The General Principal is that No Consideration NO contract -Analysis & explain with the exceptions
Introduction
Present world is running depending on business. It is time of globalization. Free market is the globalization of business. Now day’s countries are going towards the whole world for the purpose of trade. Various countries have distinct customs as they behave differently in dealing of business. The field of law is the most important sector of business studies. While we are talking about business we have to know the rules of business. There is structured formation of business in corporate level which is more precise then the ordinary. Unconsciously we follow some basic rules in dealing of business. The laws relating to business are more perfectly addressed as the précised rules of dealing of trade we follow day by day. The terms of business like company, corporation, contract, shares etc are defined by the laws relating to business.
As our topic is Consideration we got the ideas about it from the law of contract. For purpose of business we make contracts with each other. In Bangladesh, the contract made for business is guided by The Contract Act-1882.
In view to describe the term Consideration we will go through the law of contract. The term will be defined and described accordingly. There are established rules relating to this term. The term mentions the important element of contract; however there are various types of consideration. Different types of considerations are necessary for different type of contract. There are as well as some contracts without consideration. Although through this study we will know that to form a valid agreement there should be a valid consideration.
The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other
Meaning of consideration
Lush J. n Currie v Misa (1875) LR 10 Exch 153 refered to consideration as consisting of a detriment to the promisee or a benefit to the promisor:
“… Some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other.”
The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge Ltd [1915] AC 847, is as follows:
“An act or forebearance 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.”
Consideration is one of the essential elements of contract. The general Principal is that No Consider NO contract. The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other. But there are certain exceptions to this general principal where there may be subcontract even without consideration.
As stated above, consideration is an element of contract; following is the definition of a contract-
It is mentioned in section 2(h) of The Contract Act, 1882, that
`An agreement enforceable by law is a contract’
So, accordingly it means that whenever the agreement acquires the qualification of enforceability by law then it becomes a contract. Agreement means every promise and every set of promises forming the consideration for each other.
From the definitions we found that to make a contract a valid agreement is the must criteria and to form a valid agreement consideration is the must element. So it is clear that to form a valid contract there should be consideration at first.
Definition of consideration:
In ordinary sense, consideration means the exchange price. It has a different legal meaning which does not restrict it only within the area of monetary compensation rather this term has been giving a wider legal connotation.
The concept `consideration `has been defined in section 2(d) of the Indian contract act 1872[1].Its says; when, at the desire of promisor, the promisee or any other person has done or abstain from doing, does or abstains from doing, or promises to do or abstains from doing, something, such act or abstinence or promise is called a consideration for the promise’.[2]
Analyzing the above mentioned definition of consideration we get the following ingredience of consideration:
1. It is an act or abstinence.
2. It is done at the desire of promisor. So, if it is done by the desire of any third person that will not be a consideration.
3. It may be of three forms that mean it has been done, or is being done, or is promised to be done at some future time.
Example: X promises not to suit against Y if Y pays him tk. 5000 by a fixed date. The abstinence of X is consideration for Y’s payment.
Essence of consideration
There are some rules essential for a consideration. The following rules may be laid down regarding consideration:
1. Desire or request of promisor is essential:
The act done or loose suffered by the promisee must have been done or suffered at the desire of the promisor. An act done without any request is voluntary act and does not come within the definition of consideration.
For example: P sees Q’s house on fire and help in extinguishing it. Q did not ask his help
P can not demand payment for his services or loose if suffered.
2. The consideration must be real
The consideration must have some value in the eyes of law. It must not be sham or illusory If one person has a valid claim against another (in contract or tort) but promises to forbear from enforcing it that will constitute valid consideration if made in return for a promise by the other to settle the claim.
Case reference: Alliance Bank v Broom (1864) 2 Dr & Sm 289.
3. Public duty:
If someone is under a public duty to do a particular task, then agreeing to do that task is not sufficient consideration for a contract.
Example: a contract to pay money to a witness who has received a subpoena to appear at a trial. It is from the case: Collins v Godefroy (1831) 1 B & Ad 950.
If someone exceeds their public duty, then this may be valid consideration. Such is observed in the case of Glassbrooke Bros v Glamorgan County Council [1925] AC 270.
- Promise to a stranger
A promise made to a stranger to perform an existing contract, is enforceable because the promisor undertakes a new obligation upon himself which can be enforced by the stranger.
Example: X wrote to his nephew B, promising to pay him an annuity of tk. 1000 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.(Shadwell v Shadwell).
If a party promises to do something for a second party, but is already bound by a contract to do this for a third party, this is good consideration.
5. Consideration need not to be adequate:
Providing consideration has some value, the courts will not investigate its adequacy. Where consideration is recognized by the law as having some value, it is described as “real” or “sufficient” consideration. The courts will not investigate contracts to see if the parties have got equal value. The reason behind the rule is that it is impossible for the court to decide what adequate consideration is.
6. The consideration must not be illegal, immoral, or opposed to public policy
If either the consideration of the object of the agreement is illegal, the agreement can not be enforceable. The same principles apply if the consideration is immoral or opposed to public policy.
7. Consideration may move from the promisee or from any other person
The person who wishes to enforce the contract must show that they provided consideration; it is not enough to show that someone else provided consideration. The promisee must show that consideration “moved from” (i.e. was provided by) him. The consideration does not have to move to the promisor. If there are three parties involved, problems may arise.
Kinds of consideration
Consideration may be of three types at it appears clearly from the language used to define the term consideration- has done or abstained from doing, or does or abstains from doing, or promises to do or abstains from doing. So we get the following considerations:[3]
a) Executory consideration
b) Executed consideration
c) Past consideration
a). EXECUTORY CONSIDERATION
Consideration is called “executory” where there is an exchange of promises to perform acts in the future, eg a bilateral contract for the supply of goods whereby A promises to deliver goods to B at a future date and B promises to pay on delivery. If A does not deliver them, this is a breach of contract and B can sue. If A delivers the goods his consideration then becomes executed.
b). EXECUTED CONSIDERATION
If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed consideration, e.g. in a unilateral contract where A offers £50 reward for the return of her lost handbag, if B finds the bag and returns it, B’s consideration is executed.
c) Past consideration
by using the words ‘has done or abstained from doing’ the law clearly recognized past consideration as a good consideration, though it is not generally recognized as consideration in English law. If the service is rendered in the past at the request or desire of the promisor the subsequent promise is regarded as an admission that the past consideration was not gratuitous and which is evidence of amount of the reasonable remuneration on the faith of which the service were rendered.
Necessity of consideration
Consideration is one of the most important elements to make a valid contract. Section 25 of the Contract Act -1882 lays down the general principle regarding the requirement of consideration to form a contract in this way that – an agreement made without consideration is void. From here the rule has sprung that if there is no consideration there is no contract.
Consideration is essential for the validity of a contract. ‘A promise without consideration is a gift , one made for a consideration is a bargain’. A promise without consideration is a gratuitous undertaking and cannot create a legal obligation. Under Roman Law an agreement without consideration is called a nudum pactum and is unenforceable. Under English Law simple contracts must be supported by consideration but a specialy contract requires no consideration. Under Indian law the presence of consideration is, as a rule, essential to the validity of contracts.
Contract without consideration
Consideration is one of the essential elements of contract. An agreement without consideration is void as the general Principal is that No Consider NO contract. But there are certain exceptions to this general principal where there may be contract even without consideration. The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other. If a contract is made by deed, then consideration is not needed.
Section 25 of the Contract Act laid down some exceptions where consideration is not necessary to make an agreement. The exceptions are as follows:
1. Agreement made under on account of natural love and affection:
Section 25(1) while laying down the first exception says that-
an agreement made without consideration is enforceable if, it is (a)expressed in writing, and (b) registered under the law for the time being in force for the registration of documents, and is (c) made on account of natural love and affection, (d) between parties standing in near relation to each other. Thus there are four essential requirements which must be complied with to enforce an agreement made without consideration, as per section 25 (1).
2. Agreement to compensate past voluntary service:
As perSec25 (2) A promise made without consideration is also valid ,if it is a promise to compensate ,wholly or in part ,a person who has already voluntary done something for the promisor, or done something which the promisor was legally compellable to do.
3. Agreement to pay time barred debt:
According to Sec.25 (3) Where there is an agreement, made in writing and signed by the debtor or by his authorized agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even through it is not supported by any consideration .A time barred debt id without consideration, hence the importance of the present exception.
4. Completed gift:
A gift (which id not an agreement) does not require consideration in order to be valid. “As between the donor and the donee, any gift actually made will be valid and binding even and binding even though without Consideration”.[4]
5. Agency:
As stated in section 185 of The Contract Act 1882 no consideration is required to make a contract for creating an agreement
Adequacy of consideration
The word ‘something’ used in the definition of ‘consideration’ in section 2(d) of the Contract Act implies an important principle regarding consideration that it may be anything, it is immaterial whether that is sufficient or not. The definition says: ‘ when at the desire of the promisor, the promisee or any other person has done or abstain from doing , or does or abstain from doing something, or promises to do or to abstain from doing something , such act or abstinence from doing or promise is called a consideration for the promise’.
Here ‘something’ means anything which has value in the eye of law. It implies that considerations need not to be adequate because it is not mentioned in the act that the consideration must be sufficient.
An agreement to which the consent of the promissory 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 promissory was freely given. So, the explanation makes it clear that if consent is given freely then the agreement will not be void merely because the consideration is inadequate. But the court may take into account he amount of consideration to determine the rights of individuals. The reason is that it is impossible for the court to determine the exact value of a consideration.
Conclusion
Contract is an important and very famous term in field of business. While it is regular task of business dealing, we make agreements with each other. A valid agreement is called a contract. For the purpose of making a valid agreement it is necessary of availability of consideration. There is a well established principle that where there I o consideration there I no contract. All the rules relating consideration is provided in the Contract Act-1882. Consideration may be of various types, whatever the type it is must that there is a consideration for both promisor and promisee. The consideration needs not to be adequate but it must have some value. The main objective of consideration is that, the parties must have agreed with such consideration.
Consideration may be either executed or executory, the adequacy is not necessary. There are some exceptions where the consideration is not needed o make an agreement.
Therefore, though there are exceptions in special cases, consideration is the most important element to create a valid and lawful contract. And the consideration is said to be a consideration when it is made according to the laws being in force.
[1] Law of contract, by Muhammad Ekranul haque, 1st ed, pp-118
[2] Mercantile Law, by M C Kuchal, 6th ed, pp40.
[3] Law of contract, by Muhammad Ekranul haque, 1st ed, pp-122
[4] Mercantile Law, by M C Kuchal, 6th ed, pp-49