This Article is written by Akash Singh Yadav of Dattopant Thengadi Law Institute, Veer Bahadur Singh Purvanchal University, Jaunpur Uttar Pradesh, an intern under Legal Vidhiya.
ABSTRACT
The Indian Contract Act says that for an agreement to be legal, both sides must get something in consideration. Consideration can be money, goods, services, or promises for future actions. It’s a crucial element for a contract to have legal validity. The Indian Contract Act defines consideration broadly, covering past, present, and future actions or promises. This keeps things fair and prevents unfair treatment. Anything given, promised, done in the past, present, or future can count as what each side gives. But there are exceptions, like doing something out of real care, work done without pay before, and gifts. This rule is important in Indian contracts because it promotes fair deals, stops one side from gaining too much, and sets clear rules for agreements that can be enforced.
KEYWORDS
Indian Contract Act, agreement, consideration, legal, promises, valid, contract, Doctrine of consideration, promisor.
INTRODUCTION
Contracts are like promises that are legally binding. When two or more parties agree to something, they create a contract. But for a contract to be valid and enforceable under the Indian Contract Act, there’s a crucial element called consideration. Consideration essentially means that each party must give or promise something of value to the other. This ensures fairness and prevents one party from taking advantage of the other. Contracts aren’t legally binding unless they meet all the necessary conditions outlined in Section 10[1] of the Indian Contract Act.
In simple terms, consideration refers to the exchange of something valuable, whether it’s an action, refraining from an action, or a promise, between parties entering into an agreement. The essence of consideration lies in the mutual obligation created when one party agrees to something, and the other reciprocates with an act, forbearance, or promise. Without consideration, a contract lacks the necessary binding force recognized by law.
The Indian Contract Act defines consideration broadly. It includes any act done, promise made, or forbearance (refraining from doing something) at the request of the person making the promise. Consideration can be past, present, or future. Past consideration refers to something already done before the promise was made, present consideration is something done at the same time as the promise, and future consideration is something promised to be done later.
Consideration must be genuine, legal, and reasonable. It shouldn’t involve fraud, harm to anyone, or go against public policy. Both parties must freely agree to the terms for consideration to be valid.
While the general rule is that contracts require consideration to be valid, there are exceptions. For instance, contracts based on natural love and affection, past voluntary services, promises to pay old debts, creation of agencies, and gifts can be enforceable even without consideration.
The doctrine of consideration plays a vital role in Indian contract law. It ensures fairness, encourages responsible contracting, and provides predictability and certainty in legal agreements. By upholding principles of mutual benefit and fairness, consideration safeguards the interests of parties involved in contracts, making it a fundamental aspect of contract law in India.
WHAT IS CONSIDERATION
Consideration means when you give something or do something in exchange for something else. It’s really important in contracts. The main idea behind it is that if one person agrees to something, the other should also have to give or do something. If there’s no consideration in an agreement, neither person can make the other stick to it, even if it’s written down.[2]
In the well-known English case of Currie v. Misa[3], consideration was described by Judge Lush as follows: “A valuable consideration in the eyes of the law can be either some right, interest, profit, or benefit gained by one party, or some refraining from action, disadvantage, loss, or obligation undertaken by the other party.”
The second part of this legal explanation is key because it highlights that the agreement isn’t just about one person gaining money but rather about one person giving up a legal right while the other person accepts something in return. It doesn’t matter if the person accepting what’s offered doesn’t seem to get anything out of it; what’s important is that they accept it, and the person giving it up is taking on a responsibility or losing something that the law sees as valuable.
Section 2(d) of the Indian Contract Act lays down the definition of consideration as follows: “When, at the wish of the person making the promise, the person to whom the promise is made, or any other person, has done something, refrained from doing something, or promises to do or refrain from doing something, such action, refraining from action, or promise is termed as consideration for the promise[4].”
According to this definition, consideration refers to something given or promised in return for a promise. It includes:
- an action, refraining from action, or giving up something,
- by doing something because someone asked you to do it,
- by the person to whom the promise is made or by any other person,
- which can be completed, ongoing, or yet to be fulfilled.
Consideration is basically something given or received in return. It’s a must-have for any valid contract under the Indian Contract Act. Without consideration, a contract cannot be enforced by either party, except in certain cases. The law specifies what kinds of considerations are acceptable and what are not under Section 23 of the Indian Contract Act[5]. Section 23 states that all considerations are lawful unless:
- They are prohibited by law,
- They would break any law if allowed,
- They involve fraud,
- They cause harm to someone’s person or property,
- The Court considers them immoral or against public policy.
Any agreements lacking lawful consideration are void, meaning they can’t be enforced by either party in court.
UNDERSTANDING CONSIDERATION IN SIMPLE TERMS
Consideration Should Be According to the Promisor’s Wishes[6]
An act or refraining from an act should be done because the promisor wants it. However, if someone does something because of the promisor’s request, or at the request of someone else, it might not count as consideration under the law.
In the case of Durga Prasad v. Baldeo[7], Durga Prasad built some shops in a market as per the collector’s order. The shopkeepers who rented these shops promised to pay Durga Prasad a commission on their sales. When they didn’t pay, Durga Prasad sued them.
The court said there was no consideration because the shops were built on the collector’s order, not at the shopkeepers’ request. So, Durga Prasad couldn’t recover the commission.
Consideration Can Come from the Promisee or Another Person[8]
Consideration can come from the promisee or someone outside the contract or another third party. Here, a third party means someone not involved in the agreement. When the promisee or a third party does something or refrains from doing something because the promisor wants it, it counts as consideration.
In the case of Chinnaya v. Ramayya[9], ‘A’ gave certain property to her daughter with a condition that the daughter must pay an annuity to ‘A’s brother. On the same day, the daughter agreed to pay the annuity to her uncle. Later, she refused, and the uncle sued her. The daughter argued that there was no consideration from the uncle’s side, so he couldn’t sue.
The court said consideration doesn’t have to come directly from the promisee. So, the uncle could sue.
Consideration Can Be About the Past, Present, or Future[10]
Consideration can be grouped into three types:
- Past Consideration: This means doing or not doing something in the past that counts as consideration, even if it happened before the promise was made.
Illustration: If Y saves X’s life and X promises to pay Y later, it’s past consideration because Y already did something for X.
- Present Consideration: This is when something is done or not done at the same time the promise is made.
Illustration: Paying for groceries when buying them or paying workers at the end of the day is present consideration.
- Future Consideration: This is when something is promised to be done or not done in the future.
Illustration: Paying cash on delivery for online shopping is an example of future consideration.
Consideration may take the form of either a promise or an action
Consideration in a contract can be a promise or an action. An action could mean doing something in return or choosing not to do something. However, the action taken must be lawful to be considered valid.
Actual payment isn’t always necessary; a promise to act or refrain from acting can also be valid consideration.
Consideration Should Be Reasonable
Consideration doesn’t have to be of equal value. What matters is that it’s reasonable and holds legal value, not merely minimal.
According to explanation 2 of section 25 of the Indian Contract Act, as long as consideration is given freely, the contract won’t be voided just because the consideration seems inadequate[11]. The key factor is whether the consent was freely given.
Consideration Should Be Genuine and Legal
The consideration must be real, not illusory or imaginary, to be valid. It also must be legal according to the Indian Contract Act. Section 24 of the Act states that any consideration must be legal to be part of a valid contract[12]. If a contract lacks legal consideration, it will be void and won’t be enforceable by law. The consideration must also meet the requirements of Section 23 of the Indian Contract Act.
DIFFERENT TYPES OF CONSIDERATION[13]
Understanding the idea of consideration and its key parts makes it simpler to recognize various types of consideration. There are mainly three types:
Executory Consideration
When two parties make promises or obligations in a contract, but these are not yet fulfilled, it’s called executory consideration. These promises or obligations will be completed in the future. In a contract, there’s an exchange of promises or obligations between the promissor and the promisee, but they’re yet to be fulfilled.
For instance, if you hire a freelancer for legal services and agree to pay Rs. 50,000 next month, until this promise is fulfilled, it’s considered executory.
Executed Consideration
Executed consideration is the opposite of executory consideration. Under executed consideration, the promises or obligations in the contract are already fulfilled. It’s also called present consideration, as both parties have fulfilled their part of the contract.
For example, when you buy a car from a showroom and pay for it, and the car is delivered to you, both parties have completed their promises under the contract.
Past Consideration
Normally, a voluntary act or abstinence by the promisee doesn’t count as valid consideration. However, there’s an exception if certain circumstances are involved. To understand this, let’s look at a real-life example:
Imagine you’re an unpaid intern at a law firm, and after your internship, your senior pays you Rs. 8,000 for your hard work during the internship. The payment is for the acts you did in the past. This is known as past consideration.
EXCEPTIONS TO THE DOCTRINE OF CONSIDERATION[14]
Section 25 of the law lists exceptions to the rule that a contract must have consideration to be valid, known as “no consideration, no contract[15].” Here are the exceptions:
1. Natural Love and Affection
When close parties, like family members or spouses, create a written and registered agreement out of natural love and affection, it can be enforced without consideration. This exception applies in Contract Law.
For example, Peter and John, brothers, reach an agreement about their father’s property. Even though John challenges Peter’s inheritance, they later agree to divide the property. As this agreement is based on natural love and affection, it’s an exception to the usual rule, allowing John to seek his share in court.
2. Past Voluntary Services
If someone provides a service voluntarily in the past and the receiver promises to pay later, the contract is legally binding under certain conditions:
- The service was given voluntarily in the past.
- The service was provided to the promisor.
- The person who promised to pay existed when the favor was done.
- The promisor expressed willingness to compensate for the service.
For example, if Peter finds John’s lost wallet and returns it, and John promises to pay him Rs. 2,000, this promise is enforceable without consideration because Peter’s service was voluntary.
3. Promise to Pay a Time-Barred Debt
If someone promises to pay a debt that has become time-barred, the promise is valid without consideration. The promise can be for full or partial payment of the debt.
For instance, if Peter owes John Rs. 100,000, and after several years, Peter promises to pay Rs. 50,000 as a final settlement, this promise is enforceable despite the debt being time-barred.
4. Creation of an Agency
Under Section 185 of the Indian Contract Act, 1872, consideration is not necessary to establish an agency. This means that an agency contract can be created without needing any consideration.[16].
5. Gifts
According to Explanation (1) to Section 25 of the Indian Contract Act, 1872, “no consideration, no contract” does not apply to gifts. If a donor gives a gift, and the recipient accepts it, the agreement is valid and enforceable without consideration[17].
IMPORTANCE OF THE DOCTRINE OF CONSIDERATION IN THE INDIAN CONTRACT ACT
The Indian Contract Act of 1872 emphasizes the concept of consideration for several important reasons.
1. Ensuring Agreement Compliance
According to Section 10 of the Act, agreements lacking consideration are not legally binding[18]. Therefore, consideration is necessary for a contract to be enforceable. This requirement prevents careless commitments and ensures that both parties benefit from the agreement.
2. Promoting Justice and Fairness
Consideration involves each party assuming responsibility or giving something up in exchange for something else. This helps ensure fairness and fairness in agreements.
3. Providing Predictability and Certainty
By establishing clear criteria for enforceable agreements, the Act instills confidence in individuals and businesses to enter contracts, knowing that promises will be upheld. It reduces disputes and legal action related to non-performance, as the burden of proof falls on the party seeking to avoid the contract due to lack of consideration.
4. Preventing Unfair Advantage
The doctrine prevents one party from unfairly benefiting at the expense of another. It upholds principles of mutuality and consent, ensuring that both parties willingly enter into the agreement and understand the exchange of value.
5. Encouraging Responsible Contracts
Consideration encourages parties to carefully assess agreements before making promises, reducing the risk of unfair terms or unrealistic expectations. This discourages hasty commitments or careless contract signings, as parties are aware of the legal implications of the agreement’s enforceability.
6. Recognizing Modifications and Exceptions
While consideration is typically required, the Act acknowledges the importance of informal agreements and provides exceptions to prevent injustice. For example, it recognizes gifts under seal and promissory estoppel. This flexibility allows the doctrine to adapt to different contracting situations.
CONCLUSION
In conclusion, the doctrine of consideration serves as a cornerstone in the Indian Contract Act of 1872, ensuring the validity and enforceability of agreements. Through the requirement of consideration, the Act promotes fairness, justice, and predictability in contractual relations. By necessitating reciprocal exchanges of value between parties, consideration prevents unfair advantage, encourages responsible contracting, and enhances agreement compliance.
Moreover, consideration provides a framework for parties to negotiate terms and assess the implications of their promises, thereby reducing the likelihood of disputes and promoting mutual understanding. While the doctrine maintains the general rule of “no consideration, no contract,” it also acknowledges exceptions to accommodate situations such as natural love and affection, past voluntary services, promises to pay time-barred debts, creation of agencies, and gifts.
By upholding the principles of mutuality, consent, and fairness, the doctrine of consideration contributes to the stability and integrity of contractual relationships, fostering trust and confidence among parties. Therefore, it remains an essential aspect of contract law in India, playing a vital role in shaping legal obligations and protecting the interests of both parties involved in agreements.
REFERENCES
- https://www.taxmann.com/post/blog/consideration-under-the-indian-contract-act-1872
- https://bnwjournal.com/2021/07/27/nature-of-consideration-for-contracts-consisting-of-number-of-terms/
- https://blog.ipleaders.in/consideration-in-contract-law/
- https://lawbhoomi.com/exceptions-to-consideration-under-indian-contract-act/
- Law of Contract by Avtar Singh
[1]Indian Contract Act, 1872, § 10, No. 9, Acts of Parliament, 1872 (India).
[2]Taxmann, https://www.taxmann.com/post/blog/consideration-under-the-indian-contract-act-1872 (last visited April 18, 2024)
[3]Currie v. Misa, (1876) 1 App Cas 554.
[4]Indian Contract Act, 1872, § 2(d), No. 9, Acts of Parliament, 1872 (India).
[5]Indian Contract Act, 1872, § 23, No. 9, Acts of Parliament, 1872 (India).
[6]Ronith Pemmaiah, Nature of Consideration for Contracts Consisting of Number of Terms, BLACK N’ WHITE JOURNAL(April 18, 2024, 9:41 PM) https://bnwjournal.com/2021/07/27/nature-of-consideration-for-contracts-consisting-of-number-of-terms/
[7]Durga Prasad v. Baldeo, (1881) ILR3ALL221
[8]Ibid 6
[9]Chinnaya v. Ramayya, (1882) I.L.R. 4 Mad. 137
[10]Supra Note 6
[11]Indian Contract Act, 1872, § 25, No. 9, Acts of Parliament, 1872 (India).
[12]Indian Contract Act, 1872, § 24, No. 9, Acts of Parliament, 1872 (India).
[13]Rugved Prashant Manore, Consideration in Contract Law, IPLEADERS (April 18, 2024,10:51 PM) https://blog.ipleaders.in/consideration-in-contract-law/
[14]LawBhoomi, https://lawbhoomi.com/exceptions-to-consideration-under-indian-contract-act/ (last visited April 19, 2024)
[15]Indian Contract Act, 1872, § 25, No. 9, Acts of Parliament, 1872 (India).
[16]Indian Contract Act, 1872, § 185, No. 9, Acts of Parliament, 1872 (India).
[17]Indian Contract Act, 1872, § 25, No. 9, Acts of Parliament, 1872 (India).
[18]Indian Contract Act, 1872, § 10, No. 9, Acts of Parliament, 1872 (India).
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