The Indian Contract Act was enacted in 1872 and came into force on 1st September 1872. It lays down certain general rules regarding the contract. It deals with agreements that can be enforced through courts of law. An agreement becomes enforceable by law when it attains certain essential elements. One of those essential elements is known as Consideration. It is defined in Section 2(d) of the Indian Contract Act, 1872. Subject to a certain exception, an agreement is not enforceable unless each party to the agreement gets something. That ‘something’ is called consideration. It is used in the sense of quid pro quo which means something in return. An agreement without consideration is a bare promise and ex nudo pacto non oritur actio, refers to ‘no action arises on a contract without a consideration.’
Definition of Consideration
According to Section 2(d) of the Contract Act defines consideration as follows: “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.”
Consideration may be stated as the concept of value offered and accepted by parties engaging in contracts. Anything of value promised by one party to the other throughout a contract might be termed “consideration.” For example, Ben agrees to sell a house to Jerry for Rs. 10 lakhs. For Ben’s promise, the consideration is Rs. 10 lakhs. For Jerry’s promise, the consideration is the house.
In the English case, Currie v. Misa, consideration was defined as, “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given. suffered or undertaken by the other.”
Types of Consideration
Section 2(d) of the Indian Contract Act, 1872, recognizes three kinds of consideration as follows:
- Past Consideration: When one party’s consideration was given before the date of the promise, it is stated as past consideration. For example, A repairs the bicycle of B in July (without expecting any payment). In August B promises to pay him some money. The consideration of A is past consideration.
- Present Consideration: Consideration that moves simultaneously with money is known as Present Consideration or Executed Consideration. For example, X buys a book from Y’s shop and pays the price immediately. The consideration moving from X is Present or Executed Consideration.
- Future Consideration: When the consideration is to move at a future date, it is known as Future Consideration or Executory Consideration. Consideration may be executory on both sides. Thus, a promise to pay money at a future date for goods to be delivered at a future date is a valid contract.
Essential Factors of Consideration
- The desire of the promisor: The promisee’s deed or loss must have been done or experienced at the desire of the promisor. An act performed without a request is a voluntary act and shall not come within the definition of consideration. In Durga Prasad v. Baldeo, on the order of the collector of a town, Durga Prasad built some shops at his own expense in a market. The shopkeepers who occupied these shops promised to pay Durga Prasad commission on their sales. Durga Prasad sued the shopkeepers when he did not receive his commission. The court ruled that the promise was not backed by any consideration because the shops were constructed on the collector’s command rather than the shopkeepers’ request. Therefore, there could not be a recovery.
- The consideration must be real: In the sight of the law, this regard must have some worth. It should not be illusory. Impossible acts which are illusory or non-existent cannot sustain as a contract.
- Promise to a stranger: A promise made to a stranger to perform an existing contract is applicable because the promisor undertakes a new obligation upon himself which can be enforced by the stranger.
- Consideration need not be adequate: Section 25 provides that, “An agreement to which the consent of the party 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.” The basis for this rule is that the court cannot decide what constitutes appropriate consideration. The parties to the contract shall choose the quantum of consideration and the Court shall enforce the agreement if permission is provided freely. If contemplation is unsatisfactory, the Court may determine that the promisor’s consent was not freely granted and that the agreement is invalid.
- Consideration must not be unlawful, immoral, or contrary to public policy: The agreement cannot be enforced if either the consideration or the object of the agreement is illegal. If the consideration is immoral or contrary to public policy, the same principle applies.
- The consideration may be present, past, or future
- Consideration by promise or any other person (Privity of Consideration): According to Indian law, consideration may be given by the promise or any other person. In India, there is a possibility that consideration for the promise may move not from the promisee but a third person, who is not a party to the contract. In England, the position is different. There the rule is that consideration must move from the promisee and nobody else.
Case Laws for Consideration under the Indian Contract Act, 1872
In Chinaya v. Ramaya, A, by a deed of gift, made over the certain property to her daughter, with a direction that the daughter should pay an annuity to A’s brother, as had been done by A. On the same day, the daughter executed writing in favor of the brother agreeing to pay the annuity. The daughter declined to fulfill her promise and the brother sued to recover the amount. The defendant (sister) argued that there was no consideration from the brother and that he had no right to sue because he was a stranger to the consideration. It was held that it is not mandatory that consideration must move from the promised himself. A contract can be supported even by a consideration from a person other than the promised. Therefore, the brother was entitled to sustain the suit.
“No Consideration No Contract”- Exception to this rule
For the validity of a contract, consideration is required. A promise without consideration cannot create a legal obligation. According to Roman law, an agreement without consideration is known as nadum pactum. Under English law, a simple contract must be backed by consideration, while no consideration is required for contracts. Under Indian law, consideration is the most essential element for a valid contract.
There are some exceptions where a contract is enforceable even though there is no consideration. They are as follows:
- Natural love and affection: According to Sec 25(1), it was explained that an agreement without consideration is valid if it is compiled with the following circumstances:
- The agreement should be made by a written document.
- The document should be registered under the law relating to registration in force at the time.
- The agreement should be made under natural love and affection.
- The agreement’s parties are in proximity to one another.
- Voluntary Compensation: Under Section 25(2) it is stated that a promise made without consideration is valid if, “it is a promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do.”
- Time-barred debt: According to Section 25(3), a debt that has been prohibited by limitation cannot be retrieved. Therefore, a promise to repay such debt is, strictly speaking, without any consideration. Nevertheless, such a promise can be enforced if the debtor or his authorized agent makes a written and signed promise to repay it. The debt must be a liquidated or determined quantity of money, with a specific promise to pay. A mere acknowledgment is not enough.
- Agency: Under Section 185 of the Indian Contract Act, 1872, it was stated that no consideration is necessary to create an agency.
- Completed gift: According to Explanation (1) of Section 25 of the Indian Contract Act, 1872, the rule of no consideration no contract does not apply to gifts.
Consideration is an essential element for a valid contract and also it is an advantage that can be negotiated between the parties. A contract involves the exchange of one consideration for another. There can be no valid contract if there is no lawful consideration. Acts that are illegal or sufficiently unethical that violate established public policy, cannot be used as consideration for legally binding contracts. If the intended consideration is found to be of less than the expected value, damages or destruction, or performance is not done effectively, contracts may become ineffective in the event of failure of consideration. Acts that are illegal or so unethical in contravention of recognized public policy cannot qualify as consideration for an enforceable contract.
To avoid future legal difficulties, parties must reach an agreement by assigning a value to certain commodities, services, or work performance. Consideration binds a contract legally, shielding both parties from any litigation or misunderstandings. Furthermore, consideration frequently includes a portion that establishes loss of responsibility. A contract that provides this information assists a court in determining where the failure occurred, who is to blame, and what punishment to impose.
- Currie v. Misa (1875) L.R. 10 Ex 162
- Durga Prasad v. Baldeo (1880) 2 All. 221
- Chinnaya v. Ramaya (1882) 4 Mad. 137
This article has been written by Banya Mahapatra from Madhusudan Law University, Cuttack.