Consideration

Definition of Consideration

  • Consideration is an essential element in a contract. Subject to certain exceptions, an agreement is not enforceable unless each party to the agreement gets something: This “something” is called  consideration: It is used in the sense of quid -pro quo i.e. something in return.
  • In the English case, Currie v. Misa, consideration was defined as, “some right, interest’ profit or benefit accruing to one party, or some –forbearance, detriment, loss “or responsibility given; suffered or undertaken by the other.”
  • Section 2(d) of the Contract Act 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 act or abstinence or promise is called a consideration for the promise.”

Examples

(i) P agrees to sell a house to Q for Rs. 80,000. For P s promise, the V consideration is Rs: 80;000. For Q’s promise, ‘the’ consideration, is the house:

(ii) H engages Q as a clerk in his office for Rs 1000 a month. The monthly wage is the consideration received by Q ; the services of constitute the ‘Consideration received by H.

(iii) X promises not to file a suit against if Y pays him Rs. 100 by a fixed date. The -forbearance of  X is the consideration for Y’s Payment.

Types of Consideration

consideration may be classified into three types  as follows :

1.past consideration :

  • When the consideration of one party was given–before the date of the promise, it is said to be past. Suppose that X –does` tine work for Yin *the month– of January (without. expecting any payment). In February Y promises to pay Mm some money.-:The consideration of X is pt”‘ consideration.
  • Under English law past consideration is no consideration and a contract based on past consideration is void.
  • But under Indian law a past consideration is good -consideration because the definition of consideration in Section 2 (d) includes the words ` “has done or abstained from doing”.

2.present consideration :

  • Consideration which moves si­multaneously with the promise is called Present Consideration or Executed Consideration.
  • B buys an article from a shop and pays the price immediately. The consideration moving from B is present or executed consideration.

3.future consideration :

  • When the consideration is to move at a future date, it is called Future Consideration or Executory Consideration.
  • In a contract the consideration may be executory on both sides. A promise may support a promise. Thus a promise to pay money at a future date for goods to be delivered at a future date is a valid contract.

Rules (or the Essential Factors) of Consideration

The following rules may be laid down’ regarding consideration

1.desire (or request) of the promisor is essential :

The act done or lass suffered by the promisee must have been done or suffered at the desire of the promisor. An act done without any request is a voluntary act and does not come within the definition of consideration.

Examples

(i)P sees Q’s house on fire and helps in extinguishing it. Q did not ask for 6i: help. P cannot demand payment for’ his service

(ii) The Collector of a district asked D to spend some money on the improvement of a market and he did so. D cannot demand payment from the shopkeepers using the market for having improved the market. Durga Prasad v. Baldeo.

(iii) X promised to pay. Y some money by a letter. Y ‘showed the , letter to Z who thereupon consented to the marriage of her daughter with Y. Z cannot force X to pay the money to Y because them is no connection between the marriage and the promise to pay. Dashwood v. Jermyn

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. Therefore, real consideration comes from good consideration. (See p. 39)
  • A contribution to charity is without consideration. Therefore,     it is not real consideration.

Examples :

(i) illusory consideration : G promises for no consideration, to give H Rs 1,000. This is a void agreement. No consideration, no contract.

(ii) Impossible act : X promises to supply Y one total of gold brought from the sun. The consideration is sham and illusory and there is no contract.

(iii) No consideration : V owed 1208 to E who told V that if the money was not paid by 7th July he would file a bankruptcy petition against V Thereupon V promised to pay the money before 12 o’clock on 8th July and E agreed not to file the petition before that time. Held, there was no consideration for E’s promise. Vanburgen v. St. Edmunds Properties Ltd

Example (iii) above illustrates the rule that a promise to do what one is already bound to do (whether under the law or under an existing contract) confers no additional benefit and is of no value. The consideration is unreal. A promise to pay an existing debt punctually if the creditor gives a discount is without consideration and the discount cannot be enforced.

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.
  • There will be no detriment to the promisee or benefit to the promisor over and above their existing rights and liabilities

Example : A contract to pay money to a witness who has received a subpoena to appear at a trial. Collins v. Godefroy

4. Promise to a stranger :

  • But 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.
  • 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. Shadwell v. Shadwell.;

5. Consideration need not be adequate :

  • Section 25 (expla­nation 2) provides that, “An agreement to which the consent of the party 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 promisor was freely given.”
  • The reason behind this rule is that it is impossible for the court to decide what is adequate consideration. The parties to the contract must decide the quantum of consideration and, if consent was freely given, the court will enforce the agreement.
  • If the consideration is inadequate, the Court may hold that consent of the promisor was not freely given and the agreement may become void.
  • “Consideration” means a reasonable equivalent or other valuable benefit passed on by the promisor to the promisee or by the transferor `to the transferee. Similarly, when the word `Consideration’ is qualified by the word `adequate’, it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case. Sonia Bhatia v. State of U. P. and others.

Examples :

(i) P agrees to self a horse worth Rs 1000 for Rs. 10. P’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

(ii) D, promises to B to sell land in Calcutta at Rs. 10 per cottah. The agreement is valid provided the consent of D was freely given.

(iii) S files a suit against B for Rs. 5,000. Subsequently he agrees to withdraw the suit on payment of Rs. 3,000. The agreement is a contract. The withdrawal of a suit is valuable consideration so as to support the promise to pay money.

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 cannot be enforced.
  • The same principle applies if the consideration is immoral or opposed to public policy. [See, Section 23 and ch. S for examples of such agreements.

7. The consideration may be present, past, or future :

This follows from the definition of consideration given in the Act.

8. 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 allowance 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 Chinnaya v. Ramaya.
  • A stranger to the consideration can sue to enforce the contract, though a stranger to the contract cannot. In England, a stranger to the consideration .cannot sue on the contract.

9. 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 ;

(3) reasonable ;

(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 ;

(2) services ;

(3) forbearance (for example not to sue) ;

(4) arbitration or the compromise of disputed claims, and

(5) settlement or composition with creditors.

DIFFERENCES BETWEEN ENGLISH AND INDIAN LAW REGARDING CONSIDERATION

In England, a distinction is made between Formal Contracts and Simple Contracts. A Formal Contract is one which is

(a) in writing or printed,

(b) signed,

(c) sealed, and

(d) delivered -to the other party.

  • All other contracts are called Simple Contracts. Under English law,
  • Formal Contracts do not require any con­sideration but Simple Contracts must be supported by some consideration.
  • Formal Contracts are also called Contracts Under Seal and Specialty Contracts. Simple Contracts are also called Parole Contracts.

The differences between the English and the Indian law relating to consideration are enumerated below.

1. The Indian law of contract does not make any distinction between Formal Contracts an¢ Simple Contracts. In India, excepting the few cases mentioned below, all contracts require consideration.

2. Under English law past consideration is no consideration. Under Indian law past consideration is good consideration.

3. Under English law, consideration must move from the promisee. Under Indian law, it may move from the promisee. or any other person.

4. The rules regarding “Devolution of Joint Rights and Liabilities” are different.

PROMISE TO CHARITIES

A promise to make a contribution to charity is not enforce­able because it is without consideration:

Example

A person agreed to pay to a charitable society a percentage of the value of the goods imported by him. He then executed a hatchitta for the arrears of contribution to that charity. The Court held this : was no more than a repetition of a voluntary promise and is not enforceable, Jamuna v. Ram.

In Kedernath v. Gorie  Mahomed the defendant promised to pay Rs 1,000 towards the construction of the Howrah Town Hall and the trustees of the Town Hall, on the basis of this and similar other promises, engaged contractors for building the hall. The defendant subsequently refused to pay the money and a suit was filed against him. The Calcutta High Court,-held that ordinarily subscriptions to charitable objects were not recoverable but if the promisors knew the purposes of the charity and also knew that on the strength of their promises obligations would be undertaken to third parties (the building contractors in this case) the prom6e is enforceable. This decision is contrary to English decisions on similar facts. In subsequent cases on this point in Indian courts, the Calcutta decision has not been followed..

In an Allahabad case, a person subscribed Rs. 500 to rebuild a mosque. 1t was held that the promise was without consideration and that the subscriber was not liable. Abdul Aziz v. Masum Ali.

“NO CONSIDERATION NO CONTRACT”­

EXCEPTIONS TO THE RULE

Explanation

  • Consideration is essential for the validity of a contract. “A promise without consideration- is a gift; one made for a consideration is a bargain”.Salmond and Windfield, Law of Contracts.
  • A promise without consideration is a gratuitous undertaking and cannot create a legal obligation. Under Roman law an agreement without consideration was called a nudum pactum and was unenforceable. Under English law simple contracts must be supported by consideration but specially contracts require no consideration. Under Indian law the presence of consideration is, as a rule, essential to the validity of contracts.

Exceptions

There are exceptional cases where a contract is enforceable even though there is no consideration. They are as follows :

I. Natural love and affection : An agreement made without consideration is valid if, `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 of natural love and affection between parties standing in a near relation to each other.”-Sec 25(1).

An agreement without consideration is valid under Section 25(l) only if the following requirements are complied with :

(i) The agreement is made by a written document.

(ii) The document is registered according to the law relating to registration in force at the time.

(iii) The agreement is made on account of natural lave and affection.

(iv)The parties- to the agreement stand in a near relation to each other.

Examples

(i) A for natural love and affection, promises to give his son B, Rs. 1,000. A puts his promise to B in writing and registers it. This is a contract. [Illustration (b) to Section 25]

(ii) An agreement entered into by a husband with his wife, during quarrels and disagreement, whereby the husband promised to give some property to the wife. The agreement is void because, under the circumstances, there is no natural love and affection between ,  the parties. Rajlukhy Debee v. Bhootnath`

2. Voluntary Compensation :

  • A promise made without any 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.”-Sec. 25(2).
  • Section 25(2) applies when there is a –voluntary act by one party and there is a subsequent promise (by the party benefited) to pay compensation to the former. The term `voluntarily’ signifies that the act was done, ` otherwise than at the desire of the promisor”.

Examples

(i) D finds B’s purse and gives it to him. B promises to give D Rs. 50. This is a contract.

(ii) D supports B’s infant son. B promises to pay D’s expenses in so doing. This is a contract.

3. time-barred debt :

  • A promise to pay, wholly or in part, a debt which is barred by the law of limitation can be enforced if the promise is in writing and is signed by the debtor or his authorised agent.-Sec. 25(3).
  • A debt barred by limitation cannot be recovered. Therefore a promise to repay such a debt is, strictly speaking, without any consideration.
  • But nevertheless such a promise can be enforced if the debtor or his authorised agent makes written and signed promise to repay it.
  • The debt must be a liquidated or ascertained sum of money and there must be a definite promise to pay. A mere acknowledge­ment of the debt is not enough.

Example

D woes B Rs. 1000 but the debt is barred by the Limitation Act. D signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.

4. Agency :

No consideration is required to create an agency.-Sec. 185.

5. Completed gift :

  • The rule “no consideration; no contract” does not apply to completed gifts. Explanation l, to Section 25 states that, “Nothing in this section shall affect the validity as between the donor and the donee, of any gift actually made.”
  • Thus, if a person gives certain properties to another according to the provisions of the Transfer of Property Act (i.e., by a written and registered document) he cannot subsequently demand the property back on the ground that there was no consideration.

STRANGER TO CONTRACT : CAN A PERSON WHO IS NOT A PARTY TO A CONTRACT SUE UPON IT?

Difference between the rights of a stranger to a contract and of a stranger to the consideration :

  • A stranger to a contract, i.e., one who is not a party to it, cannot file a suit to enforce it.
  • A contract between P and Q cannot be enforced by R. Lard Haldane said that, “(t was a fundamental principle of English law that only a person who is a parry to a contract can sue on it and -that the law knows nothing of a right gained by a third party arising out of a contract. “Dunlop Pneumatic Tyre Co. v. Selfridge & Co.
  • But a stranger to the consideration can sue to enforce it provided he is a party to the contract. A contract between P, Q and R Whereby P pays money to Q for delivering goods to R can be enforced by R although he did not pay any part of the consideration.

Exceptions

There are certain exceptions to the rule that a stranger to the cont.–act cannot sue upon it. They are as follows :

1. Beneficiaries in the case of trust :

An agreement to create a trust can be enforced by the beneficiary. D agrees to transfer certain properties to T to be held by T in trust for the benefit of C.C can enforce the agreement though he was not a party to the agreement.

2. Provision of Marriage Settlement of Minor :

  • In Khwaja Muharnmad Khan v. Husaiui Begum, the father of the bride­groom had contracted with the father of the bride to make the daughter an allowance called Karachi-i-pandan if she married the son. After the marriage. the daughter sued her father-in-law to recover arrears of the allowance. The Privy Council held that .though she was no party to the contract yet, “she was clearly entitled to proceed in equity to enforce her claim.”

3. Assignee of a contract :

  • Under certain circumstances a ,party to a contract can transfer his rights under the contract to third parties:
  • For example, the holder of a bill of exchange can transfer it to any person he wishes. In such cases the transferee or the assignee can sue on the contract even though he was not a party to it originally.
  • Assignment may occur through operation of law. For example, when a person becomes insolvent, all his properties and rights vest in the Official Assignee who can sue upon contracts entered into by him.

4. Family Settlement :

  • When family disputes are settled by mutual agreement and the terms of settlement are written down in a document, it is called a Family Settlement.
  • Such agreements can be enforced by members of. the family who were’ not originally parties to the settlement.

5. Acknowledgement or Estoppel :

  • Where the promisor by his conduct, acknowledges, himself as an agent of the third party, a binding obligation is thereby incurred towards him.
  • Thus in Khirode Behari Dull v. Man Govinda Pande case (1933, 61 Cal 841, AIR 1934 Cal 682) the landlord was allowed to recover unpaid rent from the sub-tenant whereas under an agreement between a tenant and his sub-tenant the sub-tenant was paying the rent directly to the landlord.

Rights and Liabilities of a Stranger

With the exception of the above cases, a contract cannot confer rights upon a person who is not a party to it. Also, a contract cannot impose a liability upon a person who is not a party to it.

Examples

(i) X and Y entered into an agreement to pay a certain sum of money to their children C and D upon their marriage. The marriage took place. X died. C sued to recover the money from the executors of X. Held, he cannot sue. Tweddle v. Atkinson’

(ii) P sold to Q some rubber with a condition’ that the goods were not to be resold below s certain price. Q sold the goods to R who was aware of the condition. R resold the goods below the stated price. Held. P cannot enforce the condition against R because there was no contract between P and R. mc Gruther v. Pitcher.

(iii) The managing director of a theatre gave instructions that no tickets were to be’ sold to S Knowing this, S asked a friend to buy a ticket for him. With this ticket S went to the theatre but was refused admission. He filed a suit for damages for breach of contract. Held, no caw of action because there was no Privity of contract between the plaintiff and the defendant. S Said v. Butt.

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