Consideration in contract law is simply the exchange of one thing of value for another. It is one of the six elements that must be present for a contract to be enforceable. Consideration must be both legally sufficient and bargained-for by the receiving party.
Enforcing any legal contract requires it to have an element of consideration included in it. In simple words, it is nothing but a price that the promisee agrees to pay to the promisor. Now, this price can be paid as a benefit to the promisor and/or a loss or detriment to the promisee. In this article, we will look at this dual aspect of consideration in detail.
Basic Understanding of Consideration
According to Section 2(d) of the Indian Contract Act, 1872, consideration is defined 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 abstain from doing something, such act or abstinence is called a consideration for the promisee.”
This is a complex sentence. Let’s break it down for further understanding and rewrite it as follows:
At the desire of the promisor if the promisee either
- Does something (in the past, present or future) OR
- Abstains from doing something (in the past, present or future)
Then, this act of doing or abstinence is called Consideration. Now, it has two aspects, either doing some act or abstaining from doing something. Let’s look at some examples:
Example 1 – Doing something
Peter and John enter into a contract where Peter promises to deliver 15 curtains to John in one month’s time. Also, John promises to pay Peter an amount of Rs 3,000 on delivery. In this contract, John’s promise to pay Rs 3,000, on delivery, is the consideration for Peter’s promise. Also, Peter’s promise of delivering 15 curtains is the consideration of John’s promise to pay.
Example 2 – Not doing something
Peter has taken a loan from his friend John. However, he has not repaid the loan yet. John promises not to file a suit against Peter if he promises to repay the loan within a week. In this case, abstinence on the part of John is due to the consideration of Peter’s promise of repayment of the loan.
Rules Regarding Consideration
According to Section 2(d) of the Indian Contract Act, 1872, the follows features are essential for a valid consideration:
(i) Consideration must move at the desire of the promisor
Consideration can be offered by the promisee or a third-party only at the request or desire of the promisor. If an action is initiated at the desire of the third-party, it is not a consideration.
Peter is going back home from work. On his way, he sees that his neighbor John’s house is on fire. He immediately arranges for a water hose and manages to douse the fire. Peter cannot claim any reward for his effort because it was a voluntary act and was not done at the desire of John (promisor).
(ii) Consideration may move from the promisee to any other person
If you look at the definition of consideration according to section 2 (d) of the Indian Contract Act. 1872, it explicitly states the phrase ‘promisee or any other person…’ This essentially means that in India, consideration may move from the promise to any other person. However, it is important to note that there can be a stranger to a consideration but not a stranger to the contract.
Peter gifted his son, Oliver, an apartment in the city with a condition that he pays a fixed amount of money to his uncle, John, every year. On the same day, Oliver executed a deed to pay a fixed amount of money to John every year. However, Oliver failed to pay and John filed a suit for recovery. Oliver pleaded that he was not liable since no consideration had moved from John. However, the court held the words ‘promisee or any other person…’ and allowed John to maintain his suit for recovery.
(iii) It can be in the past, present or future
Since consideration is the price of a promise, it is normally given to induce the promise. However,it can be given before the promise is made by the promisor. This is past consideration. It is important to note that past consideration is not considered for a new promise since it is not been given in lieu of the promise. According to Indian law, ‘past considerations’ is ‘good consideration’ if it was given at the desire of the promisor.
Peter employs John to work on his field during the months of agricultural harvesting. He promises to pay John an amount of Rs 5,000 for his services when he sows the new crop in the fields. The services of John in the past constitute a valid consideration.
a.1. Past Voluntary services
At times, a person might render voluntary services without any request or promise from another. If the person receiving the services makes a subsequent promise to pay for the services, then such a promise is enforceable in India under Section 25(2) of the Indian Contract Act, 1872 which states:
‘An agreement made without consideration is void, unless it’s 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; or unless.’
Peter finds John’s wallet on the road. He returns it to him and John promises to pay Peter Rs 500 for his services. This is a valid contract.
If the promise and consideration take place simultaneously then it is present or executed consideration. An example is Peter goes to a shop, buys a bag of chips and pays for the same on-spot.
When the consideration for a promise moves after the contract is formed, it is a future or executor. It is also valid if it depends on a condition.
Peter promises to create architectural plans for John’s new house. John promises to pay Peter an amount of Rs 50,000 provided the plans are approved by his wife.
(iv) It must have value in the eyes of the law
While the law allows the parties to decide an ‘adequate’ consideration for them, it must be real and have value in the eyes of law. While the Court will not consider inadequacy, it will look at it to determine if the consent was given by the party with free-will or not.
Peter’s wife agrees to withdraw the suit she has filed against him in return for his promise to pay her a monthly maintenance amount. This is a good consideration and holds value in the eyes of law.
(v) It should be over and above the Promisors’ existing obligations
If the promisor is already obligated either by his promise or law to perform or abstain from a certain act, then it is not a good consideration for a promise.
Peter receives a summons from the Court to appear before it as a witness for John. John promises to pay him Rs 10,000 to appear in the Court. This contract is not valid because Peter is obligated by law to appear in the Court on receiving summons.
(vi) It cannot be Unlawful
A consideration that is against the law or public policies is not valid.
Peter offers Rs 10,000 to John to beat up his business rival. John beats him up but Peter refuses to pay him. John cannot file a suit for recovery since the consideration is against the law.
Solved Question for You
Q1. Which of these contracts are valid?
- Peter promises to pay John an amount of Rs 500,000 if his car meets with an accident and gets damaged more than 50% provided John pays him Rs 25,000 per year for the next 10 years.
- Arjun promises to take care of Ravi’s house while Ravi is away for work for six months provided he pays him Rs 5,000 upon his return.
- Rita promises to get Amita a job with the Indian Government if Amita promises to pay her Rs 20,000 when she gets the job.
- Peter’s promise is the consideration for John’s payment and vice versa. Further, these are lawful considerations and have value in the eyes of law. Hence, it is a valid contract.
- Arjun’s promise is the consideration for Ravi’s payment and Ravi’s payment is for Arjun’s promise. Further, these are lawful considerations and have value in the eyes of law. Hence, it is a valid contract.
- This is not a valid contract because the consideration is against the law.
Consideration can be defined as something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances which is enforceable by law. Lawyers often argue contracts “must be supported by consideration.” This consequently means that if a person makes a promise to another person to perform an act, with no promise made in return then this is unenforceable as there is no consideration. The promisor is losing something with no gain, whereas the promisee is gaining with no loss. Whereas if the promise is made and the promisee offers a promise in return then there is consideration and the contract is enforceable. The case of Williams v. Roffey Bros & Nicholls has been considered the most current alteration to the rules presented in Stilk v. Myrik. In many ways the case of Williams v. Roffey departs from the traditional rules of consideration, however many argue that the decision to depart from Stilk v. Myrick has not made a significant impact on the doctrine of consideration and has faced much criticism as well as approval.
The traditional rules of consideration consist of the pre-existing duty doctrine. This explains that “if A and B are bound by a contract, and B makes a promise which is no different from the one by which B is already bound, neither the making of this promise nor its performance can be put forward by B as consideration for a fresh promise by A.” Today the foundations of the pre-existing duty rule are generally connected to the case of Stilk and Myrick. This case follows the pre-existing duty rule, as eleven sailors agreed to sail to the Baltic and back, upon arrival two deserted, the captain of a ship agreed to pay the wages of two sailors who deserted to the rest of the crew, however he refused to pay. The sailors sued but were unsuccessful in their claim. It is argued that the case was decided in this way as there was no consideration for the captain’s promise, as the sailors were already obliged to sail the ship home safely from their original contract. It has been seen that the decision of this case has been criticised in many ways and subsequently, avoided since the ruling occurred. Many arguments have been presented to abolish the pre- existing duty rule, but these have clearly been ignored. These traditional views were over turned when the decision for Williams v. Roffey conflicted with Stilk v. Myrik and to a certain extent created a rule of its own.
In the case of Williams and Roffey Bros, Roffey Bros sub- contracted Williams to do some carpentry work for £20,000 in a block of 27 flats that they had been contracted to refurbish, but he was unable to finish on time as the price he quoted was not enough to complete the work. Therefore Roffey bro offered to increase in the wages by £10,300 if the work was completed on time; however after Williams completed eight of the flats, Roffey Bros failed to pay the additional cost, causing Williams to bring an action for the additional payment. It is argued that Roffey Bros did not give consideration to Williams and the Case was decided in his favour. It can be argued that the reason the case was decided in this way, was due to the fact that Williams continued with the work, therefore did not breach his contract Moreover as he continued, Roffey Bros did not have to look for another sub-contract, which saved them time and money, and finally as the work was being carried out, they did not suffer a penalty for late completion of the work. The decision in Williams v. Roffey led to the introduction of the practical benefit test which previously was not considered good consideration, this is due to the fact that when Glidewell LJ made his concluding statement his focus was on whether “in practice” the promisor received benefits or not, rather than looking at whether the promisee is at a disadvantage due to his promise or that the prominsor gains “legal benefit”.Moreover the Statement also implies that the effect of this decision would be to “abolish the doctrine of consideration..” Consequently the principle of this case had to make a distinction between Stilk v. Myrick, many argue that Stilk v. Myrick is incompatible with Williams v. Roffey as it was seen as out of date in the courts. This step away from Stilk v. Myrick shows how the decision in Williams v. Roffey challenged the traditional rules of consideration, such as the pre- existing duty principle and established a new path that the rule of consideration could take. However in Glidewell LJ’s statement, he made it clear that his intention was not to “contravene the principle in Stilk v. Myrick”, but to “refine, and limit the application of that principle, but they leave the principle unscathed.” This shows that even though the case of Williams v. Roffey caused much controversy concerning the rules of considerations, this however was not the intention of Glidewell LJ, it may be argued that he was attempting to modernise the rule so it relates to today’s society, additionally his intentions could have been to try to bring the rules of consideration together, to prevent the constant avoidance of the Stilk v. Myrick principle. It can be seen that is some ways, the decision was successful in creating new precedent; however it has also received much criticism.
The decision in William’s v. Roffey has been moderately influential throughout Britain and the Commonwealth, after the decision was announced the principle was followed without delay in England and Wales, moreover it was also approved in New Zealand by their Court of Appeal. Additionally the principles from Williams v. Roffey have been used to decide other cases; it is known that “some six months after Williams v. Roffey, in Anangel Atlas Companika Naviera SA v. Ishikawajima-Harima Heavy Industries Co Ltd (No 2) Hirst J Applied the Williams v. Roffey principle.” Therefore it can be seen that the decision in the case, has influenced and to a certain extent departed from the traditional rules of consideration.
However the decision of Williams v. Roffey is not without its flaws. It can be seen that the decision of the case conflicts with the case of Foakes v. Beer. This case shows how a person promised to not claim interest on another’s dept; the contract was seen as unenforceable for “want of consideration.” This is seen as a problem, as even though they are over a hundred years apart there is an issue because Foakes v. Beer was decided by the House of Lords, whereas Williams v. Roffey was decided by the Court of Appeal. Therefore Williams v. Roffey is not considered officially binding precedent until the House of Lords has agreed. Consequently it is challenging the existing rules of consideration, and the challenge is not coming from a court which has the power to make the change. Moreover, although some courts have embraced the principles set in Williams v. Roffey, not all of the courts are as willing. Some cases have recognized Glidewell LJ’s statement in Williams v. Roffey, but they do not accept it, as they feel it will “render Foakes v. Beer redundant,” this is seen in Re Selectmove Ltd which showed a company that was promised they could suspend payment to the Revenue, however the courts decided this as unenforceable, due to the conflict with Foakes v. Beer. This decision shows that some courts are not ready to enforce laws that have not been properly accepted by the House of Lords, or explained by legislation. Therefore it is argued that the decision of Williams v. Roffey does challenge the traditional rules, but not entirely successfully. It goes against the decision in Foakes v. Beer, but that does not necessarily mean that the challenges are accepted but the rest of the courts in the country. Therefore, even though it is argued that the decision was “pragmatic” it may still not be accepted entirely.
It is seen that the decision in Williams v. Roffey presents challenges to the traditional rules of consideration; however it can be argued that the challenges have not yet been viewed by the House of Lords which clearly makes them insignificant. The rules of consideration are contradictory, this is shown clearly how by the fact that two similar cases can be decided in different ways, such as Foakes v. Beer and Williams v. Roffey. Traditionally the House of Lords would argue that the principles of Foakes v. Beer should be followed, however some argue that they would actually act in favour of Williams v. Roffey. Moreover these challenges that Williams v. Roffey have presented to the traditional rules of consideration could in fact be the start of the end of consideration. In New Zealand, Williams v. Roffey has influenced the Court of Appeal to “abolish consideration and introduce a reliance based test”. This was caused by the case of Antons Trawling Co Ltd v. Smith. created new principles other than those in Williams v. Roffey, and ignore those in Stilk v. Myrick. Therefore it is clear that the challenges that Williams v. Roffey presents to the traditional rules of consideration, seem extremely important in changing the way in which the rule of consideration functions, however have not gone as far as to bring to an end the traditional rules, when the case is looked at deeply, it can be seen that the influence it has had in England and Wales has not been exceptionally significant, and have influenced few cases. None of which have made such radical decisions as that of Antons Trawling Co Ltd v. Smith.