Introduction of Contract
A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing, though contracts can be made orally. The remedy for breach of contract can be “damages” or compensation of money. In equity, the remedy can be specific performance of the contract or an injunction. Both of these remedies award the party at loss the “benefit of the bargain” or expectation damages, which are greater than mere reliance damages, as in promissory estoppel.
The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract, although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.
Definition of Contract
According to Salmond a contract is:
“An agreement creating and defining obligations between the parties”
According to Sir William Anson,
“A contract is-an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others.
Origin and scope: Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda, which is usually translated
“Agreements must be kept” but more literally means “pacts must be kept”
Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations, along with tort, unjust enrichment, and restitution.
As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological, and anthropological terms (see “Contractual theory” below). In American English, the term extends beyond the legal meaning to encompass a broader category of agreements.
Elements of Contract
At common law, the elements of a contract are offer, acceptance, intention to create legal relations, and consideration.
- Offer and acceptance: The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a concurrence of wills or consensus ad idem (meeting of the minds) of two or more parties. The concept is somewhat contested. The obvious objection is that a court cannot read minds and the existence or otherwise of agreement is judged objectively, with only limited room for questioning subjective intention.
- Intention to create Legal Relationship: An agreement to dine at a friend’ house is not an agreement intended to create legal relations and is not a contract. An agreement to buy and sell goods or an agreement to marry, are agreements intended to create legal relationship and are therefore contract.
- Lawful Consideration: An agreement is legally enforceable only when each of the parties [gives something and gets something in return-is called consideration].An agreement to do something for nothing is usually not enforceable by law. The consideration may be an act (doing something or not) or a promise to do or not to do. Consideration may be past, present or future. But only valid considerations are “lawful consideration”
- Capacity of Parties: Legally capable of entering into an agreement otherwise not enforceable by a court of law. The agreement is not enforceable by law, If any of the parties suffers from minority, lunacy, idiocy, drunkenness, and similar other factors.
- Free Consent: An agreement must be based on the free consent of the parties. Absence of genuine consent if the agreement is induced by coercion, undue influence, mistake, misrepresentation, and fraud.
- Consideration: Consideration is something of value given by a promissor to a promisee in exchange for something of value given by a promisee to a promissor. Typically, the thing of value is a payment, although it may be an act, or forbearance to act, when one is privileged to do so, such as an adult refraining from smoking.
Consideration consists of a legal detriment and a bargain. A legal detriment is a promise to do something or refrain from doing something that you have the legal right to do, or voluntarily doing or refraining from doing something, in the context of an agreement.
A bargain is something the promisor (the party making promise or offer) wants, usually being one of the legal detriments. The legal detriment and bargain principles come together in consideration and create an exchange relationship, where both parties agree to exchange something that the other wishes to have.
- 7. Possibility of Performance: The agreement must be capable of being performed. A promise to do an impossible thing cannot be enforced.
- 8. Void Agreements: There are five categories of agreements which are expressly declared to be void. They are:
i) Agreement in restraint to marriage;
ii) Of trade;
iii) Of proceedings,
iv) Agreements having uncertain meaning;
v) Wagering agreement.
- 9. Writing, Rregistration and Legal Formalities: An oral, contract is valid, except in those cases where writing and/or registration is required by some statute. The terms of an oral contract are sometimes difficult to prove. Writing is required in cases of lease, gift, sale and mortgage of immovable property, negotiable instruments; memorandum and articles of association of a company etc
Consideration is something of value given by a promissor to a promisee in exchange for something of value given by a promisee to a promissor. Typically, the thing of value is a payment, although it may be an act, or forbearance to act, when one is privileged to do so, such as an adult refraining from smoking.
Consideration consists of a legal detriment and a bargain. A legal detriment is a promise to do something or refrain from doing something that you have the legal right to do, or voluntarily doing or refraining from doing something, in the context of an agreement. A bargain is something the promisor (the party making promise or offer) wants, usually being one of the legal detriments. The legal detriment and bargain principles come together in consideration and create an exchange relationship, where both parties agree to exchange something that the other wishes to have.
The purpose of consideration is to ensure that there is a present bargain, that the promises of the parties are reciprocally induced. The classic theory of consideration required that a promise be of detriment to the promissor or benefit to the promisee. This is no longer the case in the USA; typically, courts will look to a bargained-for exchange, rather than making inquiries into whether an individual was subject to a detriment or not. The emphasis is on the bargaining process, not an inquiry into the relative value of consideration.
Monetary value of consideration
Generally, courts do not inquire whether the deal between two parties was monetarily fair—merely that each party passed some legal obligation or duty to the other party. The dispositive issue is presence of consideration, not adequacy of the consideration. The values between considerations passed by each party to a contract need not be comparable.
For instance, if A offers B $200 to buy B’s mansion, luxury sports car, and private jet, there is still consideration on both sides. A’s consideration is $200, and B’s consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts, and do not intervene. The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Thus, licensing contracts that do not involve any money at all will often cite as consideration, “for the sum of $1 and other good and valuable consideration”.
However, some courts in the United States may take issue with nominal consideration, or consideration with virtually no value. Some courts have since thought this was a sham. Since contract disputes are typically resolved in state court, some state courts have found that merely providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and consequently, no contract is formed. However, this is a minority position.
Pr-existing legal duties
A party which already has a legal duty to provide money, an object, a service, or forbearance, does not provide consideration when promising merely to uphold that duty. That legal duty can arise from law, or obligation under a previous contract.
The prime example of this sub-issue is where an uncle gives his seven year old nephew (a resident of the US) the following offer: “if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500” (assuming it is a criminal offense in the US for people under the age of 18 to smoke cigarettes, and for people of any age to smoke marijuana). On the nephew’s 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle will win, because the nephew, by U.S. law, already had a duty to refrain from smoking cigarettes or marijuana.
The same applies if the consideration is a performance for which the parties had previously contracted. For example, A agrees to paint B’s house for $500, but halfway through the job A tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already contractually obligated to paint the house for that amount.
An exception to this rule holds for settlements, such as an accord and satisfaction. If a creditor has a credit against a debtor for $10,000, and offers to settle it for $5,000, it is still binding, if accepted, even though the debtor had a legal duty to repay the entire $10,000.
Pr-existing duties relating to at-will employment depend largely on state law. Generally, at-will employment allows the employer to terminate the employee for good or even no reason, and allows the employee to resign for any reason. There are no duties of continued employment in the future. Therefore, when an employee demands a raise, there is no issue with consideration because the employee has no legal duty to continue working. Similarly, when an employer demands a pay-cut, there is also no contractual issue with consideration, because the employer has no legal duty to continue employing the worker. However, certain states require additional consideration other than the prospect of continued employment, to enforce terms demanded later by the employer, in particular, non-competition clauses.
Types of Consideration
- 1. Present consideration:
Consideration which moves simultaneously with the promise is called Present Consideration or Executed Consideration.
2. Future consideration:
When the consideration is to move at a future date, it is called Future Consideration or Executory Consideration.
3. Past consideration:
When the consideration of one party was given before the date of the promise, it is said to be past.
Re McArdle (1951) – under a will the testator’s children were entitled to a house at their mother’s death. In the mother’s life time pine of the child red and his wife lived in the house with the mother. The wife made improvements to the house. The children later agreed in writing to repay to the wife the sum of $1000 which she spent on improve mends. But at the mother’s death they refused to do so.
Held: at the time of promises the improvements were past consideration and so the promise was not binding.
Rules of Consideration:
As well as determining whether consideration is valid on the grounds of being executed or executor, the court will also seek to ensure that:
1. Desire (or request) of the promisor is essential: The act done or loss suffered by the promisee must have been done or suffered at the desire of the promisor. Ex: P sees Q’s house on fire and helps in extinguishing it. Q did not ask for his help. P cannot demand payment for his services.
2. The consideration must be real: The consideration must have some value in the eye of taw. It must not be Sham or illusory. The impossible’ acts and illusory or non-existing goods cannot support a contract. Ex: X promises to supply Y one tola of gold brought from the sun. The consideration is sham and illusory and there is no contract.
A contribution to charity is without consideration. It is not real consideration.
3. Public duty: Where the promise is already under an existing public duty, an express promise to perform, or performance of that duty will not amount to consideration. Ex: A contract to pay money to a witness who has received an order from the court to appear at a trial.
4. Promise to a stranger to perform an existing contract: X wrote to his nephew B, promising to pay him an annuity of £150 in consideration of his marrying C. B was already engaged to marry C. Held, the fulfillment of B’s contract with C was consideration to support X’s promise to pay the annuity, therefore, it is enforceable.
5. Consideration need not be adequate: P agrees to sell a horse worth $1000 for $. 10. P’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.
If the consideration is inadequate, the Court may hold that consent of the promisor was not freely given and the agreement may become void.
6. The consideration must not be illegal, immoral, or opposed to public policy: If the consideration of the object of the agreement is illegal, the agreement cannot be enforced.
7. Consideration may move from the promisee or from any other person: A person granted some properties to his wife C directing her at the same time to pay an annual allowancee to his brother R. C also entered into an agreement with R promising to pay the allowance to R. This agreement can be enforced by R even though no part of the consideration received by C moved from R.
What is good consideration? :
The rules or the necessary factors for consideration can be summed up as follows:
(1) There must be desire of the promisor;
(2) It must be real;
(4) Not illegal, immoral or opposed to public policy;
(5) Present, past or future; and
(6) From the promisee or any person.
Subject to the above essential factors, a good consideration can be any of the following:
(1) Physical goods;
(3) Forbearance (for example not to sue);
(4) Arbitration or the compromise of disputed claims, and
(5) Settlement or composition with creditors.
NO CONSIDERATION NO CONTRACT-EXCEPTIONS
Every agreement to be enforceable at law must be supported by valid consideration. An agreement made without consideration is void and is unenforceable except in certain cases. Section 25 specifies the cases where an agreement though made without consideration will be valid. These are as follow:
1. Natural love and affection [Sec. 25(1)]
An agreement though made without consideration will be valid if it is in writing and registered and is made on account of natural love and affection between parties standing in a near relation to each other. An agreement without consideration will be valid provided-
(a) It is expressed in writing;
(b) It is registered under the law for the time being in force;
(c) It is made on account of natural love and affection;
(d) It is between parties standing in a near relation to each other.
All these essentials must be present to enforce an agreement made without consideration.
2. Compensation for services rendered [Sec. 25(2)]
An agreement made without consideration will be valid if it is a promise to compensate wholly or in a part a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do. To apply this rule, the following essentials must exist:
(a) The act must have been done voluntarily;
(b) For the promisor or it must be something which was the legal obligation of the promiser;
(c) The promisor must be in existence at the time when the act was done;
(d) The promisor must agree now to compensate the promisee.
3. Time-barred debt [Sec. 25(3)]
A promise to pay a time-barred debt is also enforceable. But the promise must be in writing and be signed by the promisor or his agent authorized in that behalf. The promise may be to pay the whole or part of the debt. An oral promise to pay a time-barred debt is unenforceable
4. Completed gifts [Exp. 1 to Sec. 25]
Explanation 1 to section 25 provides that the rule ‘No consideration, No contract’ shall not affect validity of any gifts actually made between the donor and the donee. Thus if a person gives certain properties to another according to the provision of the Transfer of Property Act, he cannot subsequently demand the property back on the ground that there was no consideration.
5. Agency (Sec. 185)
There is one more exception to the rule. IT is given in section 185 which says that no consideration is needed to create an agency.
6. Guarantee (Sec 127)
A contract of guarantee is made without consideration.
7. Remission (Sec 63)
No consideration is required for an agreement to receive less then what is Du, this is called remission in the law.
“No Consideration, no Contract “what Is Meant By This Statement?
Consideration for a particular promise exists where some right, interest, profit or benefit accrues (or will accrue)
To the promisor as a direct result of some forbearance are detriments, loss or responsibility that has been given, Suffered or undertaken by the promisee. The consideration must be executor or executed, but not past. Consideration is executor Consideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid.
If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): Something must be given or promised in exchange or return for the promise.
A contract is an exchange of promises between two or more parties to do or refrain from doing an act which is enforceable in a court of law. It is where an unqualified offer meets a qualified acceptance and the parties reach Consensus in Idem. The parties must have the necessary capacity to contract and the contract must not be trifling, indeterminate, impossible or illegal.
Hence by watching both definitions you can understand that contract required benefit for both parties. If there is no consideration for one party it means that party is not getting of any benefit so. If there is no benefit for both party it means why they will make contract. And if benefit is only for one party then that is no contract because it is not full feeling contract first essential of exchange of promises, goods, services or something worth full for both parties
Exceptions to Consideration (No Consideration and No Contract)
The general rule of law is “no consideration, no contract”, i.e., in the absence of consideration there will be no contract. However, the law recognizes the following exceptions to the rule of consideration. The exceptions have been given in Sec. 25 of the Indian Contract Act. In these cases, agreements are enforceable even if these have been made without consideration.
1. A promise made out of material love and affection. [Sec. 25]:
An agreement expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection, between parties standing in a near relation to each other, is enforceable without consideration.
A agreed to pay Rs. 5000 to his younger brother out of natural love. This promise is in writing and registered. If A refuses to pay Rs. 5,000 to his younger brother, the latter can enforce the promise in the Court and A cannot refuse payment on the ground of absence of consideration. It should be noted that all the four conditions must be satisfied only then it will be valid without consideration, otherwise not.
An agreement was made between a husband and his wife after referring to quarrels to pay maintenance allowance. The court held that the agreement was not enforceable as it was not made out of natural love and affection and hence it was void being without consideration. [Rejlukhy v. Bhoothnath]
It should be noted that nearness of relation does not necessarily mean that the agreement has been made out of natural love.
2. A promise made to compensate for voluntary services [Sec. 25]:
A promise to compensate, wholly or in part, a person who has voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable without consideration.
This rule, in fact, recognizes past consideration which was given without request or desire of the promisor.
A found B’s purse and gave it to him. B promised to pay a reward of Rs. 50 to A. Later on, B cannot refuse payment on the ground that there was no consideration.
3. Written promise to pay a time-barred debt [Sec. 25(3)]:
A promise made in writing to pay a debt barred by the Law of Limitation is enforceable even without consideration.
A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs written promises is to pay B the sum of Rs. 1,000. This is a valid contract.
4. Gift, etc. actually made: 
Explanation I to Section. 25 provide that any gift actually made is valid.
A gave a watch as a gift to B on his birthday. Later on, A cannot demand his watch (gift) back on the ground that there was no consideration (as A did not get anything in return for the watch).
5. To create agency:
Under Sec. 185, no consideration is necessary to create an agency. Actually speaking, consideration is there even in an agency in the sense that the principal has agreed to be bound by the acts of the agent. Thus he undertakes the responsibility of the agent. We have seen earlier in Currie v. Misa’s case that suffering responsibility is a good consideration.
1. Ewan McKendrick, Contract Law – Text, Cases and Materials (2005) Oxford University Press ISBN 0-19-927480-0
2. P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979) Clarendon Press ISBN 0-19-825342-7
3. Randy E. Barnett, Contracts (2003) Aspen Publishers ISBN 0-7355-6525-2
4. Scott Fruehwald, “Reciprocal Altruism as the Basis for Contract,” 47 University of Louisville Law Review 489 (2009).
5. JH Baker, ‘Origins of the Doctrine of Consideration 1535-1585’ in JH Baker, The Legal Profession and the Common Law: Historical Essays (London 1986).