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UNDERSTANDING THE CONCEPT OF CONSIDERATION UNDER THE INDIAN CONTRACT ACT: A COMPREHENSIVE OVERVIEW BY:- SMT. VARSHARANI KUNDLIK GANGARDE
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UNDERSTANDING THE CONCEPT OF CONSIDERATION UNDER THE INDIAN CONTRACT ACT: A COMPREHENSIVE
OVERVIEW
AUTHORED BY:- SMT. VARSHARANI
KUNDLIK GANGARDE
CLASS:- LL.M 1st YEAR, SEMESTER:II
ROLL NO.119
(2023-2024)
SAVITRIBAI PHULE PUNE UNIVERSITY, PUNE
411007
ABSTRACT:-
Consideration is a fundamental concept in contract law, serving as the
cornerstone of contractual obligations. In the Indian Contract Act, 1872,
consideration holds significant importance, as it delineates the essence of a
valid contract. Consideration forms the bedrock of contractual relationships
under the Indian Contract Act, 1872. It ensures that parties enter into
agreements willingly and with a clear understanding of their obligations.
Understanding the nuances of consideration is essential for drafting
enforceable contracts and resolving disputes. By comprehending the intricacies
of consideration, individuals and businesses can navigate contractual
transactions with confidence and clarity. This article aims to provide a
comprehensive understanding of consideration under the Indian Contract Act,
exploring its definition, types, essentials, and legal implications.
INTRODUCTION:-
Consideration
is the foundation of every contract. The law insists on the existence of
consideration if a promise is to be enforced as creating legal obligations. A
promise without consideration is null and void.
Meaning and definition:-
In the famous English case of Currie v.
Misa, consideration was defined by Lush, J. as follows – ‘a
valuable consideration in the sense of the law may consist either in some
right, interest, profit or benefit accruing to one party or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.
Section 2(d) of Indian Contract Act defines
consideration as: “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 to abstain from doing something, such act or abstinence or
promise is called a consideration for the promise.”
As per this
definition, consideration is something in return of a promise which consists of
:
1.
an act, abstinence or
forbearance,
2.
done at the desire of the
promisor,
3.
by the promisee or any other
person,
4.
which can be either already
executed or is in the process of execution or may still be executory.
Thus, if at the
desire of A, B agrees to paint a picture for him at an agreed remuneration, the
painting of the picture would be regarded as consideration moving from B and
the remuneration as consideration moving from A.
Essential
elements/Requirements of consideration:-
The elements of
consideration can be described as follows :
(1) Consideration must move at the desire of the
promisor:-
An act or abstinence without any request from
the promisor is a voluntary act and does not come within the definition of
consideration. Similarly, an act or abstinence done at the request of any
person other than the promisor does not constitute consideration. In other
words, an act shall not be a good consideration unless it is done at the desire
of the promisor.
Example:
1.
The collector of a district
asked D to spend some money on the improvement of a market and he did so. The
shopkeepers of the market promised to pay commission to D on their sale. Later
on they refused to pay the commission. D cannot demand payment from the
shopkeepers who are using the market for having improved the market as he had
done so at the desire of the collector and not at the request of shopkeepers[1].
2.
A sees B drowning and saves his
life. A cannot demand payment for his services as it is a voluntary act on his
part and B never asked him to do so.
(2) Consideration may move from the promisee or any other person who is not
party to
the contract :–
It eans that so long as there is
consideration for promise, it is immaterial who has furnished it. It may move
from the promisee, or from any other person if the promisor has no objection.
Example:
1.
An old lady, by a deed of gift
made over certain property to her daughter D under the direction that she
should pay her aunt, P (sister of the old lady), a certain sum of money
annually. The same day D entered into an agreement with P to pay her the agreed
amount. Later, D refused to pay the amount on the plea that no consideration
had moved from P to D. Held, P was entitled to maintain the suit as
consideration had moved from old lady, sister of P, to the daughter D[2].
That the above
case is best example of Doctrine of
Privity of Consideration according to which stranger to consideration can
sue.
A consideration
moving from third party who is a minor is no consideration.
(3) Consideration is an act, abstinence, forbearance or detriment :–
At times consideration is taken as
misnomer of money form of exchange. The legal term consideration does not mean
payment of money only. The Contract Act says that the consideration can be in
the form of an act, abstinence, forbearance or detriment.
(a) Consideration as an act :–
An act done by a person can constitute
consideration. Where a person executes an undertaking in favour of a bank on
the basis of which he receives a substantial benefit of having a current
overdraft account with a bank, the facility of overdraft account cannot be said
to be without consideration.
(b) Consideration as an abstinence –
To
constitute abstinence as consideration, one must refrain or promise to refrain
from doing something that he or she is privileged to do.
Example – X
promised to pay his nephew Y, a sum of Rs. 50,000 if he would refrain from
drinking, using tobacco, and playing cards for money until he becomes 21 years
of age. The nephew refrained from all the specified activities as he was
requested to do but his uncle died without making the payment. He claimed the
money out of the uncle’s estate as his legal right. Held that, he abandoned his
legal right and restricted his lawful freedom of action upon the faith of his
uncle’s agreement although it may seem that such performance actually did not
prove to be a benefit to the promisor. Such detriment however amounted to
consideration and he was granted the promised sum of Rs. 50,000.
(c) Consideration as forbearance –
Forbearance means foregoing one’s
legal right or claim. Creditor forbearing to enforce execution and allowing
time to pay at the request of the debtor is a good consideration.
Examples:
1.
An agreement to accept a decree
and not to appeal against it when parties to it would have appealed is one
which is supported by good consideration.
2.
A promises to pay C, his law
partner, Rs. 750 if C will give up his part-time job in a dance band for the
next nine months. C lives up to the terms of the offer, but A refuses to pay.
If C brings suit to recover Rs.750, A is liable. Here again we have a
unilateral contract, promise in exchange for a negative act (or a forbearance)
– the act of not playing in the band. C’s refraining constituted both an
acceptance of the offer and a legal detriment to him; thus we can see that A’s
promise was supported by consideration.
(d) Consideration as detriment :–
A detriment suffered by the promisee
or any other person, whether actual or prospective, can constitute a good
consideration. The ordinary contract of guarantee is good example of detriment
form of consideration. In consideration of A’s lending B Rs.1000, C promises to
repay the loan if B does not. Here C derives no benefit, but A suffers
detriment by parting with his money, and this is enough consideration to
support C’s promise provided A lends the money at C’s request.
Example: X,
a publisher, promises Y: “If you will loan Rs. 5,000 to my nephew for one year,
I will run all your advertisements during that time at half the regular rate.”
Y makes the loan, but X refuses to provide advertising space at the reduced
rate. If Y sues X to recover damages for breach of contract – that is, Y seeks
to enforce X’s promise – X is liable. Y’s act of making the loan to the nephew
constituted not only an acceptance of X’s offer but a detriment to Y – the
parting with something of value where he was not otherwise legally obligated to
do so. Thus X’s promise, supported by consideration, is enforceable against
him.
That it is not necessary for the promisor to
receive any benefit as long as the promisee or someone else suffers a
detriment.
(4) Consideration can be past, present or future
:-
(a) Past consideration – A past
consideration consists in an act already done by one as consideration for a
promise of the other. Thus, when a person promises to compensate another in
return for what the latter had done for the promisor in the past or before
making of the promise, such promise is said to be for past consideration, i.e.
consideration which took place in the past. Past consideration is as good as
present or future consideration. For example, A does some work for B in
the month of April without expecting any return from B. Later on, in June, B
promises to pay him some money for the work done in April. This constitutes a
valid contract as the work done by A is of the nature of past consideration.
Example– “A”
provided extra services to B (his master), after which B promised him a bonus
for the same. Later on B refused to pay the bonus. Held that, if the servants
put forth extra work in consideration whereof a bonus is subsequently promised
to them by the masters, it is in law a promise for past services which is good
under Indian Law.
Under
the English law, past consideration is no consideration. But under the Indian
Law past consideration is good consideration because of the use of the words
“has done or abstained from doing” in the definition of “consideration”.
(b) Present (Executed) Consideration –
The consideration which moves simultaneously with the promise is present
consideration. It consists in “doing” or “abstaining from doing something”. The
best example of present consideration is cash sale where performance by both
the parties (seller and buyer) is simultaneous. Another example is a contract
of marriage where there is simultaneous performance by both the parties.
The present
consideration is also known as executed consideration because it emphasizes on
the execution part of performance. A may offer B $10 if B runs from London to
Bath. Even though B says that he will accept A’s offer, yet until he has run
from London to Bath, (i.e. B has performed his part of contract),
there is no consideration for A’s promise. B accepts the offer and by running
from London to Bath simultaneously executes the consideration which makes A’s
promise a binding contract.
Past
consideration must be distinguished from the executed consideration. The
consideration (running from London to Bath) in the above case is executed after
the offer or request and simultaneously with the acceptance. But, if A promises
B $10 in consideration of having run from London to Bath last week, the
consideration is past. It is something wholly done before the offer or request
and before acceptance of the offer.
(c) Future (Executory) Consideration –
A promise to do something in future is legal consideration. When the
consideration from one party to another is to move at some future date, it is
called future consideration. The consideration for A’s promise to B may be a
promise by B to A. The consideration is then said to be executory. If A promises to
marry B in consideration of B promising to marry A, the promise
made by each is the consideration for the promise made by the other.
Examples:
1.
M and B enter into a contract
in April under the terms of which M agrees to build a swimming pool for B in
June, B promising to pay Rs. 2,500 in return. M later refuses to perform, and B
sues him to recover damages for breach of contract. M is liable; that is, his
promise is enforceable.
(5) Consideration
must be lawful – According to section 10 of
the Act,“All agreements are contracts if they are made for a lawful
consideration”. So a consideration must be lawful without which an agreement is
void. Section 23 states that consideration is unlawful if
(a) it is forbidden by law;
(b) or, is of such a nature that if allowed it would defeat some law of
the country;
(c) it is fraudulent;
(d) it involves injury to the property or person of the other;
(e) court regards it as immoral or opposed to the public policy.
As
per section 24 of the act an agreement void if consideration and objects
unlawful in part. There may be cases where one part of consideration is
unlawful but the other is not. In such cases the whole agreement is void if the
unlawful part connot be separated from the lawful part.
Example – A promises to work for B
who runs both illegal and legal business for a sum of Rs. 4,000 per month and B
agrees to pay this amount to A. The legal business can be separated from
illegal business, the part of salary pertaining to legal business is lawful
consideration.
In the above
case, if legal and illegal businesses cannot be separated, whole salary of A
will constitute unlawful consideration.
Nudo pacto non-oritur,
i.e An agreement without consideration is void. Exceptions to the doctrine of consideration:-
So far, we have seen
that an agreement has to be supported by consideration to be enforceable at
law. But there may be certain circumstances where it will not be reasonable to
apply the doctrine of consideration to meet the basic motives of the law.
Section 25 of the Indian Contract Act, 1872 takes care of such circumstances.
It says that,
“An agreement
without consideration is void unless it is in writing and registered or is a
promise to compensate for something done, or is a promise to pay a debt barred
by limitation law.”
Such
circumstances are elaborated below:
(1) Love and affection [Sec. 25(1)] – An agreement is enforceable even if there is no
consideration, if it is
(i) expressed in writing,
(ii) registered under the law for the time being in force for the
registration of documents,
(iii) is made on account of natural love and affection, and
(iv) between parties standing in a near relation to each other.
In simple words, a
written and registered agreement based on natural love and affection between
near relatives is enforceable even if it is without consideration.
Examples:
1.
A, for natural love and
affection, promises to give his son, B, Rs. 1,000. Aputs his promise to B in
writing and registers it. This is a contract.
2.
An agreement by a person
entitled to a certain share in the income of a Trust, to pay out of that share
a certain amount to his mother over and above her own share of that income is
supported by consideration as per section 25 (1) of the Act.
Note: The Act does not provide any guidance as to who is near relative.
The expression would therefore include parties related by blood or marriage.
Further, nearness of relationship does not necessarily import natural love and
affection.
3.
A Hindu husband, after
referring to quarrels and disagreement between him and his wife executed a
registered document in favour of his wife agreeing to pay her for maintenance,
but no consideration moved from the wife. Held, the agreement was void for want
of consideration – Rajlukhyv. Bhoothnath, (1900) C.W.N.
488 as the essential requirement that the agreement is made on account of
natural love and affection between the parties was missing.
(2) Compensation for past voluntary services
[Sec. 25 (2)] – A promise to
compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, is enforceable, even though without consideration. In simple words, a promise to pay for a past
voluntary service is binding.
Examples:
1.
A finds B’s purse and gives it
to him. B promises to give A Rs. 50. This is a contract.
2.
A supports B’s infant son. B
promises to pay A’s expenses in so doing. This is a contract.
3.
A says to B, “At the risk of
your life you saved me from a serious accident. I promise to pay you Rs.
1,000.” There is a contract between A and B.
4.
X agreed to pay Y Rs. 5 per
mensem for life in consideration of Y having trained X the art of singing. It
was found that Y’s sister and not Y himself had rendered those services for X.
In a suit by Y it was held that as Y himself had done nothing for X’, there was
no consideration for the agreement and hence it was not enforceable. [AIR 1916
Pat. 80 (81)]
(3) Promise to pay a time-barred debt [Sec.
25(3)] – A time barred debt is a debt
which is not recoverable because of lapse of specified time (presently 3 years)
under the Limitation Act. In the normal course, once a debt becomes time
barred, the lender is left with no remedy to get his money back. Therefore a
debtor is not legally bound to pay the debt if it becomes time-barred.
In such a case,
if the debtor subsequently promises to pay the time barred debt, apparently
there is no consideration moving from the other party but the contract is still
enforceable. This is because, under
section 25(3) of the Act, a promise by a debtor to pay a time-barred debt is
enforceable provided:
(i) it is made in writing,
(ii) is signed by the debtor or by his agent generally or specially
authorized in that behalf, and
(iii) the debt must be such “of which the creditor might have enforced
payment but for the Law of the limitation of suits.”
The promise may
be to pay the whole or any part of the debt.
Example – D owes C Rs. 1,000 but the debt is barred by the Limitation Act. D
signs a written promise to pay C Rs. 1,000 on account of the debt. This is a
contract.
Section 25(3)
applies only :
When a promisor
himself was liable for the time barred debt. This means sub-section 25(3) would
not apply to a case of a promise to pay a time barred debt payable by a third
party.
(4) Completed gift [Explanation 1 to Sec. 25] – The rule “No consideration, no contract” does not apply to
completed gifts. According to Explanation 1 section 25, nothing in
section 25 shall affect the validity, as between the donor and the donee, of
any gift actually made.
Thus transfer of properties by one person
to the other as a gift according to the provisions of the Transfer of Property
Act (i.e. by a written and registered document) is valid and a
person transferring the property cannot subsequently demand the property back
on the ground that there was no consideration.
(5)
Consideration need not be adequate (Explaination 2 to Sec.25)- An agreement to
which consent of the promisor is freely given is not void merely because the
consideration is inadequate; but the inadequacy of the consideration may be
taken into account by the court in determining the question whether the consent
of the promisor was freely given.
example:- A
agreed to sell a watch worth Rs.500 for Rs.20, A's consent to the agreement was
freely given. The consideration, though inadequate will not affect the validity
of the contract.
(6) Agency [Sec. 185] – Under section 185 of the Indian Contract Act, no
consideration is necessary to create an agency, i.e. a transaction
of agency. For giving a person authority to act as agent, consideration is not
necessary. Thus if A authorises B to act on his behalf (act as an agent) before
C, and B agrees to do so, the contract is enforceable at the court of law
although no consideration is moving from A to B. A will be bound by the acts
done by B on his behalf as against C. Even a gratuitous agent can be held
liable for negligence. The principle of Promissory Estoppel emanates from this
provision.
CONCLUSION
Without lawful
consideration contract is not meaningful. Consideration is an integral part or
essential element of a valid contract.
Lawful consideration follows some rule then we called it good
consideration. But there are some exceptions to the rule – No consideration, No
contract.
References
Statute:
1.
The Indian Contract Act, 1872.
Books:
1. Avtar Singh, Law of Contract.
2. P.S Atiya, Introduction to the Law of
Contract.
Websites:
1) https://www.legalserviceindia.com/legal/article-5045-consideration-under-indian-contract-act.html#google_vignette
last seen on 26/04/2024.
2) https://docs.manupatra.in/newsline/articles/Upload/01CAB3F7-FEF2-47EF-8D1B-AE4A3EB4C2D8.pdf last seen on
26/04/2024.
Article Information
UNDERSTANDING THE CONCEPT OF CONSIDERATION UNDER THE INDIAN CONTRACT ACT: A COMPREHENSIVE OVERVIEW BY:- SMT. VARSHARANI KUNDLIK GANGARDE
Authors: SMT. VARSHARANI KUNDLIK GANGARDE
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/29
- Issue 7
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