Meaning of consideration

When a party to an agreement promises to do something, he must get “something in return”. This
“something in return” is defined as consideration. In Latin, consideration means ‘quid pro quo’ i.e.
something

in return.

Consideration is what a promisor demands as the price for his promise. In simple terms it is the
benefit

received by a party to the contract in return to the promise made by him. A promise made without
consideration (except in some cases) is only a gratuitous promise which is not enforceable by law,
since there

is no legal obligation formed between the parties and therefore, in such cases one party gets
something

from the other without giving anything to the other. Hence an agreement without consideration is
void

and not enforceable by law.

Definition

Section 2 (d) of the Contract Act defines consideration as “When at the desire of promisor, the
promisee or

Unit

1.3

Learning

Objectives

After studying this unit, you will be able to

understand:

) Meaning and definition of consideration

) Essential elements of consideration

) The doctrine of privity of contract

) Exceptions to the doctrine of privity of

contract

) Agreements without consideration

) Exceptions to the general rule- ‘No consideration no contract’

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Unit 1.3
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 consideration for a
promise”.

The analysis of this definition shows that consideration is an act (i.e., doing something) or an
abstinence

(i.e., abstaining from doing something). It means it is “to do” or “not to do” something.

Example1 : To do

Raj contracts to sell his Car to Kiran for ` 50,000/-. In this case Raj’s promise of giving his car is a
consideration for kiran’s promise to pay ` 50,000/- to Raj. Similarly for Kiran’s promise of giving
50,000/- is a consideration for raj’s promise to give his car.

Example1 : Not to do

Amar owes Akbar ` 10,000. Akbar promises to Amar not to file a suit against him for one year on
Amar’s

agreeing to pay him ` 500 more. In this case, Amar’s promise to pay ` 500 more is the consideration
for

forbearance to file a suit by Akbar and for Akbar’s promise to forbear from filing a suit the
consideration is

` 500 by Amar.

Essential elements of consideration

ƒ Consideration must move at the desire of the promisor: It is a fundamental rule that the action

or forbearance must be done at the desire of promisor. If it is not done at the desire of the promisor

or done at the desire of a third party, then it will not be a valid consideration. Similarly, acts done

voluntarily or services rendered without any request cannot constitute a valid consideration.

Example: Mahesh sees one person drowning and saves his life. Mahesh cannot demand payment for
his

services as it is a voluntary act done by him which the other person never asked him to do so.

Mr X constructed a shop at the desire of the collector of the district. In consideration of this Y a
shopkeeper promised to pay some money as commission on the articles sold in that shop. Later, Y
refused

to pay the commission. It was held that the agreement was void for the want of consideration
because

X had constructed the shop not at the desire of Y but at the desire of the collector.

[Durga Prasad vs. Baldeo]

ƒ Consideration may move from the promisee or any other person on his behalf: As long as
there is consideration for a promise it is immaterial as to who furnishes the same. Thus an act

constituting consideration may be done by the promisee himself or may proceed from third person

also. The judgement that the consideration may move from the promisee or any other person on

his behalf is valid was given in a landmark case law of Chinnaya vs. Ramayya.

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27

Consideration

An old lady made a deed of gift over certain property, to her daughter Ramayya, under the direction

that she should pay her uncle Chinnaya (brother of the old lady), a certain sum of money annually.

On the same day, Ramayya entered into an agreement with Chinnaya to pay him the agreed
amount.

Later, Ramayya refused to pay the amount on the plea that no consideration had moved from
Chinnaya to him. Held, Chinnaya was entitled to maintain suit as the consideration had moved from
the

old lady to Ramayya.

[Chinnaya vs. Ramayya, (1882) 4 Mad. 137]

ƒ Consideration must be real and not illusory:

Consideration is not valid if it is to do an act which is

à Physically impossible

à Legally not permissible

à Uncertain

Example: Amar promises to put life into Akbar’s dead wife and Akbar in turn promises to pay ` 1,
00,000.

This agreement is void because the consideration is physically impossible to perform.

ƒ Consideration may be past, present or future:

à Past Consideration

If the consideration by a party for a present promise was given in the past i.e., before the date of

promise, it is called a past consideration. It is also known as an executed consideration.

Example: Sunil finds Anil’s purse and returns it to Anil. Anil promises to pay ` 100 to Sunil after 5
days. The

consideration provided by Sunil (finding the purse) for Anil’s promise to pay is a past consideration,
something done before Anil makes the promise.

The English Law does not recognise past consideration.

à Present Consideration

The consideration which moves simultaneously with the promise is called present consideration.

It is in the process of execution. Cash sales are the most common examples of present consideration

as both or one of the parties furnishes consideration at the time of formation of the contract.

Example: Kumar sells the goods and delivers the goods to Gopal and at the same time Gopal pays
the price.

à Future Consideration

The consideration which moves after the formation of contract is called future consideration or
executory consideration. In the case of future consideration both the parties promise to perform
their

obligation after the formation of the contract..

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28

Unit 1.3

Example: Suresh promises to deliver certain goods to Ramesh at a future date and Ramesh promises
to

pay on delivery.

ƒ Consideration need not be adequate: The consideration by one of the parties may not be
adequate.

The consideration may be adequate, inadequate or grossly inadequate. The adequacy of the
consideration is for the parties to decide and the law does not interfere with the same. The only
thing required

is that the consideration must be of some value in the eyes of law, however small it may be. Sec 25

exp 2 however states that inadequacy of consideration may be taken into account by the court in

determining the question that the consent of the parties to the contract was free or not.

Example: Amar agrees to sell his house to Akbar for ` 10,000. The house could be sold for about ` 1,
00,000.

Later on, Amar cannot refuse to sell his house to Akbar on the grounds that the consideration is not
adequate. However, if Akbar had received Amar’s consent by unfair means, i.e. at knife point etc.,
then Amar can

refuse to sell the house to Akbar as the consent of Amar is not free.

ƒ Consideration must be something which the promisor is not already bound to do: A promise

to do what one is already bound to do either by general law or under an existing contract, is not a

good consideration for a new promise, since it adds nothing to the pre-existing legal or contractual
obligation. Likewise, a promise to perform a public duty by a public servant for something in return

is not a consideration.

When a person being already under a legal or contractual duty to do something

undertakes to do something more than he is bound to do under the original

contract, it will be a good consideration for the promise.

Example: Akbar contracted with Anthony, a doctor, to diagnose Akbar’s son for ` 5,000. In addition
to this,

Akbar asked Anthony to visit his home once a week to check his son, for which Akbar agreed to pay `
1,000

extra. The above contract is valid, as the doctor is undertaking something more than he is bound to
in the

original contract.

There was a promise by a client to pay the advocate, an additional sum over and above the fee if the

suit was successful. Held, such promise to pay an additional sum was void for the want of
consideration.

The advocate was under a pre-existing contractual obligation to render the best of his services
(which

includes winning the suit) under the original contract for the fees paid by the client.

[Ramachandra Chintamani vs. Kalu Raju (1877) 2 Bom 302]

ƒ Consideration must not be illegal:

The consideration to a promise must not be unlawful or opposed to public policy. The consideration
to

an agreement is unlawful, if:

à It is forbidden by law

à It defeats the provisions of law

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29

Consideration

à It is fraudulent

à It involves injury of a person or property

à It is immoral or opposed to public policy

Example: Raju told Ramesh that he would pay him ` 10,000, if he murders Anthony. Such agreements

cannot be enforced in the court of law as the consideration is illegal.

The Doctrine of privity of contract

ƒ Meaning of privity of contract: The doctrine of privity of a contract means that a contract is a
private relationship between the parties to the agreement and no other person can acquire the
rights or

liabilities under it. A contract is an agreement between two or more parties that creates an
obligation

to do or not to do something. A contract cannot confer rights or impose obligation on any person

except the parties to it. Hence, only party to a contract can sue or be sued for the enforcement of

the contractual obligations and a person who is not a party to a contract cannot sue or be sued. This

establishes the rule “Stranger to a contract cannot sue”.

A stranger to a contract means the person who is not a party to the contract. The stranger to a
contract

is known as a third party. A stranger to a contract cannot sue except in few cases.

Mr. S bought tyres from the Dunlop Rubber Co. and sold them to Mr. D, a sub- dealer, Who agreed
with

Mr. S not to sell these tyres below Dunlop’s list price and to pay the Dunlop Co., $5 as damages on
every

tyre Mr. D undersold. Mr. D sold two tyres at less than the list price and thereupon the Dunlop Co.
Sued

him for the breach. Held, Dunlop Co. could not maintain the suit as it was a stranger to the contract

[Dunlop Pneumatic Tyre Co.Ltd. Vs Selfridge & Co.Ltd. (1915) A.C.847].

ƒ Stranger to a consideration: If a consideration moves from promisee or any other person on his

behalf it will be a valid consideration (Ref.: Chinnaya vs. Ramayya). The person who does not provide
consideration, even though he may or may not be a party to contract, such person is known as

stranger to consideration and gets right to sue with respect to his rights arising from the contract.

Hence a stranger to a consideration can sue but a stranger to a contract cannot sue.

Under English Law stranger to consideration cannot sue.

Exceptions to the doctrine of privity of contract

The rule that a stranger to a contract cannot sue, is subject to the following exceptions:

ƒ In case of beneficiary of a trust: A trust is always created for the benefit of some person called as

the beneficiary. The beneficiary can file a suit to enforce his right even though he is not a party to

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30

Unit 1.3
the contract.

Example: Kalu transferred a certain property to Balu under the trust, to be held by him for the
benefit of

Ramu. If Balu refuses to give benefit to Ramu, then Ramu can enforce the agreement even though
he is not

a party to the contract.

A husband who was separated from his wife executed a separation deed by which he promised to
pay

to the trustees, all the expenses for the maintenance of his wife. Held, the agreement created a trust
in

favor of his wife and wife could claim such amount though not a party to the contract.

[Gandy vs. Gandy (1884)]

Mr. A had a son Mr. X and Mr. B had a daughter Mis. Y. A agreed with B that in consideration of the

marriage of Y with X, he (A) would pay to Y, his daughter- in – law, an allowance of ` 500 a month in

perpetuity. Later on Y claimed ` 500 from A which A refused to pay. Held, Y, although not a party to
the

agreement between A and B, was clearly entitled to recover the arrears of the allowance

[Khwaja Mohd.Khan Vs. Hussani Begum ,(1910) 32 All 410]

ƒ In case of family settlement: When certain arrangements are made for the marriage or
maintenance

of a particular member of the family then such person for whose benefit the provision is made may

enforce the contract.

Family or marriage settlements should be in writing.

Two brothers, on partition of joint property, agreed to invest a certain sum of money, in equal
shares,

for the maintenance of their mother. Later the brothers decided not to part away with such funds.
Held,

mother was entitled to recover from her sons such amount that was invested by the sons.

[Shuppu Ammal vs. Subramaniyam, (1910)]

ƒ In case of acknowledgment of liability :When the promisor, by his conduct, acknowledges or

himself

acts as an agent of a third party, a binding obligation is thereby incurred by him towards the third
party.

Example: Amar receives some money from Akbar to be paid to Anthony. Amar admits of this receipt
to
Anthony. Anthony can recover the amount from Amar, who shall be regarded as the agent of Akbar.

ƒ In case of assignment of a contract :Assignment refers to the transferring the rights in a contract to

a third person. When a contract is assigned in favor of someone, the assignee can enforce the
contract,

even if he is not a party to the contract.

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31

Consideration

Example: The assignee of an insurance policy of a deceased person, Endorsee of bill of exchange can

enforce the contract though he is not a party to the contract.

A contract requiring use of personal skills (singing, dancing etc) cannot be assigned.

For bringing a legally enforceable contract between the parties, consideration is one of the most
essential

elements. Sec. 25 of The Indian Contract Act states that “An agreement made without consideration
is

void”. The Latin maxim, “Ex Nudo Pacto Non Oritur Action” means an agreement without
consideration

is void. In simple terms, ‘No consideration No contract’

X promised Y, the secretary of a Mosque Committee, to subscribe a sum of `500 for rebuilding a

mosque, but he failed to pay the promised subscription. Y filed a suit against A for the recovery of
the

promised subscription. It was held by the court that there was no consideration either in the sense
of

any benefit or advantage to the promisor X, or detriment or loss to the promisee, Y, and so, the
agreement was void and unenforceable.

[Abdul Aziz Vs.Mauzam Ali]

A mere promise for charity is void because it is without consideration. But if a person promises to

contribute for charity and on his faith, the promisee undertakes liability then the contract is valid to
the

extent of the subscription so promised.

Kumar promised a trust to donate a sum of ` 5,000 for the construction of a temple. The trust of the

temple, on the faith of Kumar’s promise entered into a construction contract with Super builders for

the construction of the temple. Later, Kumar refused to pay the amount. Held, Kumar was liable to
pay
to the extent of detriment incurred by the promisee subject to the maximum amount promised as
the

trust had incurred a liability on his faith.

[Kedarnath vs. Gauri Mohamed]

Exceptions to the general rule no consideration no contract

Following are the exceptional circumstances provided in Sec.25, under which the agreement is valid
and

enforceable even if it’s made without a consideration.

ƒ Sec 25(1) Natural love and affection: An agreement in writing which is registered and is based

on natural love and affection between parties in close relation to each other is valid and enforceable

even if there is no consideration. The following conditions must be satisfied for the application of

this exception:

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32

Unit 1.3

à The agreement must be in writing and registered

à The agreement must be based on natural love and affection

à The agreement must be between the parties who are in near relation to each other

Example: A father by a registered document promised to pay his daughter ` 100 per month as her
pocket

money. This agreement is valid.

Mere nearness of relation by itself does not necessarily imply natural love and

affection.

A Hindu husband by a registered document, after referring to quarrels and disagreements between

himself and his wife, promised to pay his wife ` 1,000 p.m. for her maintenance. It was held that this

agreement was void because there was no natural love and affection.

[Rajlakhi Devi vs. Bhoot Nath Mukherjee]

Sec 25(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, even though it is without consideration. In simple words, a promise to
pay

for a past voluntary service is binding. In order to pay for past voluntary services, the following
factors
must exist:

à The service should be rendered voluntarily

à The service must have been rendered for the promisor

à The promisor must be in existence at the time when the services were rendered

à The promisor must have intended to compensate the promisee

à The services rendered should be lawful

Example: Sunil finds Anil’s purse and gives it to him. Anil promises to give ` 500 to Sunil. This is a valid

contract even though the consideration did not move at the desire of Anil, the promisor. Thus it can
be

enforced in the court of law and Sunil can recover the amount promised from Anil.

ƒ Sec 25(3) Promise to pay time-barred debt: Time barred debt refers to an amount which has
remained unclaimed beyond a time period specified by the law of limitation.

A promise to pay a time-barred debt is enforceable if such a promise is in writing and duly signed

by the promisor or his authorized agent. The following conditions must be satisfied for the
application of this exception:

à The promise to pay must be definite and expressed

à The promise must be in writing

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33

Consideration

à The promise must be signed by the promisor or his authorized agent

à The debt must be time-barred i.e., the limitation period for the recovery of the debt must have

expired

A promissory note executed by a window in her personal capacity (Not as an agent of her husband)

in payment of the time-barred debt taken by her husband cannot be brought within this exception.

Moreover, the wife of a person cannot be considerd as the authorised agent.

(Pestonji Vs. Bai Maherbai)

Similarly, a promise by a Hindu son to pay the time-barred debt of his deceased

father does not come within this exception.

A debt is barred by limitation if it remains unpaid or unclaimed for a period of

three years in case of moveable property and twelve years in case of immovable

property from the date it becomes due. Such a debt becomes legally irrecoverable.
ƒ Completed gift :‘Completed gift’ means a gift actually handed over. The gifts actually made by a

donor and accepted by the donee are valid even without consideration. Thus, a completed gift needs

no consideration.

Example: On Gopal’s birthday, Ganesh gives him a gold chain as a birthday gift. In this case, Ganesh
cannot

demand back the chain on the ground that there was no consideration. In case of immoveable
property the

gift should be signed and registered in order to constitute a completed gift.

ƒ Contract of agency: No consideration is required for creation of contract of agency. The fact that
the

principal has agreed to be represented by the agent is sufficient ground for the principal to support

the contract of agency. According to Sec. 185 of Indian Contract Act, no consideration is required

to create the contract of agency.

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