Preface
Consideration is something in return for something. In the eyes of the law, consideration means some rights, interests, or benefits accruing to one party and certain responsibilities undertaken by the other.
Relevant Provisions
Sections 2(d), 23, 24, 25, 127, and 185 of the Contract Act, of 1872 deal with consideration in a contract.
Definition of Consideration
The term consideration is defined by the Section 2(d) of the Contract Act, 1872: It says
When at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.
Ingredients of Consideration
The ingredients of consideration are the following.
1. Desire of the Promiser
The activities must be performed at the desire of the promisor because the desire of the promisor is of great importance. Where a person does anything at his own will, voluntarily, no compensation for his consideration can be claimed.
2. Promisee or any other person
A promisee or any other person may proceed with consideration. That is to say, a stranger to the consideration could be the construction of law, and be regarded as a party to it if he was closely related to the person from whom the consideration proceeded.
3. Past Consideration
When an act has been done before the promise is made, at the desire of the promiser, it is called past consideration.
Example: X mends Y’s Bus brakes at the desire of Y. Later on, Y promises to compensate X for the service. It is past consideration.
4. Present Consideration
A consideration that takes place simultaneously with the promise, is known as present consideration or executed consideration.
Example: X receives Rs. 500/- in return for the goods he has delivered to Y. This is an executed consideration.
5. Future Consideration
When the consideration on both sides is to move at a future date, it is called future consideration or executory consideration.
Example: X promises to deliver certain goods to B after a week Y promises to pay the price after a week. It is a case of future consideration.
6. Something in Return
The words “something” indicates that this something must be of some value though not necessarily of pecuniary value. An agreement to which consent of the parties has been fully given is valid even if consideration is inadequate.
Legal Rules as to Consideration
The general rules relating to consideration are as follows. These are those factors that make a consideration lawful for the contract to proceed. In the absence of any of the following, the consideration will be unlawful.
1. Genuineness
It must be real/genuine.
2. Need not be adequate
It need not be adequate
3. Desire of the promiser
The consideration must move at the desire of the promisor.
4. Move from the promisee
It may move from the promisee or any other person.
5. Past, Present, or Future
It may be in the past, present (Executed), or future (Executory).
6. Lawful
It must be lawful.
7. Plausible
It is necessary for consideration to be plausible.
Doctrine of “Nudum Pactum”
Section 25 of the Contract Act, of 1872 says that an agreement made without consideration is void unless it is in writing and registered. This is called the “Doctrine of Nudum Pactum” which means a ‘Naked Pact”
A Naked Pact is without consideration whereas a bare promise is not legally binding.
What is a Lawful Object?
It means an object or purpose that is recognized and accepted by law. Anything which the law forbids or grants punishments for that act is not lawful. To understand the meaning of the lawful object, have a look at the following example.
Example: ‘A’ ‘B’ & ‘C’ enter into an agreement for the division of grains among themselves, acquired by fraud. The agreement is based on an unlawful object.
When a Contract is Valid?
Section 10 of the Contract Act, of 1872 states that a valid contract is for a lawful consideration and a lawful object. Thus consideration and object must not be unlawful.
What is an Unlawful Object?
According to Section 23 of the Contract Act, when the following facts are present in the contract, the object and consideration are unlawful.
- When the object or consideration is forbidden by law
- When it is against the provisions of the law
- When it is fraudulent
- When it is immoral
- When it is against the public policy
- When it is injurious to a person or property
Legal Effects of Unlawful Consideration
The legal effect of unlawful objects and consideration are as follows:
Section 23 of the Contract Act, of 1872 says that an agreement whose object or consideration is unlawful is considered to be void under the law.
Section 24 of the Contract Act, of 1872 deals with the Doctrine of Severability which states that where both lawful and unlawful terms exist which are severable then the contract would be voidable such as a mixture of rice and wheat. But in cases where both lawful and unlawful terms exist and which are not severable then the whole contract would be void e.g. Mixture of water and milk.
Validity of Contract without Consideration
Section 25 of the Contract Act, of 1872, tells about the general rule that an agreement made without consideration is void. However, the contract act contains certain exceptions also, where agreements are enforceable even without consideration. Some of these situations are as follows
1. Agreement for Natural Love and Affection
Section 25 provides an exception for contracts based on natural love and affection existing between two parties. Thus any gift made and possession delivered will be valid and binding between the donor and donee, even without consideration. The contract should be in writing or registered. The parties should stand in near relation to each other, like father and son, brother and sister, doctor and patient, etc.
Example: A, the father, promises his son B to give him Rs. 50,000/- and puts his promise in writing and gets it registered. B can enforce it.
2. Agreement to Compensate for Past Voluntary Services
Section 25(2) of the Contract Act, of 1872 states that if a promise is made to compensate a person who has voluntarily done something for the promisor, it would be enforceable although there was past consideration. The act must be done for a person competent to contract.
Example: A finds B’s Golden Watch and gives it to him. B promises to give A Rs.500/-. This is a contract enforceable by law.
3. Agreement to pay a Time-Barred debt
Section 25(3) of the Contract Act, of 1872, provides that where there is an agreement made in writing and signed by the debtor or his authorized agent, to pay wholly or in part a debt barred by law of limitation the agreement is valid even without consideration.
Example: A owes B Rs. 5000/- but the debt is barred by law of limitation. A puts his signature on a written promise to pay Rs.3000/- on account of debt. This is a contract enforceable by law.
4. Contract of Agency
Section 185 of the Contract Act 1872, states that no consideration is necessary to create a relation of an agency.
Example: A as principal admits B as his agent and has no botheration to be represented by B. Although there is no consideration involved yet A is bound for the contracts made by B on behalf of A.
5. Contract of Guarantee
Section 127 of the Contract Act 1872, deals with the sufficiency of consideration for a contract of guarantee. If a promise or anything is done for the benefit of the principal debtor, it may be sufficient consideration to surety for giving the contract.
6. Contribution to Charity
A promise to contribute to charity, though gratuitous would be enforceable, if on the faith of promised subscription, the promisee undertakes a liability, to the extent of liability incurred, but not exceeding the promised amount of the subscription.
7. Contract under Seal
A contract made in the form of a deed under seal is valid even without consideration.
8. Agreement to Remit a part of the claim
When a creditor agrees to remit or give up a part of his claim, then there is no need for consideration for such an agreement.
9. Agreement to Extend the Time of Performance
An agreement also needs no consideration from any of the contracting parties
Final Note
It is concluded that consideration is one of the essential elements to support a valid contract. When a party to an agreement promises to do something, he must give “something in return. If he does not have something in return, the contract is not valid. This something constitutes consideration.
Something in Return = Consideration
FREQUENTLY ASKED QUESTIONS
What is meant by unlawful consideration and object? What is their effect on the process of formation of a contract?
(2019-A, 2016-A, 2014-S, 2012-A)
Define Consideration. What are the exceptions to the rule that an agreement without consideration is void?”
(2019-A, 2019-A 5 year, 2015-S, 2015-A)
What Consideration and objects are lawful and what not? Discuss.
(2019-A, 2015-S)
Define consideration. When contracts without consideration are valid? Explain with examples.
(2011-A)
Define “consideration” when consideration or object of an agreement is unlawful. Discuss in the light of examples in each case.
(2010-S)
REFERENCES
- The Contract Act, 1872
- N-Series by M.A. Chaudhary
- Law of Contract by Avtar Singh
