What is Consideration ?
Meaning and Definition of Consideration in Contract Law [Section 2(d)]
The term "consideration" is one of the vital elements to uphold a contract. Subject to some exceptions, an agreement made without consideration is a null and void contract, Consideration is a legal term used in the sense of quid pro quo, which means 'something in return.
When a party to an agreement promises to do something, he must get something' in return. This 'something' is called consideration. Consideration is the price agreed to be paid by the promisee for the obligation of the promisor.
Section 10 of the Indian Contract Act distinctly states that a "lawful consideration" is necessary for the recognition of an agreement as a valid contract. Sections 23, 24 and 25 further lay stress on the nature of the lawful consideration and thus play an important role in regulating the contractual relation for their legal validity and enforcement through a court of law.
Section 2(d) 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 net or abstinence or promise is called a consideration for the promise".
That is to say.
- Consideration is the doing or not doing of something which the promisor desires to be done or not done.
- Consideration must be at the desire of the promisor.
- Consideration may move from one person to any other person.
- Consideration may past, present or future.
- Consideration need not adequate, but should be real.
For example, X Promises to deliver his good to Y and Y promises to pay ₹1,000 on delivery. In this case, the consideration for each of these promises is as under:
|
Promise |
Consideration |
|
For X's promise |
Y's promise to pay Rs.1000 in delivery. |
|
For Y's promise |
X's promise to deliver his goods. |
Basically, the essence of the concept of consideration lies in the return sought by a person for undertaking an obligation by making a promise. Scholars have described the meaning of consideration in the same sense.
According to Blackstone:
"Consideration is the recompense given by the party contracting to the other".
According to Pollock:
"Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable".
According to Cheshire and Fifoot:
"Consideration is the price paid by the plaintiff for the defendant's promise".
According to Sir Frederick Pollock:
"An set or forbearance of one party or the promise thereof, (Consideration) is the price for which the promise of the other is bought and the promise thus given for value is enforceable".
Essential Elements of a Valid Consideration
Essentials of a valid consideration are as follows:
1) Consideration must Move at the Desire of the Promisor:
In order to constitute legal consideration, the act or abstinence forming the consideration for the promise must be done at the desire or request of the promiser. Thus acts done or services rendered voluntarily, or at the desire of third party, will net amount to valid consideration so as to support a contract. The logic for this may be found in the worry and expense to which every one might be subjected, if he were obliged to pay for services, which he does not used or require. For example, A sees B's house on fire and helps in extinguishing it. He cannot demand payment for his services because B never asked him to come for help.
2) Consideration may Move from the Promise or Any Other Person:
The second essential of valid consideration, as contained in the definition of consideration in Section 2(d), it that consideration need not move from the promisee alone but may proceed from a third person. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promises or from any other person. This means that even a stranger to the consideration can sue en a contract, provided he is a party to the contract. This is sometimes called as 'Doctrine of Constructive Consideration'.
3) It may be Past, Present or Future:
The words used in Section 2(d) are: ".. has dene or abstained from doing (past), or does or abstains from doing (present), or promises to do or to abstain from doing (future) something..". This means consideration may be past, present or future:
- Past Consideration: When consideration by a party for a present promise was given in the past, i.e., before the date of the promise, it is said to be past consideration.
- Present or Executed Consideration: When consideration is given simultaneously with promise, i.e., at the time of the promise. It is said to be present consideration. For example, in a cash sale consideration is present or executed.
- Future or Executory Consideration: When consideration from one party to the other is to pass subsequently to the making of the contract. It is future or executory consideration.
4) It need not be Adequate:
Consideration, as already explained, means "something in return". This "something in return" need net necessarily be equal in value to "something given". The law simply provides that a contract should be supported by consideration. So long at consideration exists, the Courts are not concerned as to its adequacy, provided it is of some value. "The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the Court when it is sought to be enforced."
5) It must be something which the Promisor is Not Already Bound to Do:
A promise to do what one is already bound to do, either by general law or under an existing contract, is not a good consideration for a new promise, since It adds nothing to the pre-existing legal or contractual obligation. Likewise, a promise to perform a public duty by a public servant is not a consideration.
6) It may be an Act, Abstinence or Forbearance or a Return Promise:
This has already been explained. Thus it may be noted that the following are good considerations for a contract:
i) Forbearance to Sue: If a person who could sue another for the enforcement of a right agrees not to pursue his claim, this constitutes a good consideration for a promise by the other person. This results in a benefit to the person not sued and a detriment to the person who could sue. For example, A borrows from B ₹100 at 20 per cent p.a. and fails to pay the amount. When B is about to file a suit, A agrees to pay a higher rate of interest. B, as a result, does not file the suit. This forbearance on the part of B to file a suit is a sufficient consideration and B can enforce the promise by A to pay the higher rate of interest.
ii) Compromise of a Disputed Claim: Compromise is a kind of forbearance. As such the same principle, as discussed above, applies to the bona fide compromise of a disputed claim even though ultimately it might appear that the claim was wholly unfounded. But, originally, the claim should be reasonable and the person claiming should honestly believe that it is a valid claim. He should also act bona fide. If it turns out that the claim was frivolous and the claimant was not acting bona fide, the other party can claim compensation.
iii) Composition with Creditors: A debtor who is financially embarrassed may call a meeting of his creditors and request them to accept a lesser amount in satisfaction of their debt. If the creditors agree to it, the agreement is binding both upon the debtor and the creditors as these amounts to a compromise of the claims of the creditors.
7) It Must be Real and Not Illusory:
Although consideration need not be adequate, it must be real, competent and of some value in the eyes of the law. There is no real consideration in the following cases:
- Physical impossibility
- Legal impossibility
- Uncertain consideration
- Illusory consideration
For example, A in consideration of some money from B promises to bring gold for him from sun or convert copper into gold with the help of magic. This consideration is illusionary and fictitious on account of Impossibility and uncertainly.
8) It must not be Illegal, Immoral or Opposed to Public Policy [Section 23]:
The consideration given for an agreement must not be unlawful. Where it is unlawful, the Courts do not allow an action on the agreement.
Exception to the Rule 'No Consideration, No Contract'
The general rule is that an agreement made without consideration is void (Section 25). In every valid contract consideration is very important. A contract may only be enforceable when there is adequate consideration. However, the Indian Contract Act contains certain exceptions to this rule. Following are the exceptions to the general rule 'No Consideration, No Contract':
1) Agreements Made on Account of Natural Love and Affection [Section 25(1)]:
Such agreement made without consideration is valid if:
- It is expressed in writing.
- It is registered under the law.
- It is made on account of love and affection.
- It is between parties standing in a near relation to each other.
Note: Nearness of relation by itself does not necessarily import love and affection.
For example, a Hindu husband by a registered document promised to pay his wife Rs.2,000 per month as her pin-pocket money. This agreement is valid.
2) Promise to Compensate [Section 25(2)]:
Such promise made without consideration is valid if:
- It is a promise to compensate (wholly or in part).
- The person who is to be compensated has already done something voluntarily or has done something which the promisor was legally bound to do.
For example, X finds Y's purse and gives it to him. Y promises to give ₹500 to X. This is a valid contract even though the consideration did not move at the desire of Y, the promiser.
3) Promise to Pay Time Barred Debt [Section 25(3)]:
Such promise without consideration is valid if:
- It is made in writing.
- It is signed by the debtor or his agent.
- It relates to a debt which could not be enforced by a creditor because of limitation.
For example, A has borrowed sum of 10,000 from B for the period of 2 years. Till the expiration of that period neither A served notice of demand to B nor B repaid the debt. Debt become time barred which A cannot legally recover. B makes promise to repay 5000 after a month. This promise is valid without consideration provided B makes it in writing and signs on it with a clear intention of making partial payment.
4) Completed Gifts [Explanation to Section 25):
The gifts actually made by a donor and accepted by the dance are valid even without consideration. Thus, a completed gift needs no consideration.
For example, X transferred some property to Y by a duly written and registered deed as a gift. This is a valid contract even though no consideration moved.
5) Contract of an Agency [Section 185]:
The contract made for creating relationship of agency between parties does not require any consideration. Without consideration such contracts are invalid. Thus a promise made by the person to act as an agent of another person is enforceable without consideration. Similarly if person makes an agreement with another to appoint him as his agent for particular period of time. It is also a valid agreement.
6) Bailment [Section 148]:
Consideration is not necessary to effect a valid bailment of goods. It is Called Gratuitous Bailment.
7) Remission [Section 63]:
For compromising due debt, i.e., agreeing to accept less than what is due, no consideration is necessary. In other words, a creditor can agree to give up a part of his claim and. there need be no consideration for such an agreement. Similarly, an agreement to extend time for performances of a contract need not be supported by consideration.
8) Charity:
A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promised subscription, the promisee takes definite stops in furtherance of the object and undertakes a liability, to the extent of liability incurred, not exceeding the promised amount of subscription.
Privity of Contract
A contract is an agreement between two or more parties that creates an obligation to do or not to do something. The parties to the contract are under an obligation to perform the terms and conditions as laid down in the contract. The general rule of law is that only parties to a contract may sue and be sued on that contract. Thus a contract can confer rights ar impose obligations arising under the contract on the parties to the contract. Third parties cannot be under such an obligation to perform or demand performance under a contract. This is referred to as Privity of Contract.
The rule laid down in Tweedle versus Atkinson laid down the foundation of the Doctrine of "Privity of Contract" which means that a contract is a contract between the parties only and no stranger to the contract can sue even if the contract is avowedly made for his benefit. Thus a stranger to the consideration cannot sustain the action on the promise made between two persons unless he has in some way intervened in the agreement.
Doctrine of Privity of Contract in India
According to Section 2(d), "Consideration for a contract can proceed from any person and not necessarily the parties to the contract. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the pramisee or any other person. However, there is no specific provision in the Act which either for or against the Doctrine of Privity of Contract. It is through a series of case laws that the Doctrine has evolved.
There are two aspects of this doctrine:
- No one but the parties to the contract is entitled under it. Rights or benefits may be conferred upon a third party but such a third party can neither sue under the contract cor rely on defenses based on the contract.
- The parties to a contract cannot impose liabilities an a third party.
Exceptions to Privity Rule
Over a period of time the Courts have through the various judgments laid down few exceptions to the principle. The exceptions are as follows:
1) Beneficiaries under Trust:
A trust is a conception in law representing a formal arrangement between the owner of a property and another person by which the other person would acquire the possession of the property of the owner and would be under a commitment to use the property for the specified purposes only. The person for whose benefit the trust is created is called the beneficiary of the trust. He would normally not be a party to the arrangement made between the trust-maker and the trustee. But he has been allowed to enforce the trust terms against the trustee.
2) Beneficiary of Specific Charge upon Immovable Property:
Such charge is enforceable at the instance of the beneficiary entitled. The fact that the beneficiary is a stranger to the document cresting charge is immaterial.
3) Insurance:
The principle of privity has been applied to insurance policies affected for the benefit of third parties. Where a policy of insurance is affected by the assured for his awn life, and the policy is expressed to be for the benefit of his wife she cannot sue the insurance company on the policy unless it is assigned in writing or a trust has been declared by the assured.
4) Family Arrangements and Marriage Settlements:
The Specific Relief Act under Section 16(c) enables specific performance of a contract being a settlement on marriage and a family arrangement by any person beneficially entitled thereunder, and creates an exception in the role of privity of contract.
5) Creation of a Charge:
A stranger to a contract can sue for the money made payable to him by it where the money is charged on immovable properties, or also where the specific money in suit is allocated by the promisor in favor of such third party.
6) Covenants running with the Land:
The doctrine of privity of contract has been relaxed to allow certain positive and negative covenants to run with the land so as to benefit or burden persons not party to the contract imposing such covenants.
7) Collateral Contracts:
A collateral contract between a third party and one of the parties to a main contract may be associated with the main contract. This contract may enable a third party to enforce the first contract.
8) Multilateral Contracts:
When a person joins a club or an unincorporated association, one member joining the club is deemed to contract with other members.
9) Acknowledgement and Estoppel:
A promisor may create privity between himself and the third party by conduct, by acknowledgement or by otherwise, constituting himself as an agent of the third party, entitling the third party to sue.
10) Contract for the Benefit of the Third Person:
A person not a party to the contract cannot sue on the contract unless the case comes within one of the recognized exceptions.