Chapter 3: Consideration

Consideration is elemental to a contract. A

promise is not binding unless made for
something in return - consideration. For
instance the seller of goods undertakes to
transfer ownership in the goods for a price to
be paid by the buyer for acquiring the
ownership.
 Key Features

 Consideration Defined
 Examples on Consideration
 Rules Governing Valid Consideration
 Stranger to a Contract and Stranger to Consideration
 Validity of Agreements without Consideration
 CONSIDERATION DEFINED

Consideration simply means that both the contracting parties are

bound to give something (of value) to each other.
Legal Definition:
‘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
an act or abstinence or promise is called a consideration for the
promise.’ Section 2 (d)
Thus, the term ‘consideration’ is used in the sense of quid pro
quo, meaning thereby something in return. It may involve a
positive act (i.e., doing something) or an abstinence (i.e.,
something given up).
Consideration may be in the form of some right, interest, profit, or
benefit accruing to one party, or some forbearance, detriment,
loss, or responsibility given, suffered or undertaken by the other.
Examples on Consideration
1. A offers to sell his plasma TV set to B for Rs
50,000. B accepts the offer. Here, B’s promise to
pay Rs 50,000 is the consideration for A’s promise to
sell the TV and A’s promise to sell the TV is the
consideration for B’s promise to pay Rs 50,000.
3. A promises to maintain B’s child, and B promises
to pay A Rs 1,000 annually for the purpose. Here,
the promise of each party is the consideration for
the promise of the other party. (Illustration
appended to Section 23)
4. A promises Y, his debtor, not to file a recovery
suit against him on B’s agreeing to repay the amount
of loan along with a compound interest @ 12% p.a.
within a year. A’s abstinence is the consideration
for Y based on B’s promise to pay.
RULES GOVERNING CONSIDERATION
1. Simple Contracts must be supported by
Consideration
In the absence of a valid consideration passing between the
parties the general rule is that the agreement they have made
will be of no legal effect. The purpose of the requirement of
consideration is to put some legal limits on the enforceability
of agreements even when they are intended to be legally
binding otherwise and are not vitiated by factors such as,
mistake, misrepresentation, and illegality etc. Consideration
acts as an aid in determining whether promises are worth
enforcing
2. Consideration Must Move at the Desire of the
Promisor (Promissory Estoppels)
Whatever is done must be done at the desire or request of the
promisor and not voluntarily or at the desire of a third party.
For instance, if A rushes to the rescue of B whose house has
been trapped in fire, it is not a consideration but a voluntary
act on the part of A. He cannot ask B to compensate him for
the services rendered by him as B had never requested him to
help. However, if A goes to B’s rescue at the latter’s express
request, this will be regarded as consideration as A did not
wish to do the act voluntarily.

Consideration At Desire Of Third Person Not
Valid

In Durga Prasad vs Baldeo, ‘D’ the plaintiff had

constructed, at his own expense, a market at the instance
of the Collector of the District. The occupants of the shops
i.e., shopkeepers in the market promised to pay the
plaintiff a commission on the articles sold through their
shops. Subsequently the shopkeepers refused to pay any
commission. ‘D’ sued the shopkeepers against their alleged
default. It was held that there was no consideration
because the plaintiff (the promisee) had constructed
market not at the desire or request of the defendants (the
promisors), but at the desire of a third person (i.e., the
Collector) to oblige him and thus, the contract between D
and the shopkeepers was void.
Rules Governing
Consideration
3. Consideration May Move From the Promisee or Any Other
Person
The second rule as to consideration as contained in the
definition of Section 2 (d) is that the act, which is to
constitute a consideration, may be done by ‘the promisee
or any other person’. This means that as long as there is a
consideration for the promise, it is immaterial who has
furnished it. This is sometimes referred to as Doctrine of
Constructive Consideration. It may proceed from the
promisee, or if the promisor has no objection, from any
other person who is not a party to the contract. But the
English Law on this point is different. In the United
Kingdom a person to whom a promise was made can
enforce it only if he himself provided the consideration for
it. He cannot sue of the consideration for the promise
moved from a third party.
Rules Governing
Consideration
 Consideration must have some Value
 Another notable feature of valid consideration is the
idea of reciprocity. ‘Something of value’ must be given
for a promise in order to make it enforceable as a
contract. An informal gratuitous promise therefore does
not amount to a contract. A person or body to whom a
promise of gift is made from purely charitable or
sentimental motive gives nothing for the promise.
Justice Patterson observed in Thomas vs Thomas -
Consideration means something which is of some value
in the eyes of the law. It may be some benefit to the
plaintiff or some detriment to the defendant.
Rules Governing Consideration
Benefit and Detriment
LUSH J. in Currie V. Misa concentrated on the requirement that
‘something of value’ must be given, and accordingly stated that
consideration is either some detriment to the promisee (in that he
may give value) or some benefit to the promisor (in that he may
receive value). Thus payment by a buyer is consideration for the
seller’s promise to deliver and can be described as a detriment to
the buyer or as a benefit to the seller. Conversely, delivery by a
seller is consideration for the buyer’s promise to pay and can be
described either as a detriment to the seller or as a benefit to the
buyer. In a suit on a contract, the plaintiff must show that he give
or promised to give some advantage to the defendant in return for
his promise.
A bare promise (nudum pactum) is not binding. For example if A
promises to gift a diamond ring to B, his fiancée, but subsequently
changes his mind, B cannot sue him for breach of promise. B
cannot show that she gave some advantage to A in return for the
promise, which was bare.
Rules Governing Consideration

Past, Present or Future Consideration

Depending upon the circumstances and facts of each case
in India consideration may be in the past, present or
future.
 Past Consideration
In Section 2 (d), the expression, ‘has done or abstained
from doing’ is recognition of the doctrine of past
consideration. Past consideration means a past act or
forbearance which took place and is complete (wholly
executed) before the agreement is made. Past
consideration may consist of services rendered at request
but without any promise at the time or it may consist of
voluntary services. Box 3.4 presents some examples of past
consideration.
Rules Governing Consideration

Consideration Need not be Adequate But It Must Be

Sufficient
Sufficiency of consideration is not the same thing as
adequacy of consideration, at least in law. The word
adequate in this context refers to fairly equal to the
promise given. On the contrary, sufficiency is used here
as a legal term, and it means that what is promised
must be real, tangible and have some actual value. The
courts do not exist to repair bad bargains (Haigh vs
Brooks). Adequacy will be decided by the parties
themselves.
Rules Governing Consideration

Present or Executed Consideration

The expression in Section 2 (d) ‘does or abstains from doing’ refers to
present or executed consideration. It is an act or forbearance, which
moves simultaneously with the promise. In other words a consideration,
which consists in the performance of an act or forbearance, is said to be
executed at present.
For instance A pays Rs 1000 to B, and B promises to deliver a certain
quantity of wheat the following day. In this case, A pays the amount but
B has merely made a promise. Therefore, the consideration paid by A is
executed, whereas the consideration promised by B is executory. If A
pays the price and B delivers the goods at the same time, consideration
is said to be executed by both the parties
Future or Executory Consideration
The expression ‘promises to do or to abstain from doing’ in Section 2 (d)
refer to future. Here the bargain consists of mutual promises. An
example is an agreement in which the seller promises to deliver goods
next week, and the buyer agrees to pay for them on delivery. However,
consideration on part of one party may be executed and in respect of
the other executory. Consider the following illustration in this behalf.
Rules Governing Consideration

Consideration must be Legal

Consideration may not be adequate but must invariably be
legal i.e., it must not involve an illegal act. For example,
promising to pay money to a witness to turn hostile. An
illegal consideration makes the whole contract invalid. It
should be noted that attempting to enter into an illegal
contract might itself give rise to criminal liability.
Moreover, consideration should not be physically impossible
or illusory. For example, promise to double the money by
magic or to make a dead man alive, are impossible acts and
therefore such promises constitute no consideration.
Similarly, a son’s promise to ‘stop being a nuisance’, or an
agreement to ‘perform an existing obligation made with
the promisor being illusory with no considerations.
STRANGER TO A CONTRACT AND STRANGER TO CONSIDERATION

A stranger to a contract is one who is not a party to the contract.

The rule that consideration ‘may move from the promisee or any
other person’ implies that the consideration is permitted to be
supplied by a third person (i.e., stranger) as well, thereby need
not necessarily be supplied by the promisee himself. In other
words, as long as there is a consideration in exchange of a promise,
it is immaterial who has furnished it. Thus, a stranger to the
consideration may maintain a suit. But the English Law on this
point is different. Nonetheless, a stranger to a contract cannot sue
upon a contract both under the British Law as well as the Indian
Law. From this arises the doctrine of privity of contract, discussed
below.
Privity of Contract
The doctrine of Privity implies that, in general, a person who is not
privy to a contract, that is a third party, can neither sue nor be
sued on the contract. The rule prevents the burden of a contract
being imposed on a third party. Therefore, a stranger to the
consideration must be distinguished from a stranger to a contract.
The instances in Box 3.5 will help understand the concept better.
Examples on Strangers to Contracts

1. A is indebted to B. A sells his property to C who

undertakes to discharge his debt vis-à-vis B. In case C fails to
keep his promise, B has no right to sue C because of privity of
contract between B and C. C is a stranger to the contract
(between A and B) the example is based on Jamna Das vs Ram
Autar.

2. In the famous English case of Tweedle vs Atkinson, A

promised B to pay a certain amount to B’s son C on C’s marriage
to A’s daughter, as the young man was to take up the new
responsibilities of marital life. After the demise of both the
contracting parties, ‘C’ sued the executors of A (his father-in-
law) upon the agreement between A and his father. It was held
that ‘C’ could not maintain the suit against the defendant
being stranger to the contract.
Exceptions to the Doctrine of Privity
of Contract

The rule that a stranger to a contract cannot sue on the

contract is, however, subject to certain statutory
exceptions both under the Indian Law and the English
Law. Thus, a person who is not a party to a contract can
sue upon it in the following cases.
 Trust or Charge
 Assignment
 Marriage settlements
 Family settlements
 Agency
 Acknowledgement of Liability
Exceptions to the Doctrine of Privity
of Contract

Trust or Charge
In the case of trust or charge, the beneficiary can enforce
an agreement, even though s/he was not a party to it. For
example, in Khwaja Muhammad vs Hussaini Begum, K the
father-in-law of H executed an agreement with the H’s
father to pay Rs. 500 a month in perpetuity to the bride (H)
in the name of Kharchi-I-Pandan (betel-leaf expenses),
equivalent of pin money, in consideration of her marriage
to his son. K also put in H’s charge certain properties with
payment, with power to the beneficiary (H) to enforce it.
However, H separated from her subsequently following a
quarrel. This resulted in stoppage of allowance by H’s
father-in-law, K. H, the plaintiff brought a suit against her
father-in-law for the recovery of the arrears of the said
annuity. The Privy Council held that although H was not
party to the agreement, yet, ‘she was entitled, in equity,
to enforce her claim.’
Exceptions to the Doctrine of Privity of
Contract

Assignment
In the case of assignment of a contract, when the benefit under a
contract has been assigned, the assignee can sue upon the contract
for the enforcement of his rights, title and interest. [Kishan Lal
Sadhu vs Pramila Bala Dasi]. However, a mere nominee cannot sue
on the policy as the nominee is not an assignee.
Marriage Settlement
In the case of certain marriage contracts, provision of marriage
expenses to female members of Hindu Undivided Family entitle a
female member to sue for such expenses on a partition of the
family [Sunder Raja vs. Lakshmi].
Family Settlements
In the case of a family settlement, if the terms of the settlement
are reduced to writing, the members of the family, who originally
had not been parties to the settlement, may enforce the
agreement [Shuppu vs Subramanium].
Exceptions to the Doctrine of Privity of
Contract

Agency
Agency is a major common law exception to the doctrine of privity.
A contract of agency arises when one person (the principal)
appoints an agent to make a contract on his or her behalf with
third parties. As a general rule, the principal, even if undisclosed
may sue the third party .
Acknowledgement of Liability
In case someone acknowledges liability to a third person, a binding
obligation is thereby incurred towards the former. This exception
covers cases where the promisor by his conduct, acknowledgement
or otherwise, constitutes himself as an agent of the third party. For
example, A receives money from B for paying it to C, the creditor
of B. A subsequently makes part payment to C informing him that
this was out of the money held for him. But A, afterwards refuses
to remit the balance. C will be entitled to recover the same from A
[based on Devaraja vs Ram Krishniah].
VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION

The Indian Contract Act contains certain exceptions, which make a promise without
consideration valid and binding, stated as under.
Natural Love and Affection
 An agreement without consideration is valid if it is
 made in writing,
 registered,
 made out of natural love and affection, and
 between the parties standing in near relation to each other [Section 25 (1)]

 In Rangaswamy an elder brother, on account of natural love and affection, promised to

pay off the debts of his younger brother. The agreement was put into writing and was
registered. The court held the agreement as valid and binding.
Promise to Compensate for Past Voluntary Services
As per Section 25 (2) a promise to compensate, wholly or in part, a person who has already
done something voluntarily for the promisor, or something, which the promisor was legally
compellable to do, is enforceable.
VALIDITY OF AGREEMENTS WITHOUT
CONSIDERATION

Illustrations: Compensation for Past Voluntary Services

Example 1
A finds B’s purse and, gives it to him. B promises to give A
Rs 50. This is a valid contract.
Example 2
A supports B’s infant son. B promises to pay A’s expenses in
doing so. This is a valid contract.

Promise to Pay Time-barred Debt

A promise made in writing and signed by the person to be
charged therewith, or by his agent to pay a debt (wholly or
in part) barred by the law of limitation is valid without
consideration [S 25 (3)].
VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION

Completed Gift
In case of completed gifts (i.e., gifts actually made),
the rule no consideration no contract does not apply.
Here nearness of relation between the parties is
immaterial and even if it, there may not be any natural
love and affection between them.
Agency
As per Section 185 of the Indian Contract Act, no
consideration is required to create an agency.
Guarantee
In a contract of guarantee there is no consideration
between the creditor and the surety [Section 127].