Doctrine of Consideration

Introduction

According to Section 2(h)[1], an agreement enforceable by law is a contract. Therefore it must be an enforceable arrangement for any contract to be considered legal. Let’s look at each of those elements. An agreement is simply a collection of agreements detailing a feature of the Do’s & Don’ts making up an arrangement. When the proposal is approved, it means the one to whom the words were specified is satisfied with the essence of the project. As once a proposal is accepted, this becomes a promise, and consequently the agreement is valid.

A contract includes nine key components in order to be enforceable. Consideration is one of those basic elements. A contract made without consideration is void, subject to certain exceptions such as natural to love, affection, voluntary service and payment of the time-barred debt. Consideration is a technical concept that is used in the quid pro quo sense (something in return). Under Section 2(d)[2] consideration defined as ‘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’. When an individual to an agreement agrees to do something, it will in exchange obtain ‘something.’ The ‘everything’ is a Consideration.

Why is consideration required?

The reason that law enforces only those promises that are made for consideration is that frequently gratuitous or voluntary promises are made rashly and without due deliberation. Consideration is needed as both parties are expected in an agreement to be in some kind of commitment or responsibility which would make them fulfill the commitment made. The agreement will literally become a reward, without consideration.

Illustration- If ‘X’ agrees to pay ‘Y’ Rs. 5,000 for nothing, ‘Y’ does not do or agree to do anything in order to repay ‘X’ for his money, then the offer of X has no legal force.

Requisites

A consideration for being a legitimate one demands that certain laws be followed when it is being made. They are listed under:

1.      The consideration has to pass at the promisor’s wish.

The definition in Section 2(d) clearly underlines that an act or abstinence which is to be a consideration of the promise must be made or promised to be made in accordance with the promisor’s desire. It will not be a reasonable consideration if such consideration is made at the behest of a third party or without the promisor’s wish.

Illustration- X saves Y ‘s products from a fire without being told to. X can’t request payment for his service. Y spent some money on a business change at the district’s collector’s will. Keeping in mind this Z who was using the market agreed to pay Y some money. Held, the deal was null and void because it hadn’t changed to Z’s will.

2.      The consideration can be moved from the Promisee or any other person.

This means that as long as a fact remains, it is immaterial who has furnished it. In common law consideration must change from the promisee; even so consideration under Indian law may shift from the promise or even a stranger. Yet the newcomer to the analysis is unable to sue until he is a contractual party.

In the case Chinnayya v. Ramayya[3], ‘A’ by gift deed transferred certain property to her daughter with the direction that the daughter should pay an annuity to ‘A’s brother as had been done by ‘A’. Whereas daughter executed writing in favour of brother to pay the annuity. Afterwards, she refused to fulfill her promise saying that no consideration had moved from A’s brother. The court held that ’A’s brother was entitled to maintain the suit.

3.      The consideration may be an act, abstinence or forbearance or a return promise.

The following may be noted as being a good consideration for a contract:

Forbearance to sue-

Forbearance to sue has always been considered important. It is indeed, a sort of abstinence which is so evidently identified in the definition itself as a good consideration. “Forbearance to sue” means the plaintiff has a certain right of action against the defendant or any other entity and he refrains from bringing the suit on a commitment made by the defendant. It results in an unclaimed gain to the individual and a loss to the individual who may sue.

Compromise of a disputed claim-

Compromise may also come under the theory of forbearance; as such, the very same refers to a disputed claim’s bona fide compromise. The argument should be fair and the complainant will believe it is a legitimate claim.

Composition with creditors–

A financially challenged debtor can depend on his creditors and ask them to agree a smaller sum to satisfy their debts. If the creditors agree, both the debtor and the borrower are bound by the arrangement and this leads to a settlement of the creditors’ claims.

 

4.      Consideration may be past, current or future concern.

The terms used in Section 2(d) are “have done or abstained from doing, or do something or refrain from doing or pledge to do or refrain from doing something” this exclusively indicates towards past, current, or future.

Past–

When a party to an agreement has given consideration in the past, i.e. before the commitment date, it is called past consideration.

Illustration- X must make some service to Y at the request of the latter. After a month Y promises to compensate X for the services that it has rendered. It’s a thing of the past.

Present or executed-

The commitment is made when the consideration is given at the same time. It is called thought of the present or the executed. A cash-sale will be the best example of such consideration. If we buy something from a store for money it’s a present thought.

Future or executory–

This is a future consideration when the consideration from one party to the other is to pass to the contract making subsequently.

Illustration- X promised, after a week, to deliver those products to Y; Y promises to pay the price after fortnight. In this case the promise of Y. expectation is future or executory is backed by the promise of X.

5.      Consideration should not be appropriate

However, consideration of the commitment made does not need to be sufficient. Considered as “something in return,” it does not necessarily have to be equal to the “something given” value. But this should be something that the law assigns importance to. The adequacy of consideration depends on the parties, how important it is for them when entering into the arrangement, not for the court when compliance is sought.

Illustration: X buys a Y table for Rs 900. It is a challenging job for the court to decide if the table value is worth the specified price or not.

6.      Consideration should be actual, rather than illusory

Although, the accepted consideration may not be adequate but it should be real and not illusory and should be competent in the eye of law and of some value. The following cases do not give any real consideration.

Physically Impossible- X vow on behalf of Rs. 3500 to put life in Y’s dead wife. This is difficult to carry out physically.

Legally Impossible- X owes to Y Rs. 4100. He agrees to pay Rs. 8510 to Z, Y’s wife, who offers to discharge X out of his debt in return. This is legally impossible, because Z is unable to discharge a debt because of Y.

Uncertain consideration- X hires Y to do some research and agrees to pay a “fair” price. There is no accepted way to ascertain “fair” pay. Here the consideration is an unsure consideration.

7.      Consideration should not be something the Promisor is expected to do already

An individual may already have a legal or contractual obligation to do something. A guarantee that he is already committed to do it is not a reasonable consideration. Likewise, a pledge made by a public official to conduct a public service is not a reasonable consideration.

8.      Consideration must not be deemed unlawfully, immorally or against public policy

Section 23 of the Contract Act, 1872 states that ‘consideration to an agreement should not be something illegal, immoral or something against the public policy’. The court will determine whether the agreed consideration is lawful or unlawful. The courts do not require litigation on the arrangement where it is unlawful.

Stranger to a contract

It is a general rule that only the parties to a contract are entitled to sue or appeal. This law is dubbed contract privacy. The contract privacy law implies that there is a relationship between two parties who have entered into contractual obligations. In a number of cases, Lord Justice Denning has questioned the law and noted that “the principle of privity has never been able to supersede another presumption whose origins go far deeper.”

This rule has two consequences which follow.

  • An individual who is not a party to a contract is unable to sue it even if the contract is for his benefit and consideration has been granted.
  • A contract can not grant rights upon any other person other than the parties to it or enforce obligations under it.

Conclusion

Consideration is an advantage to be discussed between the parties and is the primary justification for a negotiating party. Consideration must be of value and is exchanged by the other party for performance or promise of performance (such performance is consideration in itself). One consideration (the specified thing) is exchanged in a contract for another consideration. For enforceable contracts, acts that are unlawful or so unethical that they are against existing public policy cannot serve as considerations.

If the intended consideration is found to be worth less than expected, is damaged or lost, or performance is not performed properly, contracts that become unenforceable or rescindable for lack of consideration. For enforceable contracts, acts that are unlawful or so unethical that they are against existing public policy cannot serve as considerations.

For any valid contract it is not meaningful without lawful consideration. Contract considered being several important elements and lawful consideration is an essential part of a legal contract or element. Through lawful consideration follows a rule we called successful consideration afterwards. But the rule has some exceptions – no consideration, no contract. Under seal a contract is enforceable in English law without thought.

Questions-

  1. What is consideration?
  2. What are the exceptions to consideration?
  3. What is the importance of consideration into a contract?
  4. What is a status of contract without consideration?
  5. What are the essentials of consideration?

[1] The Indian contract act, 1872

[2] Ibid.

[3] (1882) 4 Mad.137.

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