made.

Definitions by Legal Scholars

• Blackstone: Consideration is the recompense given by one party to the other in a contract.
• Pollock: Consideration is the price for which a promise is bought, making the promise enforceable.
• Patterson: Consideration is something of legal value, which could be a benefit to the plaintiff or a detriment to the defendant.

Currie v. Misa Case

• Background: Currie v. Misa (1875) is an important case in English contract law that helped define consideration. The case involved a dispute over whether a promise to pay an existing debt constituted valid consideration for a new contract.
• The Dispute: Misa borrowed £100 from Currie, with the loan due on March 1, 1875. Currie promised to pay the debt on March 1 if Misa agreed to sign a new contract for the loan. Misa agreed, but later sued Currie for breach of contract.
• Court Ruling: The court ruled in favor of Misa, stating that Currie's promise was not supported by consideration since Misa was already legally obligated to repay the debt. The court defined consideration as something of value moving from the promisee to the promisor.
• Legal Principle Established: The case established that consideration must be something bargained for and of value to both parties, ensuring contracts are not based on gratuitous promises.
• Criticism of the Decision: Some scholars criticize the decision for being too narrow, excluding certain promises like charitable donations from enforceability. However, the ruling remains law in England and Wales and is followed in other common law jurisdictions.

Essential Elements of Consideration

Consideration is a crucial part of a contract, but it also has specific essential elements that determine its validity. Here are some important essential elements:

1. Consideration Must Move at the Desire of the Promisor

• According to the Indian Contract Act, 1872, consideration involves an act, abstinence, or promise by the promisee that must be at the desire of the promisor. This means that if the promisee acts voluntarily or without the promisor's request, it does not constitute valid consideration. For example, if you help someone lift their luggage without being asked and then demand payment, the person is not obligated to pay you because your assistance was unsolicited.

2. Consideration May Move from the Promisee to Any Other Person

• Consideration can come from someone other than the promisee, and it can also move to a third party, as long as the promisor does not object. This means that the promisee is not the only one who can provide consideration; it can be offered by anyone. For instance, if your friend borrows money from you and later asks you to accept payment from his brother, the consideration has moved from your friend to his brother. This transfer does not affect the validity of the consideration in the promise, highlighting that the doctrine of privity of consideration does not apply in India.

3. Consideration Must Not Be Unlawful

• Consideration that is illegal, immoral, or involves harm to a person or property is not valid. Such considerations render the contract void. For example, offering to pay someone for selling drugs at their workplace constitutes unlawful consideration and is therefore invalid under the Indian Contract Act, 1872.

4. Consideration Must Not Be Physically Impossible

• A consideration that is physically impossible to perform is considered invalid. Promises should involve tasks that are capable of being carried out. For instance, if someone promises to pay another person a large sum of money for completing an impossible task, such as running a hundred kilometers in an unrealistic timeframe, the consideration is deemed invalid due to its physical impossibility.

5. Consideration May Not Be Adequate

• The adequacy of consideration is not a concern for the court when enforcing a contract. As long as the parties freely consent to the terms, the consideration is valid regardless of its adequacy. For example, if a contract is signed with the free consent of both parties, the consideration remains valid even if it is unequal. The court may consider the adequacy of consideration to determine whether the consent was freely given, but it does not invalidate the contract on the grounds of inadequate consideration. Explanation 2 of Section 25 of the Indian Contract Act, 1872, clarifies this point by stating that a contract is not void due to inadequate consideration as long as the promisor's consent was freely given.

Types of Consideration

Consideration, as we have seen, is a crucial aspect of a contract. Now, let's explore the different types of consideration in detail. 
1. Executory Consideration

• Executory consideration refers to promises or obligations that are yet to be fulfilled by the parties involved in a contract.
• It involves an exchange of promises or obligations that will be executed in the future.
• For example, if you hire a freelancer to provide legal services for your company and agree to pay Rs. 50,000 for the services next month, the consideration in the contract is executory until both parties fulfill their promises.

2. Executed Consideration

• Executed consideration is the opposite of executory consideration.
• It involves promises and obligations that have already been fulfilled or completed by the parties in the contract.
• It is also known as present consideration because both parties have successfully completed their part of the contract.
• For instance, when you buy a car from a showroom and make the payment, the car is delivered to you immediately.
• At this point, both parties have fulfilled their promises, and the situation falls under executed consideration.

3. Past Consideration

• Past consideration refers to a situation where a promise is made in exchange for something that has already been done in the past.
• It is an exception to the rule that a voluntary act or abstinence by the promisee does not constitute valid consideration.
• For example, if you are an unpaid intern at a law firm and after your internship, your senior pays you Rs. 8,000 for your work and performance during the internship, this payment is based on your past actions.
• In this case, the consideration is valid because it is based on something you did in the past.

Agreement without Consideration is Void: Exceptions

Consideration is a fundamental aspect of every legal contract. However, there are certain exceptions to this rule, as outlined in Section 25 of the Indian Contract Act, 1872. This section states that an agreement without consideration is void, unless it meets specific criteria such as being in writing and registered, or being a promise to compensate for something done, or a promise to pay a debt barred by limitation law.

Let's take a closer look at these exceptions:

• Section 25(1): This section exempts the rule of consideration in cases of agreements based on natural love and affection between the parties.
• Section 25(2): This section introduces the concept of past consideration as an exception to the rule of consideration. While past consideration is generally not considered valid, there are specific exceptions where it is recognized.
• Section 25(3):. promise to pay a debt barred by the law of limitation is considered valid even in the absence of new consideration.
• Section 185: This section states that consideration is not necessary to create an agency.

Landmark Cases

The significance of consideration in a contract is often highlighted through landmark cases where court judgments set important precedents for interpreting the law. Let's explore some notable judgments related to consideration in contracts.

Kedarnath Bhattacharji vs. Gorie Mahomed (1886)

• This case established a crucial principle that any act done at the request of the promisor constitutes valid consideration in a contract.
• It emphasized the importance of the promise made and the obligation to fulfill it.
• The Calcutta High Court ruled that even if the defendant does not benefit from the promise, he is still liable to pay because he made a legally binding commitment.
• Once the defendant makes a promise, he is bound to fulfill it, regardless of personal benefit.
• The court's decision underscores the principle that a promise is a legal obligation, and failure to fulfill it can lead to legal consequences.
• In this case, the defendant's promise to pay the plaintiff was enforceable despite the lack of personal benefit, highlighting the importance of keeping promises.

Doraswamy Iyer vs. Arunachala Ayyar and Ors. (1935)

• This case reaffirms the essential element of consideration moving at the promisor's desire.
• Justice Cornish of the Madras High Court held that for consideration to be valid, there must be a request from the promisor to the promisee to perform an act.
• Without such a request, the promise lacks consideration and is unenforceable.
• For instance, if A promises to give B Rs. 100 without any conditions, it is not enforceable because there is no consideration.
• However, if A promises to give B Rs. 100 in exchange for mowing A's lawn, the promise is enforceable due to the consideration involved.
• The requirement of consideration ensures that promises are not made lightly and prevents enforcement of empty promises.
• While some scholars criticize the doctrine of consideration as unnecessary, it remains a fundamental principle of contract law in India.

Comparison between Kedarnath Bhattacharji vs. Gorie Mahomed and Doraswamy Iyer vs. Arunachala Ayyar

• Kedarnath Bhattacharji vs. Gorie Mahomed: In this case, the construction of the hall was initiated based on the promised subscriptions.
• Doraswamy Iyer vs. Arunachala Ayyar: In this instance, the repairs of the temple were already underway when the subscriptions were solicited.
• The key distinction lies in the timing and influence of the promises, where the action in Kedarnath was dependent on the promised subscriptions, while in Doraswamy Iyer, the work was independent of the promise.

Conclusion

To sum up, consideration is crucial in contract law as it helps differentiate a contract from a simple promise. The various types of consideration allow parties to enter into agreements that suit their specific needs and transactions. Understanding the different aspects of consideration is important for businesses, legal professionals, and individuals when drafting contracts to ensure they are legally sound and enforceable in court. Therefore, whether you are a legal expert, a business entity, or a law student, it is essential to be mindful of the essentials, types, exceptions, and precedents related to consideration when creating or entering into a contract.