This article is written by Saket Srivastava of University of Allahabad, an intern under Legal Vidhiya
ABSTRACT
This article seeks to give some insights on Consideration as per the Indian Contract Act, 1872.Consideration is defined under Section 2d of the Indian Contracts Act, 1872. It is defined as when the promisee at the request to the promisor has:- Done or abstained from doing something Does or abstains from doing something, promise to do or abstain from something Then such act or abstinence is called consideration.
Keywords
Contracts, Consideration, Doctrine of Privity, Contract Law, Legal Framework, Reciprocal Exchange, Bargain for Exchange, Contractual Agreements, Quid Pro Quo, Legal Validity, Modern Contracts, Online Agreements, Electronic Commerce, Business Practices, Third-Party Beneficiaries, Trust Relationships, Agency Relationships, Legal Evolution, International Perspectives, Smart Contracts
INTRODUCTION
Consideration is the price paid for a promise. As per Section 10 of the Indian Contract Act 1872, an agreement without consideration is void subject to a few restrictions under Section 25, since one of the requirements for a legal contract is consideration. When a contract is backed by consideration, it becomes legally enforceable and binds the parties to their obligations. Such an agreement would be merely gratuitous and unenforceable under the law in the absence of consideration. One party may profit from consideration at the expense of the other. “Consideration is the act, forbearance, or promise done or given at the request of the promisor to any other person,” according to Pollock and Mulla. Even if the promisor does not profit from the promise, one party’s harm is sufficient. It is the cost that is required to purchase the other’s promise. Valid consideration needs to be adequate, genuine, and substantial.
DEFINITION ACCORDING TO CONTRACT ACT 1872
Consideration as per Section 2(d) of the Indian Contract Act, 1872
Consideration, as given under Section 2(d) of the Indian Contract Act, 1872, defines it as “when at the desire of the promisor, the promisee or any other person has done or abstained from doing something, does or abstains from doing or promises to do or to abstain from doing something. Such an act, abstinence or promise is called a consideration for the promise”.
This sentence is quite intricate. To better understand, let’s dissect it and reword it as follows:
At the promiseor’s request if the promisee Either does something (past, present, or future) OR doesn’t do anything (past, present, or future).
Therefore, this behavior—doing or refraining—is referred to as consideration. There are now two components to it: acting or refraining from acting. Let’s examine a few instances:
Example 1: Taking action
A contract is made between Peter and John, according to which Peter will bring John fifteen curtains in a month. John also agrees to give Peter Rs 3,000 upon delivery. According to this contract, Peter’s promise is exchanged for John’s promise to pay Rs 3,000 upon delivery. In addition, Peter’s pledge to deliver fifteen curtains is based on John’s payment guarantee.
Example 2: Acting inaction
John, a friend, has given Peter a loan. He hasn’t paid back the loan yet, though. If Peter agrees to return the loan within a week, John says he won’t sue him. John’s abstinence in this instance is the result of his consideration of of Peter’s promise of repayment of the loan
NATURE OF CONSIDERATION[1]
Unilateral consideration
Contracts wherein the promisor agrees to pay only after a predetermined event has taken place. Stated differently, the promisor is prepared to cover the cost of the promise. It only travels in one direction when considered unilaterally. Only the promisor is legally required to keep his end of the bargain within the allotted time frame under such a contract. For instance, Mr. Raj lost his dog and offered Mr. Rahul Rs. 100 in exchange for helping him find his dog. Mr. Rahul is free to accept or reject the offer; he is not obligated to do so.[i]
Bilateral consideration
Bilateral consideration refers to a contract in which both parties are required to keep their end of the bargain. In contrast to a unilateral consideration, where only the promisor is obligated to fulfill his promise, there must be a minimum of two parties involved in this situation. Consideration can flow in either direction under these contracts. As an illustration, consider a sale agreement in which the seller and the buyer agree that the seller will give him title to the car after the buyer pays him within the allotted time frame.
ESSENTIALS OF CONSIDERATION[2]
Consideration can only be moved at the desire of the promisor-
It should be moved only at the promisor’s request and for no other reason in order to receive proper consideration. Since the act was not performed at the promisor’s request or desire, a voluntary act performed by the promisee or in response to the actions of a third party would not qualify as valid consideration. For instance, when A’s house caught fire, he asked B to help put it out by bringing some water, and in exchange, he promised to give B Rs 500. Since the consideration was moved at the promisor’s request, it is a case of valid consideration. In Durga Prasad v. Baldeo (1880),it was decided that since the consideration was not changed at the promisor’s request,It was not a legitimate factor to take into account. In the 1932 case The Municipal Corporation of… v. The Secretary of State for India, it was decided that the subscriber understood the full intent of the subscription and that the subscription constituted a contract that obligated him to pay the contractor for the work he completed. As a result, in this instance, the promisor’s act of signing a contract with the contractor is considered to have been done so voluntarily.[ii]
Consideration by promisee or any other person-
Consideration can be provided either by the promisee or any other person, but the condition that needs to be satisfied is that it should be moved at the desire of the promisor only. According to English law, the rule is somewhat different, as under English law, consideration can only be moved by the promisee and no third party who is a stranger or who is not a party to the contract can move the consideration. It was held in the case of Tweddle v. Atkinson (1861) that no case could be made out as the consideration was not moved by the husband, who was the promisee.
The condition that must be met is that consideration must only be moved at the promisor’s request. The promisee or any other person may offer consideration. The rule is slightly different under English law, which states that the promisee is the only person who may move consideration; strangers or parties not involved in the contract cannot move consideration. In Tweddle v. Atkinson (1861), it was decided that there was no case to be made because the promisee, the husband, had not moved to move for consideration.A person may file an action under Indian law even if the consideration was possibly moved by a third party. Generally speaking, if the contract is for his enjoyment, a stranger who is not a party to the suit may file a lawsuit. Accordingly, a stranger who may not be a party to the contract may enforce the terms against the promisee under Indian law, but under English law, a third party cannot bring an action for the same.
For instance, suppose A buys a watch from B. However, C pays B the consideration instead of A. According to Section 2(d)of the Indian Contract Act, which states that the promisee or any other person may provide consideration, this contract is legitimate. In the 1882 Chinnaya v. Ramayacase, it was decided that the promisee need not make the entire consideration. In the case of S. Premalatha v. Mysore Minerals Ltd. And Anr. (1992), it was decided that a stranger to a contract may file a lawsuit because “promisee or any other person” is included in Section 2(a) of the Indian Contract Act 1872.
In the current case, the Karnataka High Court further held that no precedent is necessary when the statute expressly specifies who is eligible to receive consideration.
PRIVITY OF CONTRACT[3]–
The essential principle that only parties to a contract may file a lawsuit to enforce it is established by the doctrine of privity of contract. Even if a third party has an interest in the contract, he is not permitted to take legal action on its behalf. There must be a relationship between the parties that confers certain obligations and rights on them. The English and Indian contracts are subject to the same privity of contract rule. It is important to distinguish between the rule of privity of contract and the rule that states that a promisee or any other person may enforce a contract. The privity of contract rule is unaffected by this rule. The Indian Contract Act of 1872 states thatexpanded the meaning of “consideration” so that someone who wasn’t a party to the contract could still enforce it. If the contract had been governed by English law, this would have made the party who wasn’t a party to it a recipient of the purely voluntary promise and prevented them from filing a claim under Nudum Pactam. A person who is not a party to the contract is likewise precluded from suing under Section 2 of the contested Act. Furthermore, this impression is contradicted by the definitions of “promisor” and “promisee.”It would be incorrect to believe that anyone who is not a party to the contract may file a lawsuit under Indian law. In the 2012 case of Utair Aviation v. Jagson Airlines Ltd. & Others, it was decided that although privity of contract does exist in India, there are a number of exceptions that have developed that allow a third party, a beneficiary, or a stranger who is not a party to the contract to sue. These are not all of the exclusions[iii]
For instance -, in the event that A and B enter into a contract requiring each party to fulfill their share of the obligations, only the parties to the contract may file a lawsuit against one another; a third party may not file a lawsuit on behalf of the parties.
Exceptions to privity of contract.
Only parties to a contract may bring legal action against one another, but over time, the courts have created a number of exceptions to safeguard the rights of non-party third parties:
Beneficiary under a contract-
A contract between two parties that creates a charge in favor of a third party who is the beneficiary of certain immovable property can be enforced by the beneficiary if one of the parties defaults on their obligations. This exception has been acknowledged by the Privy Council in the Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum case (1906).
Marriage, partition or family settlement
A beneficiary may enforce an agreement regarding a marriage settlement, partition, or family settlement even though they are not parties to the contract if it is entered into in their best interests. One exception to the general rule that a stranger to a contract cannot sue is provided by Section 15 of The Specific Relief Act 1963, which permits the specific performance of the suit for the beneficiary’s entitlement. In the 1909 Shappu Ammal v. Subranarayan case, it was decided that even though the mother was not a signatory to the agreement, she was still entitled to receive equal maintenance payments from both of her sons.
Recognition of a Liability
When someone has a financial obligation to a third party and, by their actions, acknowledges it to them, this is known as estoppel or partial payment. Because the contested contract is founded on the idea of estoppel law, a third party may enforce it.
Covenants affixed to the property
A person who buys land and learns that the owner is subject to certain duties affecting the land is still obligated to fulfill those duties even if they were not part of the original contract. It was decided in Steel Authority of India v. the State of MP (1999) that the undertaking would have a similar exemption from paying land revenues to the Central Government.
Statutory exclusions
In some cases, the statute protects the third party, who may not even be aware of the terms of the contract but can still benefit from them. For instance, in the event of a car accident, the insurance company assumes all third-party risks.
CONSIDERATION CAN BE PAST, PRESENT OR FUTURE (KINDS OF CONSIDERATION)
Past consideration
Past consideration, also known as executed consideration, occurs when the consideration is given before the promise is made and the promise is made later. Under this kind, the promise is made after an act has been performed in the past without the other party promising anything. The promise is induced by the consideration. In order to encourage the promisor to eventually pay the consideration for the contested act, a promise for consideration is made for an act that has already been completed in the past. The promisor does not anticipate receiving anything in exchange for an act or obligation that has already been fulfilled for past consideration.Most of the time, past consideration is not legally required, and it is more likely a moral obligation. In general, until a material benefit is involved for the promise of the benefit that was made after consideration, such an obligation of past consideration cannot be enforced. For instance, it is acceptable to use past or executed consideration when A asks B to locate his lost dog in exchange for giving him Rs 500. The Supreme Court ruled in M/S Atma Ram Properties Pvt Ltd v. M/S Federal Motors Pvt Ltd (2004) that in cases where a tenant eviction decree has been issued. For the use and possession of the, the tenant is entitled to receive the mesne profits or compensation.concerned premises at the same price that the landlord would have charged a third party to occupy the space in the event that the contested tenant had left. In addition, the landlord is not obligated to pay the agreed-upon rent until the matter is still pending in a higher forum.
Executed consideration
Each and every contract is contingent upon an act being performed. A deed constitutes payment for the assurance. A consideration is referred to as executed when it is established concurrently with the promise. An act in exchange for a promise is called executed consideration. The specified act exhausts the consideration, meaning that no further act can be carried out until more consideration is given. In these kinds of agreements, one party has fulfilled their performance obligations, and the other party only needs to fulfill his half of the bargain. Acts and promises that constitute consideration are both necessary and relate to the same transaction.In the Mohammad Ebrahim Molla v. Commissioners (1926) case, it was decided that although a contract of executed consideration remains valid even in the absence of a tinder seal, this exception does not even extend to executed consideration in contracts unless specifically stated.
CURRENT SCENARIO
Every contract is thought to have consideration as its cornerstone and basis. According to the principle of privity of consideration, only the party who has given consideration is able to uphold and enforce the terms of the agreement. The promisor’s wishes should be taken into consideration. We refer to this as Promissory Estoppel . At present time no one can do contact without and consideration, If he or she do than that contract is void ab- initio. Except exception given under sec 25 of Indian contact act 1872.
Executory consideration
Executive consideration occurs when parties to a contract agree to execute it at a later time; alternatively, it occurs when the promisor extends an offer to the promisee that would occur at a later time, and the promisee accepts the offer and agrees to pay the promisor at that later time. In these kinds of agreements, each party is required to fulfill their obligations subsequent to the contract’s creation. One promise is swapped for another promise under an executory consideration. To put it another way, both parties still owe money. A contract is finalized when both parties make valid promises. Consequently, both parties have unrestricted rights and obligations under these kinds of agreements.In the Municipal Corporation of the… v. Secretary of State for India (1932) case, it was decided that an executory promise consists of two promises, also known as mutual promises. On the other hand, one promise is a consideration for another.
CONCLUSION
The cost of the other party’s promise is known as consideration. Consideration for the promise can take many forms, including an act, abstinence, or promise to do or not do something at the promisor’s request or desire made by the promisee or by any other individual. For a consideration to be considered valid, it must be sufficient, unconditional, and significant. In the sense that it shouldn’t be unfeasible or illegal, consideration must be genuine Consideration must be moved at the desire of the promisor only and nobody. It has to be given by the promisee or any third party, whereas under English law, consideration can only be moved by the promisee. The types of consideration are past, present, and future. The law does not recognise consideration for charitable purposes and it is unenforceable in the eyes of the law. Consideration should always originate from a new obligation, as consideration from a pre-existing duty is not enforceable. An agreement without consideration is void, but there are certain exceptions incorporated under Section 25, such as promises arising out of natural love and affection, past voluntary services, promises to pay a time-barred debt, etc, under which an agreement without consideration is valid.
Only and only at the promisor’s request may consideration be moved. In contrast to English law, which states that consideration may only be moved by the promisee, it must be given by the promisee or any third party. Past, present, and future considerations are the different categories. The law considers it unenforceable and does not recognize consideration for charitable purposes. Since consideration from an existing duty is unenforceable, consideration should always come from a new obligation. Although an agreement without consideration is void, there are some exceptions included under Section 25, including promises made out of genuine love and affection, voluntary services performed in the past, promises to settle a debt that has passed its statute of limitations, etc., under which an agreement without consideration is valid.
REFERENCES
- The Indian Contract Act, 1872 by Fredrick Dinshaw Mulla
- Contract and Specific Relief by Avatar Singh
- Indiankanoon.org
- Legalbites.in
- GH Treitel, The Law of Contract
- https://indiankanoon.org/doc/171398/
- https://legaldictionary.net/consideration
[1] Nature of consideration – ipleaders
[2] Essential of consideration- writinglaw.com
https://www.writinglaw.com/essentials-of-consideration-contract-act/
[3] Doctrine of privity of contract-ipleaders
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