Consideration

In latin language it means

“quid pro quo”, i.e., ’something in return’.

Section 2(d) 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 abstain from doing something, such an act or
abstinence or promise is called consideration for the promise”.

In English case of “Misa vs Currie”

“A valuable consideration in the sense of law may consist either in some right, interest, profit or benefit
accruing to one party (i.e. promisor) or forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other (i.e., the promisee).”

Legal Rules Regarding Consideration

(i) Consideration must move at the desire of the promisor: Consideration must be offered by the
promisee or the third party at the desire or request of the promisor. This implies “return” element of
consideration.

An act done at the desire of a third party is not a consideration.

In Durga Prasad v. Baldeo, D (defendant) promised to pay to P (plaintiff) a certain commission on

articles which would be sold through their agency in a market. Market was constructed by P at the
desire of the C (Collector), and not at the desire of the D. D was not bound to pay as it was without
consideration and hence void.

(ii) Consideration may move from promisee or any other person:

• In India, consideration may proceed from the promisee or any other person who is not a party to
the contract. The definition of consideration as given in Section 2(d) makes it clear.

• According to the definition, when at the desire of the promisor, the promisee or any other person
does something such an act is consideration.

• In other words, there can be a stranger to a consideration but not stranger to a contract.

[Chinnayya vs. Ramayya][M. Imp.]: Facts: An old lady made a gift of her property to her daughter with
a direction to pay a certain sum of money to the maternal uncle by way of annuity. On the same day,
the daughter executed a writing in favour of the brother agreeing to pay annuity. The daughter did not,

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 however, pay the annuity and the uncle sued to recover it. It was held that there was sufficient
consideration for the uncle to recover the money from the daughter.

(iii) Executed and executory consideration: A consideration which consists in the performance of an act is
said to be executed. When it consists in a promise, it is said to be executory. The promise by one party
may be the consideration for an act by some other party, and vice versa.

Example: A pays ₹ 5,000 to B and B promises to deliver to him a certain quantity of wheat within a
month. In this case A pays the amount, whereas B merely makes a promise. Therefore, the
consideration paid by A is executed, whereas the consideration promised by B is executory.

(iv) Consideration may be past, present or future:

• The words “has done or abstained from doing” [as contained in Section 2(d)] are a recognition of
past consideration. In order to support a promise, a past consideration must move by a previous
request.

• It is a general principle that consideration is given and accepted in exchange for the promise. The
consideration, if past, may be the motive but cannot be the real consideration of a subsequent
promise.

• But in the event of the services being rendered in the past at the request or the desire of the
promisor, the subsequent promise is regarded as an admission that the past consideration was not
gratuitous.

Example: ’A’ performed some services to ‘B’ at his desire. After a week, ‘B’ promises to compensate ‘A’
for the work done by him. It is said to be past consideration and A can sue B for recovering the promised
money.

(v) Consideration need not be adequate:

• Consideration need not to be of any particular value. It need not be approximately of equal value
with the promise for which it is exchanged but it must be something which the law would regard
as having some value. Something in return need not be equal to something given. It can be
considered a bad bargain of the party.

• It may be noted that Explanation 2 to Section 25 states that an agreement to which the consent of
the promisor is freely given is not void merely because the consideration is inadequate.

• But as an exception if it is shockingly less and the other party alleges that his consent was not free
than this inadequate consideration can be taken as an evidence in support of this allegation.

Example: X promises to sell a house worth ₹6 lacs for ₹1 lacs only, the adequacy of the price in itself
shall not render the transaction void, unless the party pleads that transaction takes place under
coercion, undue influence or fraud.

(vi) Performance of what one is legally bound to perform:

• Consideration must not be performance of existing duty.

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 • The performance of an act by a person who is legally bound to perform the same cannot be
consideration for a contract.

• Hence, a promise to pay money to a witness is void, for it is without consideration. Hence such a
contract is void for want of consideration.

• Similarly, an agreement by a client to pay to his counsel (i.e. lawyer) after he has been engaged, a
certain sum over and above the fee, in the event of success of the case would be void, since it is without
consideration.

• But where a person promises to do more than he is legally bound to do, such a promise provided it
is not opposed to public policy, is a good consideration. It should not be vague or uncertain.

(vii)Consideration must be real and not illusory: Consideration must be real and must not be illusory. It
must be something to which the law attaches some value. If it is legally or physically impossible it is not
considered valid consideration.

Examples: A man promises to discover treasure by magic. This transaction can be said to be void as it
is illusory.

(viii) Consideration must not be unlawful, immoral, or opposed to public policy. Only presence of
consideration is not sufficient it must be lawful. Anything which is immoral or opposed to public
policy also cannot be valued as valid consideration.

Example: A agrees with B to sell car for ₹2 lacs to B. Here A is under an obligation to give car to B and
B has the right to receive the car on payment of ₹2 lacs and also B is under an obligation to pay ₹2 lacs
to A and A has a right to receive ₹2 lacs.

Suit by a Third Party to a Contract

The consideration for an agreement may proceed from a third party, the third party cannot sue on contract.
Only a person who is party to a contract can sue on it.

Thus, the concept of stranger to consideration is a valid and is different from stranger to a contract.

The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of contract”,
is however, subject to certain exceptions.

(1) In the case of trust, a beneficiary can enforce his right under the trust, though he was not a party to
the contract between the settler and the trustee.

(2) In the case of a family settlement, if the terms of the settlement are reduced into writing, the members
of family who originally had not been parties to the settlement may enforce the agreement.

(3) In the case of certain marriage contracts/arrangements, a provision may be made for the benefit of a
person, he may file the suit though he is not a party to the agreement.

(4) In the case of assignment of a contract, when the benefit under a contract has been assigned, the

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 assignee can enforce the contract.

(5) Acknowledgement or estoppel – where the promisor by his conduct acknowledges himself as an agent
of the third party, it would result into a binding obligation towards third party. For example, if L gives
to M ₹20,000 to be given to N, and M informs N that he is holding the money for him, but afterwards
M refuses to pay the money. N will be entitled to recover the same from the former i.e. M.

(6) In the case of covenant running with the land, the person who purchases land with notice that the
owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced
by the successor of the seller.

(7) Contracts entered into through an agent: The principal can enforce the contracts entered by his agent
where the agent has acted within the scope of his authority and in the name of the principal.

Validity of an Agreement Without Consideration

The general rule is that an agreement made without consideration is void (Section 25).

A contract may only be enforceable when consideration is there. However, the Indian Contract Act contains
certain exceptions to this rule. In the following cases, the agreement though made without consideration,
will be valid and enforceable.

1. Natural Love and Affection: Conditions to be fulfilled under section 25(1)

(i) It must be made out of natural love and affection between the parties.

(ii) Parties must stand in near relationship to each other.

(iii) It must be in writing.

(iv) It must also be registered under the law.

A written and registered agreement based on natural love and affection between the parties standing
in near relation (e.g., husband and wife) to each other is enforceable even without consideration.

Example: A husband, by a registered agreement promised to pay his earnings to his wife. Held the
agreement though without consideration, was valid.

2. Compensation for past voluntary services: A promise to compensate, wholly or in part, a person who
has already voluntarily done something for the promisor, is enforceable under Section 25(2). In order
that a promise to pay for the past voluntary services be binding, the following essential factors must
exist:

(i) The services should have been rendered voluntarily.

(ii) The services must have been rendered for the promisor.

(iii) The promisor must be in existence at the time when services were rendered.

(iv) The promisor must have intended to compensate the promisee.

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 Example: P finds R’s purse and gives it to him. R promises to give P ₹10,000. This is a valid contract.

3. Promise to pay time barred debt: Where a promise in writing signed by the person making it or by his
authorised agent, is made to pay a debt barred by limitation it is valid without consideration [Section
25(3)].

Example: A is indebted to C for ₹60,000 but the debt is barred by the Limitation Act. A signs a written
promise now to pay ₹50,000 in final settlement of the debt. This is a contract without consideration,
but enforceable.

4. Agency: According to Section 185 of the Indian Contract Act, 1872, no consideration is necessary to
create an agency.

5. Completed gift: In case of completed gifts, the rule no consideration no contract does not apply.

Explanation (1) to Section 25 states “nothing in this section shall affect the validity as between the
donor and donee, of any gift actually made.” Thus, gifts do not require any consideration.

6. Bailment: No consideration is required to effect the contract of bailment (Section 148).

7. Charity: If a promisee undertakes the liability on the promise of the person to contribute to
charity, there the contract shall be valid. (Kadarnath v. Gorie Mohammad)

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