INSUFFIENCY OF CONSIDERATION IS IMMATERIAL, BUT AN AGREEMENT WITHOUT CONSIDERATION IS VOID – ILLUSTRATE AND EXPLAIN.


1. INTRODUCTION:

A legally binding contract needs consideration as it is a vital element. So, a valid contract does not exist without consideration. We know that by promise one party give or sacrifice something and other party take something. This type of give and take or sacrifice is called consideration by law[1]. If someone promises without any consideration that is called gift. On the other hand give premise exchange of any consideration that is called contract. So it is clearly seen that to become a valid agreement we need to consider its materiality and the level of voidable.

An agreement made without consideration is void unless it is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account if natural love and affection between the parties standing in near relation to each other. Agreement must be in writing and registered. If you have an oral arrangement or unregistered agreement although it is in writing, it will not be valid even though it proceeds from natural love and affection and even if the parties to it are near relations to each other. It must be both in writing and registered.

This essay is discussed into two separate parts. First I want to discuss about consideration[2] and void agreement quite elaborately and after that I will go through the topic ‘insufficiency of consideration is immaterial, but an agreement without consideration is void’. My objective to discuss in this way is because the whole topic is related with consideration and void agreement. By understanding consideration and void agreement will facilitate us to understand the concept of ‘insufficiency of consideration is immaterial, but an agreement without consideration is void’.

 

2. CONSIDERATION:

In simplest terms, consideration is what a promisor demands as the price for his promise.[3] Sir Frederick Pollock defines consideration as “an act or forbearance of one party or the promise thereof is the price for which the promise of the other is bought and the promise thus given for value is enforceable.”[4]

In consideration was termed as “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.”[5]

From the foregoing definitions it is clearly brought out that the term ‘consideration’ is used in the sense of ‘quid-pro-quo’ which means ‘something in return.’ This ‘something’ may be some benefit, right, interest or profit or it may also be some forbearance, detriment, loss or responsibility upon the other party.

In India, the definition of consideration is contained in Section 2 (d) of the Indian Contract Act, 1872.

It reads: “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 promises to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

Examples

1. Amin agrees to sell his house to Banu for Rs. 50,000. Here Banu’s promise to pay the sum of Rs. 50,000 is consideration for Amin’s promise to sell the house; and Amin’s promise to sell the house is the consideration for Banu’s promise to pay Rs. 50,000.

2. Amin promises to pay Banu Rs. 5,000 at the end of 6 months, if Chaku, who owes that sum to Banu, fails to pay it. Banu promises to grant time to Chaku, accordingly. Here the promise of each party is the consideration for the promise of the other party.

3. Amin promises, for a certain sum paid to him by Banu to make good to Banu the value of his ship if it is wrecked on a certain voyage. Here Amin’s promise is the consideration for Banu’s payment and Banu’s payment is the consideration for Amin’s promise.

4. Amin promises to maintain Banu’s child and Banu promises to pay Amin Rs. 5,000 yearly for the purpose. Here the promise of each party is the consideration for the promise of the other party.

2.1 Importance of Consideration

If a promise is made without consideration it is purely superfluous, and not matter how sanctified and binding in honor it may be, it is not considered a legal obligation. Any contract broken down and analyzed will show two clearly distinguishable parts: (i) the promise and (ii) the consideration for the promise. Someone that makes a promise to do or not do something usually does so as a return or equivalent of some loss, damage, or inconvenience that may have been happened to the other party in relation to the promise.

The benefit so received and the loss, damage or inconvenience so caused is regarded in law as the consideration for the promise. Thus, generally speaking, a contract cannot be thought of without consideration.[6] “No consideration, no contract” is the rule of the law”.

3. VOID AGREEMENT:

a) Literally: 

Void means having no legal value and agreement means arrangement, promise or contract made with somebody.  So void agreement means an agreement that has no legal value.

 b) Traditionally:

“An agreement not enforceable by law is said to be void”.
A void agreement has no legal effect. An agreement which does not consist of the necessary elements of contract is void. Void contract bestows no rights on any person and does           not       create   any       obligation.

Example: 

An agreement made by a minor, agreement without consideration,         certain agreements against public          policy   etc.
c) Agreement which become void:  
An agreement, which was legal and enforceable when it was created, may afterwards become void due to impossibility of performance, change of law or other reason. When it becomes void the agreement loses its legal effect.[7]

3.1 Expressly Declared Void Agreement
There are certain agreements, which are expressly declared to be void.
They are as follows:
(1)      Agreement by a minor or a person of unsound mind.[Sec(11)]
(2)      Agreement of which the consideration or object is unlawful[Sec(23)]
(3)      Agreement made under a bilateral  mistake of fact material to the agreement[Sec(20)]
(4)      Agreement of which the consideration or object is unlawful in part and the illegal  part cannot be separated from the legal part [Sec(24)]
(5)      Agreement made. without consideration.[Sec(25)]
(6)      Agreement in restraint of marriage [Sec(26)]
(7)      Agreement in restraint of trade  [Sec(27)]
(8)      Agreement  in restrain of legal proceedings[Sec(28)]
(9)      Agreements the meaning of which is uncertain [Sec(29)]
(10)    Agreements by way of wager [Sec(30)]
(11)    Agreements contingent on impossible events [Sec(36)]
(12)    Agreements to do impossible acts [Sec(56)]

Furthermore, since agreement, by definition as per section 2(e) is a promise/s in exchange for a promise/s, each promise forming consideration for the other. It will therefore be an unequal to think of an agreement without consideration. Therefore, we may sum up the importance of consideration simply: Except in certain cases, a contract without consideration cannot be thought of and if made, it is devoid of any legal obligation.

4. INSUFFIENCY OF CONSIDERATION IS IMMATERIAL, BUT AN AGREEMENT WITHOUT CONSIDERATION IS VOID

a) Meaning:

Consideration is a technical term used in the sense of quid-pro-quo (i.e., something in return). When a party to an agreement promises to do something, he must get something in return. This “something” is defined as consideration.[8]

b) Definition:

“When at the desire of the promisor, the promise (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.”[9]

c) Illustration in general:

Shoummo promises to give tk.5, 000 to build mosque. It is not contract because there is no consideration. Consideration may be paid in future and it is not sufficient but in a contract must have consideration. So, it is clear that “no consideration no contract.”

Example:

Facts: The secretary of a mosque committee filed a suit to enforce a promise which the promisor had made to subscribe Rs.1, 000/- for rebuilding a mosque.

Judgment: ‘The promise was not enforceable because there was no consideration in the sense of benefit’, as ‘the person who promised gained nothing in return for the promise made’, and the secretary of the committee to whom the promise was made, suffered no detriment (liability) as nothing had been done to carry out the repairs. Hence the suit was dismissed.

4.1 Validity of an agreement without consideration:

The generalization is that an agreement without consideration is void[10], but in the following cases, the agreement though made without consideration[11], will be valid and enforceable according to section 25 and 185 are as follows:-

a)      Nature, love and affection:  An agreement made without consideration is valid if it is made out of love, nature and affection such agreements are enforceable if

  • The agreement is made in writing and registered
  • The agreement must be made between the parties standing in near relations to each other and
  • There must be nature, love and affection between the parties

Example: Voatka (vs) Rogata

Facts: By a registered agreement, ‘Voatka’, on account of nature, love and affection for his brother, ‘Rogata’, promises to discharge debt to ‘Voatka’. If ‘Voatka’ does not discharge the debt then the agreement will be void.

Judgment: ‘Rogata’ may discharge it and then sue ‘Voatka’ to recover the amount. Therefore it is a valid agreement.

b)      Compensation for past voluntary services: A promise made without consideration is valid if, it is 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.

c)      Promise to pay Time-Bared debt: An agreement to pay a time-bared debt enforceable if the following conditions are satisfied.

  • The debt is a time bared debt
  • The debtor promises to pay the time barred debt
  • The promise is made in writing
  • The promise is signed by the debtor

d)      Completed gifts:The rule “No consideration – No contract” does not apply to completed gifts. According to section 1 to 25 states “nothing is section 25 shall affect the validity, as between the donor and done, of any gift actually made”

e)      Agency: According to section 185, no consideration is necessary to create an agency

f)       Charitable subscription: Where the promise on the strength of promise makes commitments (i.e., changes his position to his liability/detriment)

Example: Kallu (vs) Gullu

Facts: ‘Gullu’ had agreed to subscribe Rs.100/- towards the construction of a town hall at Howrah. The secretary, ‘Kallu’, on the faith of the promise, called for plans and entrusted the work to contractors and undertook the liability to pay them.

Judgment: The amount could be recovered, as the promise resulted in a sufficient detriment to the secretary. However, be enforceable only to the extent of the liability incurred by the secretary. In this case, the promise, even though it was gratuitous, became, enforceable because on the faith of promise the secretary had incurred a detriment.

4.2 Exceptions to the Rule “No Consideration No Contract”

The general rule of law is that an agreement without consideration is void.[12] “A bargain without consideration is a contradiction in terms and cannot exist.”[13] But there are a few exceptional cases where a contract, even though without consideration, is enforceable. They are as follows:

1. An agreement made without consideration is valid if—

(a) It is expressed in writing

Examples of (a)

1. An elder brother, on account of natural love and affection, promised to pay the debts of his younger brother. The agreement was put to writing and was registered. Held, the agreement was valid [14]

2. A Mohammedan husband, by a registered agreement promised to pay his earnings to his wife. Held the agreement, though without consideration, was valid.[15] Notice that for an agreement to be valid under this clause the agreement must be the result of natural love and affection and nearness of relation by itself does not necessarily import natural love and affection.

(b) It is registered (under the law for the time being in force for registration of documents)

Examples of (b)

1. A Hindu husband by a registered document, after referring to quarrels and disagreements between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence, it was held that the promise was unenforceable. [16]

2. 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”[17].

(c) It is made on account of natural love and affection

Examples of (c)

1. Abir finds Boldi’s purse and gives it to him. Boldi promises to give Abir Rs. 50. This is a valid contract.

2. Abir supports Boldi’s infant son. Boldi promises to pay Abir’s expenses in so doing. This is a valid contract.

3. A promise to pay, wholly or in part a debt which is barred by the law of limitation can be enforced if (a) it is in writing, and (b) is signed by the debtor or his authorized agent [Section 25(3)].

A debt barred by limitation16 cannot be recovered. Therefore, a promise to pay such a debt is, strictly speaking, without any consideration. But as noted above, if a written promise is made to repay, it is enforceable.

(d) Made between parties standing in a near relation to each other.

Example of (d)

Akkas owes Boni Rs. 5,000 but the debt is barred by the Limitation Act. Akkas signs a written promise to pay Boni Rs. 1,000 on account of the debt. This is a valid contract.

Notice that the above section [Section 25(3)] applies only when the promisor was liable himself for the time-barred debt; the sub-section does not apply to the case of a promise to pay a time-barred debt owing by a third party. [18]Further, sub-section (3) of Section 25 would not apply unless the promise is to pay an ascertained sum. A promise to pay what is due after taking accounts is not a promise within the meaning of Section 25(3).[19]

4. Consideration is not necessary to effect bailment (Section 148).

5. No consideration is required to create an agency (Section 185). Notice, however, that if no consideration has passed to the agent, he is only a gratuitous agent and is not bound to do the work entrusted to him, although if he begins the work, he must do it to the satisfaction of his principal.

6. The rule ‘no consideration no contract’ does not apply to completed gifts [Explanation 1 to Section 25].

5. CONCLUSION:

An agreement without consideration is void.” Explain this rule and state exceptions if any. Unless Indian Contract Act 1872 in section 2(e) says that every promise and every set of promises that form a consideration for each other is an agreement. Therefore, we can see that the existence of consideration for a promise or promises is required for a promise to become an agreement. Thus, there cannot be an agreement if there is no consideration. Section 25 of the act says the same thing in precise terms and also gives three exceptions where an agreement without consideration is a valid contract: Section 25: An agreement without consideration is void unless, it is in writing and registered and the promise has been made due to natural love and affection between the parties standing in near relation to each other. it is a promise to compensate, wholly or in part, a person who has voluntarily done something for the promisor or something that the promisor was legally bound to do. It is a promise to pay for a time barred debt.

Exceptions to the Rule “No Consideration No Contract”. The general rule of law is that an agreement without consideration is void. But there are a few exceptional cases where a contract, even though without consideration, is enforceable.

We know that consideration involves a concept of give and take. There are rules about what makes up an exchange and what might be exchanged in order to become a good consideration. We will look at these rules after we have examined the requirements of offer and acceptance. The relationship between the rules of offer and acceptance on the one hand and the rules of consideration on the other hand is that the exchange which constitutes an acceptance of an offer – in effect an exchange of promises is brought about by acceptance – is at the same time the necessary exchange which constitutes the consideration. All this will become clearer when we examine the doctrine of consideration in detail.

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INTERNET:

  1. http://www.transtutors.com/university-california/importance-consideration-6.htm
  2. http://www.citeman.com/4120-no-considerations-and-no-contracts.html
  3. http://www.citeman.com/4120-no-considerations-and-no-contracts.html#ixzz1dIv2eh3m
  4. http://www.scribd.com/doc/46786178/B-LAW-UNIT-I
  5. www.newagepublishers.com/samplechapter/000999.pdf
  6. www.transtutors.com/university…/importance-consideration-6.htm
  7. www.lawphil.net/judjuris/juri2009/jun2009/gr_184861_2009.html
  8. www.slideshare.net/vishakeb/bl-mid-sem-slides-presentation
  9. http://issuu.com/sbm.rawalpindi/docs/00_-_complete_mercantile_alw_-_b_5
  10. www.citeman.com/4120-no-considerations-and-no-contracts.html
  11. www.dupedia.com/Iyear/…/Paper%20V-%20Business%20Law.pdf
  12. www.scribd.com/doc/55830084/Business-Law-IInd-Year
  13. http://www.transtutors.com/university-external-influences-business/business-processes/importance-consideration-tp-6.htm
  14. http://drapl.com/node/15057
  15. http://www.scribd.com/doc/46786178/B-LAW-UNIT-I
  16. http://www.docstoc.com/docs/55141600/BUSINESS-LAW
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[1] Something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee; that which motivates a person to do something, esp. to engage in a legal act. •

[2] Consideration, or a substitute such as promissory estoppel, is necessary for an agreement to be enforceable.  Broadly speaking, consideration is simply a collective term for all the various separate elements that can make a promise legally enforceable.  Bargain is one such element.

[3] We have already seen that consideration involves a notion of exchange. There are rules about what constitutes an exchange and what might be exchanged in order to amount to a good consideration.

[4] Narrowly speaking, consideration is equated with the single element of bargain (often referred to as the “bargain theory of consideration”)

[5] Currie v. Misa (1875) L.R. 10 Ex. 162,

[6] Exceptions, i.e., cases where an agreement even without consideration is valid are discussed on page I-45.

[7] An illegal agreement is one of the consideration or object of which (1) is forbidden by law; or (2) defeats the provisions of any law; or (3) is fraudulent; or (4) involves or implies injury to the person or property of another; or (5) the court regards it as immoral, or opposed to public policy.

[8] The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise something and receive something or a promise in return. Consideration is the price for which the promise of the other is sought. However, this price need not be in terms of money. In case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and is not enforceable at law. Moreover, the consideration must be real and lawful. Every agreement of which the object or consideration is unlawful is not only void as between immediate parties but also taints the collateral transactions with illegality.

[9] According to section 2(d) of the Indian contract Act, 1872

[10] There are certain agreements which have been expressly declared illegal or void by the law. In such cases, even if the agreement possesses all the elements of a valid agreement, the agreement will not be enforceable at law.

[11] An act done at the desire of a third party is not a consideration. Although it is necessary  that consideration must move at the desire of the promisor, it may be supplied either by the promisee or any other person. The case of Chinnayya v. Ramayya, 4 Mad. 137 is a good illustration on the point. Adequacy of consideration is always the lookout of the promisor. Courts do not see whether every person making the promise has recovered full return for the promise.  Finally, Consideration must be real and Illegal consideration renders a contract void

[12] “If the order is void, it may be attacked at any time in any proceeding,” Evans v Corporate Services, 207 Ill.App.3d 297, 565 N.E.2d 724 (2nd Dist. 1990)

[13] Lord Loughbotough.

[14] [Venkatswamy v. Rangaswamy (1903) 13 M.L.J. 428].

[15] [Poonoo Bibi v. Fyaz Buksh (1874) Bom. L.R. 57].

[16] [Raihikhy Dohee v. Bhootnath (1900) 4. C.W.N. 488]

[17] [Section 25(2)]

[18] [Pestonji v. Meherbai, 30 Bom. L.R. 1407].

[19] [Chowksi v. Chowksi, 8 Bom. 194].