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CONSIDERATION UNDER LAW OF CONTRACT

After studying this lesson, you would be able to understand the concept of
consideration, its importance for a contract.

Introduction:

After studying this lesson, you would be able to understand the concept of
consideration, legal requirements and exceptions of consideration. Consideration is one
of the essential elements of the valid contract under Section 10 of the Indian contract
Act. Even section 25 of the Indian Contract Act opens with the declaration that an
agreement without consideration is void. In Rann V Hughes,(1778) 7 term reports 346,
lord Chief Baron Skynner observed, “ it is undoubtedly true that every man is by law of
nature bound to fulfill his engagements. It is equally true that the law of the country
supplies no means, nor affords any remedy, to comply the performance of the
agreement made without sufficient consideration.

Definitions of Consideration

Blackstone: Consideration is the recompense given by the party contracting to the

other.

Pollock: Consideration is the price for which the promise of the other is brought, and
the promise thus given for value is enforceable.

Patterson: Consideration means something, which is of some value in the eye of the
law. It may be some benefit to the plaintiff or some detriment to the defendant.

Cheshire and Fifoot: The expression consideration has to be understood as a price

paid for a promise has been commended.

Lush J: Lush J in curie V. Misa (1875) LR10 Ex 153 in this case it was held, that
consideration is “some right, interest, profit or benefit accruing to one party or
forbearance, detriment, loss, or responsibility given, suffered or undertaken by the
other”. The judgment thus refers to the position of both the promisor, and the promisee
in an agreement.

Indian Contract Act, 1872 defines consideration under Section 2 (d):

Consideration as ‘when at the desire of the promisor, the promisee or any other person
has done or abstains from doing, or does or abstains from doing or promises to do or
abstains from doing something, such act or abstinence or promise is called
consideration for that promise.

Supreme Court of India: In Chidambar Iyer V. Renga Iyer AIR 1966 SC 193 AT P 162,
approved the definition of consideration pronounced by Calcutta High court in
Fazaluddin V. Panchanam Das case and pointed out that the definition is almost similar
to that contained in section 2(d) of the Indian Contract Act. Thus consideration means a
reasonable equivalent or other valuable benefit passed on by the promisor to the
promisee or by transferor to the transferee. Again Supreme Court in Commissioner V.
Shiv Kumar Joshi AIR 2000(1) SC 98, states generally there can be sufficient
consideration if there is any benefit to the promisor or any loss or detriment to the
promisee.

From the above definitions what conveys out is that:

Consideration is doing or not doing something, which the promisor desires to be done or
not done.

(1) Consideration must be at the desire of the promisor

(2) Consideration may move from one person to any other person
(3) Consideration may be past, present or future and
(4) Consideration should be real though not adequate

In most cases the promisor for doing an act or not doing an act derives some benefit by
way of consideration. Thus consideration is identifiable benefit as quid pro quo from the
promise or performance of the promisor.
But it is also possible that there may not be identified benefit towards consideration. For
example ‘A’ promises to carry ‘B’s goods free of charge and B allows to A to carry the
same. Here B does not offer any consideration to A. Is this valid contract?

The answer to this question is B has suffered a detriment or disadvantage while

allowing A to carry his goods. Here there is sufficient consideration. This illustration is
given essentially to prove the point that consideration could be not necessary a gain or
advantage to the promisor but it can even be a loss or detriment to the promisee. That
is why consideration is referred to as a concept with double aspect.

Where Y applies for loan of Rs 20,000 to X and if X insists on a guarantee by S and

upon S guaranteeing the loan. X gives the lone to Y. In this case S will be the promisor
and X the promisee. The benefit in this transaction conferred on Y by X at the guarantee
of S, is sufficient consideration for X. in other words X has suffered a detriment which is
the consideration for the guarantee of S to repay the lone which X has given to Y.
detriment to one is benefit to another.

It can often be seen that consideration is mutual. For instance if A promises to sell his
house to B for Rs 10 lakhs, here A is the promisor and B is the promisee. In the same
transaction where B agree to buy the house for Rs 10 lakhs. B will be the promisor and
will be the promisee. Here A must part with the house and B must part with Rs.10 lakhs.
This proves the point that consideration is mutual and had two sides.

Thus from above it can be concluded that:

Consideration is promise or performance that parties exchange with each other and the
forms of consideration is some benefit, right or profit to one party or some detriment.

Now the question is whether gratuitous promise can be enforced?

The word gratuitous means free of cost or without expecting any return. It can therefore
be inferred that a gratuitous promise will not result in any agreement in the absence of
consideration. For instance a promise to subscribe to a charitable cause cannot be
enforced.
Essentials Requirements of Consideration

1. Consideration must move at the desire of the promisor: Consideration must

move at the desire of the promisor, either from the promisee or some other third party.
But consideration cannot move at the desire of a third party. Where collector had
passed an order that anyone using the market constructed by the Zamindar, for the
purpose of selling his goods should pay commission to the Zamindar, it was held that it
was not a proper order as the desire to receive consideration had not emanated from
the Zamindar but from a third party namely the collector was held in Durga Prasad V.
Baldev (1880) 3, All 221.On the other hand a mere promise to contribute some amount
for a charitable purpose may not be enforceable. But if an exchange of such a promise
something is done then the same will be enforceable. In Kedar Nath V Gorie Mohamed
(1886)ILR 14 Cal 64,
persons were asked to subscribe, knowing the purpose to which the money was to be
applied, and they knew that on the faith of their subscription an obligation was to be
incurred to pay the contractor for the work. Under these circumstances, this kind of
contract arises. The subscriber by subscribing his name says, in effect,--In
consideration of your agreeing to enter into a contract to erect or yourselves erecting
this building, I undertake to supply the money to pay for it up to the amount for which I
subscribe my name. That is a perfectly valid contract and for good consideration; it
contains all the essential elements of a contract, which can be enforced in law by the
persons to whom the liability is incurred.
In Abdul Aziz V. Masum Ali A.I.R1914 ALL. 22, the defendant promised to pay a some
of Rs.500 as donation for the repair and reconstruction of a mosque. Nothing was done
to carry out the repairs and reconstruction of the mosque. The defendant refused to pay
the amount. It was held that since nothing was done on the faith of the promise, there
was no consideration in this case and therefore, the defendant was not liable to pay the
subscription promised by him.
2. Consideration can flow either from the promisee or any other person: The
consideration for a contract can move either from the promisee or from any other
person. This point is made clear even by the definition of the word consideration
according to which at the desire of the promisor, the promisee or any other person,
doing something is consideration.

That the consideration can legitimately move from a third party is an accepted principle
of law in India though not in England. Example, A by the deed of gift made over certain
property to her daughter (D) with condition that her brother (B) should be paid annuity
by D. on the same day, D executed a document agreeing to pay annuity accordingly but
declined to pay after sometime. B sued D. it was contended on behalf of D, that there
was no consideration from B and hence there was no valid contract. This pleas rejected
on the ground that the consideration did flow from B’s sister A to D and such
consideration from third party is sufficient to enforce the promise of D to pay annuity to
A’s brother B. was held in Chinnaya V Ramaya (1881) 4 Mad. 137. Thus a stranger to
a contract can sue upon a contract in India and also in England, where as stranger to a
consideration can sue under Indian law though not under English law.

3. Executed and executory consideration: Where consideration consists of

performance, it is called executed consideration. Where it consists only of a promise, it
is executory. For example where A pays Rs 1000 to B requesting B to deliver certain
quantity of rice, to which B agrees, then here consideration for B is executed by A as he
has already paid Rs. 1000 whereas B’s promise is executory as he is yet to deliver the
rice.
Insurance contract are of the same type. When A pays a premium of Rs 1000 seeking
insurance cover for the year, from the insurance company which the company promise
in the event of fire, the consideration paid by A to the insurance company is executed
but the promise of insurance company is executory or yet to be executed. A
forbearance by the promisor should however be considered as an executed
consideration provided the forbearance is sufficient at the time of consideration.
4. Past consideration: the next issue is whether past consideration can be treated
as consideration at all. This is because consideration is given and accepted along with a
promise concurrently. However the law recognizes past consideration as consideration
when it uses the expression in section 2(d) has done or abstained from doing. But in the
event services being rendered in the past at the request or desire of the promisor the
subsequent promise is regarded as an admission that the past consideration was not
gratuitous. The plaintiff rendered services to the defendant at his desire during his
minority. He also continued to render the same service after the dependant-attained
majority. It was held to be good consideration for a subsequent express promise by the
defendant to pay an annuity to the plaintiff but it was admitted that if the services had
not been rendered at the desire of the defendant it would be hit by Section 25 (b) of the
Act. This principal was also laid down in Sindia V. Abraham (1985) Z Bom 755.

5. Adequacy of Consideration: Consideration need not necessary be of the same

value as of the promise for which it is exchanged. But it must be something, which can
be inadequate as well inadequate consideration, would not invalidate an agreement but
such inadequate consideration could be taken into consideration by the court in
deciding whether the consent of the promisor was freely given. In Chijjitumal V. Rampal
Singh AIR1968 the Supreme Court reiterated that consideration need not be material
and may be even absent. In the said case the father had died leaving his house to two
sons. They had agreed to partition the house, which did not admit the division in exactly
equal parts, and one of the sons had agreed not to construct a door at a certain place in
his portion of the house that it was without adequate consideration. The Supreme Court
came to the conclusion that the motive for the said agreement at the time when it was
made, was to avoid any dispute in future, and held that it was sufficient consideration.
The above view is in tune with explanation 2 to section 25 of the Act, which provides
that an agreement to which the consent of the promise is freely given is not merely
because the consideration is inadequate. Where there is valuable consideration, court
will not interfere and inquire into the adequacy of it but leave the matter to the parties to
make their own bargain. But inadequate consideration might raise suspicion about the
free will of the promisor. Promisor could be treated as victim of some imposition but this
would not render the agreement void.
6. Performance of what one is legally bound to perform: The performance of an
act by a person what he 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. Performance of a
legal duty is no consideration for a promise. This principle of English law was adopted
by Madras High Court in R. Sashannah Chetti V. P. Ramaswami Chetti (1868) 4 MHC 7
even before the Contract Act came into force, although the Act contains no provision on
the point.
The facts of the case were that the plaintiff had been served with summons requiring
him to give evidence before a court of law. The defendant, who was a party to the case,
gave him a promissory note promising to pay a sum of money for his trouble. The note
was held to be void for want of consideration.
The court observed: “It is quite clear that if a summon had been served, and the note
had been given to compensate the plaintiff for his loss of time or other inconvenience, it
would have been without consideration, because his attendance and the giving of
evidence would have been merely the performance of a duty imposed upon him by law.
Similarly, an agreement by a client to pay to his counsel, certain money 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 good consideration. For
instance during a civil strike, a question arose as to how best to protect a coal mine.
The police authorities thought that surveillance by a mobile force swould be adequate
but the colliery manager desired a stationary police guard. Ultimately it was agreed that
the police authorities would provide a stationary guard and the manager would pay
$2,200 for the service. It was held that the promise to pay the amount was not without
consideration. The police, no doubt were bound to afford protection, but they had
discretion as to the form it should take. The undertaking to provide more protection than
what they deemed to be necessary was a consideration for the promise of reward. This
was held in Glasssbrook Brothers V Glamorgan County Council (1925) A.C 270.
7. Performance of contractual obligations: Compliance with legal obligation
imposed by a contract with the promisor can be no consideration for a promise. An
illustration is supplied by the facts of Ramchandra Chintaman V Kalu Raju (1877) 2
Bom 362; the plaintiff accepted a vakalatnama from the defendant to act for him in a
certain suit on receiving his usual fee. Subsequently the defendant agreed to pay him a
certain sum as a special reward, if the suit was decided in his favour. The suit was
decided in favour of the defendant, who, however, did not pay the amount. The plaintiff
therefore brought the present suit against him. Court held that plaintiff; having accepted
a Vakalatnama was already bound to render his best as a pleader. There was no fresh
consideration proceeding from the plaintiff when he obtained the agreement.

Exceptions when agreement without consideration is valid:

Section 25 of Contract Act as a general rule, declares that an agreement without

consideration is void. The section, however, mentions three exceptions, when there is
no need of any consideration for the validity of the contract.

The provision is as under:

“25. An agreement made without consideration is void unless-

(1) 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, or unless
(2) It is 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; unless
(3) It is a promise, made in writing and signed by the person to be charged
therewith, or by his agent generally or specially authorized in that behalf, to pay wholly
or in part a debt of which the creditor might have enforced but for the law for the
limitation of suit.

In any of these cases, such an agreement is a contract.”

1. Promise due to natural love and affection

When the promise is made in favour of a near relation on account of natural love and
affection, the same is valid even though there was no consideration for such a promise.
The following requirements have got to be satisfied in order that the case is covered
under this exception: -
(a) The parties to the agreement must be standing in a near relationship to each
other.
(b) One party out of natural love and affection should make the promise for the
other.
(c) The promise should be in writing and registered.

The parties should be nearly related to one other in such an agreement. What is near
relationship has neither been defined in the Act, nor in any judicial pronouncement. But
from the various decided cases it appears that it will cover blood relations or those
related through marriage, but would not include those relations, which are not near but
only remotely entitled to inherit. In Raj lucky Dabee v. Boothnath Mookerjee (1900) 4
C.W.N 488 it was held that near relation between the two parties does not necessarily
imply natural love and affection between them. In this case after lot of disagreement and
quarrels between a Hindu husband and wife they decided to live apart. At this stage the
husband executed a registered document in favour of the wife whereby he agreed to
pay for her separate residence and maintenance. In that agreement mention was also
made about the quarrels and disagreements between the two. It was held that from the
recitals in the document, it was apparent that the document has been executed not
because of natural love and affection between the parties but because of the absence
of it, and therefore the wife was not entitled to recover the sum mentioned in the
document.

It is further necessary that the agreement should be in writing and registered under the
law relating to registration of documents.

According to English law contract are of two kinds:

1.Simple Contract and 2. Contract under seal, or in the form of a deed. There,
consideration is required only as regards simple contract. No consideration is required
in case of contract under seal. If the contract is under seal, which is valid even without
consideration, irrespective of the relationship between the contracting parties as is
required in India.
(2) Compensation for past voluntary services: when something has been done at
the desire of the promisor, that constitutes a good consideration in respect of a
subsequent promise to compensate for what has already been done. The promise to
compensate, though without consideration, is binding because of this exception. The
exception also covers a situation where the promise is for doing something voluntary
which the promisor was legally compelled to do. For example when A finds B’s purse
and gives it to him and then B promise to pay A Rs 100, or A supports B’s infant son
and B promises to pay A’s expenses in so doing, there is a valid contract in such cases
although A’s act was voluntary one.

(3) Promise to pay time-barred debt: Section 25 (3) requires the following essentials
to be satisfied in such case.

1. The promise must be to pay wholly or in part a time-barred debt i.e., a debt of which
the creditor might have enforced payment but for the law for the limitation of suit.

2. The promise must be in writing and signed by the person to be charged therewith, or
his duly agent.