Consideration is one of the essential elements of contract. The word
consideration is derived from the Latin word ‘considerare’ which
means payment or reward.
It is the foundation of every contract because when a party to an agreement promises to do something, he must get something in return so as to make the contract valid. This something in return is nothing but the consideration.
According to Sir Fredrick Pollock, ‘A consideration is the price for which the promise of the other is bought and the promise thus given for the value is enforceable.’
According to Tomlins Law Dictionary, ‘Consideration is the material cause of any contract without which it will not generally be effectual or binding.’
Section 2(d) of the Indian Contract Act provides that – When at the desire of the promisor, the promise 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 act or abstinence or promise is called a consideration for the promise.
Ex nudo pacto non oritur action – Anything which is agreed upon between the parties as return or equivalent for the promise is called consideration.
3. Legal rules of consideration:
A. Consideration must move at the desire of the promisor –
An act constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be a consideration.
Case law – Durga Prasad v. Baldeo
In this case, the plaintiff on the order of the collector of a town built certain shops in the market at his own expense. The shops came to be occupied by the defendants who in consideration of the plaintiff having expended money in the construction, promised to pay him a commission on articles sold through their agency in the market. The court rejected plaintiff’s action to recover the commission.
B. Consideration may move from the promisee or any other person –
A consideration if furnished by any other person, the promisee becomes a stranger to the consideration. Under Indian law, consideration may move from the promisee or any other person. A stranger to consideration can sue on a contract provided he is a party to the contract and this principle is called Doctrine of Constructive consideration.
Case law – Chinnayya v. Ramayya
Facts: A by a gift deed transferred her property in favour of her daughter B, with the instructions that B should pay her uncle C a certain amount of money annually. B by an agreement with C promised to pay him the agreed amount. Subsequently B refused to pay the amount to C on the ground that there was no consideration from C. C sued B to recover the amount.
Held: The court held that there was sufficient consideration for the promise from B to A’s brother and as such she was liable to pay.
C. Consideration may be past, present or future –
When consideration by party for a present promise was given in the past i.e. before the date of promise it is said to be past consideration.
When the promise and consideration are completed simultaneously it is said to be present consideration.
Eg: Customer pays the price immediately for the article he buys from the seller.
When the consideration from one party to the other is to pass subsequently to the making of contract, it is said to be a future consideration.
D. Consideration need not be adequate –
Consideration may not necessarily be equal in value to something that is given in the contract. In Indian, law insists only in the presence of consideration and not on the adequacy of it. The adequacy of consideration is for the parties to acknowledge at the time of making the agreement not for the court when it is sought to be enforced. Inadequacy of consideration may be a factor which the court may take into consideration to know whether the consent of a party was free or not.
In Thomas v. Thomas, the court had accepted as good consideration a promise to pay one pound per year as annual rent for a big house. The rent though nominal and grossly inadequate did not render the contract invalid.
E. Consideration must be real –
Although it is not necessary that the consideration should be adequate, it is however necessary that it should be real and not substantial, illusory or unreal.
In White v. Bluett, a son used to complain to his father that his brothers had been given more property than him. The father promised that he would release his son from a debt if the latter stopped complaining. After the father’s death an action was brought by the executors to recover the debt. The son contended that the father had made a contract to release hi from the debt in consideration for his promise not to bore his father.
The court held that the promise by the son not to bore his father with complaints in future did not constitute good consideration for the father’s promise to release him and therefore the son continued to be liable for the debt.
4. Agreement without consideration is void:
It is an general rule that an agreement without consideration is void except under certain circumstances. Under Indian law, the presence of consideration is as a rule essential to the validity of contracts. Section 25 of the Indian Contract Act states, an agreement without consideration is void thus the general rule of contract is that an agreement made without consideration is void.
5. Exceptions to the general rule of consideration:
a) Promise made on account of natural love and affection –
Section 25(1) of the Contract Act states, ‘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 & affection between parties standing in a near blood relation to each other.’ All gift deeds are examples of this clause.
In Venkatasamy v. Rangasamy, A on account of natural love and affection promised to pay the debts of his younger brother B. the promise was put in writing and registered. The agreement was held valid and binding.
b) Promise to compensate for voluntary services –
A promise to pay for a past voluntary service is binding. Voluntary service means service done without any request. To apply this rule, following essentials must exist
i. The service should have been done voluntarily
ii. It should have been done for the promisor and nobody else
iii. At the time of service, the promisor must have been in existence
iv. The intention of promisor must have been to compensate the promise
v. The promisor need not be competent to contract at the time of service being done
vi. The rendered service must be legal
c) Written promise to pay a time barred debt –
The promise to pay the time barred debt must be an express one and cannot be held to be sufficient if the intention to pay is unexpressed and has to be gathered from a number of circumstances. Section 25(3) requires an express promise to pay a time barred debt rather than a mere acknowledgment of the debt.
In Palliyath Govinda Nair v. Parekalathil Achuthan, the Madras High Court held that a promise to pay a time barred debt by any person on behalf of the debtor is also valid.
d) Contract of agency –
According to section 185 of the Contract Act, no consideration is necessary to create a contract of agency.
e) Remission by the promisee of performance of the promise –
A creditor can agree to give up a part of his claim and there need be no consideration for such an agreement. Similarly, an agreement to extend time for performance of contract need not be supported by consideration.
f) Contract under seal –
In English law, a contract under a seal is valid and enforceable even without consideration. Contract under seal means a contract which is in writing, signed, sealed and delivered to the other party.
g) Negotiable instruments –
Consideration is not necessary in case of negotiable instruments where consideration is presumed to have been received.