Adequacy of Consideration

Consideration is the price paid for a promise. It can be in the form of money, goods, services or an act (or abstaining from an act). The essential requirement is that the consideration must be something of value in the eyes of the law. The legal system does not concern itself with the adequacy or fairness of consideration but rather with its existence and sufficiency.

What is Adequacy of Consideration?

Adequacy of consideration refers to the fairness and equivalence in value of the consideration exchanged between parties in a contract. It is a measure of whether the consideration is reasonable and free from suspicion, though not necessarily equal or full.

The law does not require consideration to be economically adequate for it to be lawful; the focus is on the presence of consideration, not its value. Inadequate consideration means that the consideration given is not sufficient or of equal worth to what is received, but it is still legally binding as long as some consideration exists.

The principle is that as long as the parties agree to the terms, the court typically does not interfere with the adequacy of the consideration unless it is grossly unfair or there is evidence of fraud or undue influence.

Legal Framework on Adequacy of Consideration

In common law jurisdictions, the principle of consideration is enshrined in the legal system, although its interpretation and application can vary. According to the Indian Contract Act, 1872, Section 2(d), consideration is defined as follows:

“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.”

This definition highlights that consideration involves a reciprocal exchange and that it must be at the desire of the promisor.

Adequacy vs. Sufficiency of Consideration

The distinction between adequacy and sufficiency of consideration is crucial. While sufficiency refers to the legal requirement that consideration must be something of value, adequacy pertains to the fairness or equivalence of the exchanged value.

Sufficiency of Consideration

For consideration to be legally sufficient, it must possess some value recognised by law. This does not imply that it needs to be of equal value to what is received in return, but merely that it is something tangible or intangible that the law acknowledges as having value. For example, a peppercorn rent (a nominal sum) is considered sufficient consideration if it is exchanged as part of a contractual agreement.

Adequacy of Consideration

Adequacy refers to the fairness of the value exchanged. The law typically does not scrutinise whether the consideration is adequate, as long as it is sufficient. This means that even if the consideration is nominal or significantly disproportionate to the value of the promise, the contract can still be enforceable. The rationale is that parties to a contract are free to determine the terms of their exchange and courts do not interfere in the bargains made by the parties.

Consideration Need Not be Adequate

Consideration need not be adequate to be valid in the eyes of the law. While ‘adequate consideration’ is generally fair and equivalent in value for the benefit gained, the legal requirement for consideration is that it must be ‘sufficient,’ meaning it has some value in the eyes of the law and is given at the request of the promisor. This means the consideration does not need to be economically equivalent to the promise made, as long as it is recognised by law as having some value.

There is a distinction between ‘sufficient’ and ‘adequate’ consideration. Sufficient consideration indicates that the courts require something of legal value to be exchanged for the promise. Adequate consideration, on the other hand, relates to whether the economic value given is fair and reasonable. The law does not demand that consideration be economically adequate but merely sufficient.

Section 25 of the Indian Contract Act, 1872, explicitly states that mere inadequacy of consideration does not render a contract void. However, the courts may consider the inadequacy of consideration to determine whether the consent of the promisor was freely given.

For example, if A agrees to sell a horse worth Rs. 1,000 for Rs. 10 and the consent was freely given, the contract is valid despite the inadequate consideration. This principle ensures that contracts are upheld as long as there is some consideration, even if it appears economically disproportionate.

Small Amount of Money as Adequate Consideration

In the legal context, consideration is an essential component of a binding contract and it need not be economically adequate as long as it is recognised by the law as having some value. Various cases illustrate this principle, such as Thomas v. Thomas, Mountford v. Scott, Devji Shivji v. Karsandas Ramji, Chappell & Co Ltd v. Nestle Co. Ltd and De La Bere v. Pearson.

Thomas v. Thomas

In the landmark case of Thomas v. Thomas, Mr. Thomas expressed his desire for his wife to reside in their house after his death, although this request was not included in his will. Following his death, his executors agreed with Mrs. Thomas that she could stay in the house for a peppercorn rent of £1 per year.

When the executors later sought to evict her, they argued that the contract was invalid due to inadequate consideration. However, the court held that the £1 rent was sufficient consideration, as “consideration means something which is of some value in the eye of the law.” Therefore, the contract was enforceable, demonstrating that even a small amount of money can constitute valid consideration.

Mountford v. Scott

In Mountford v. Scott, the defendant agreed to sell his house to the plaintiff for £10,000, granting a six-month option for £1. When the defendant attempted to withdraw the offer, the plaintiff sought specific performance. The court upheld the contract, ruling that £1 was a legally adequate consideration. The case underscores that the amount of consideration, however nominal, can be sufficient to make a contract binding.

Devji Shivji v. Karsandas Ramji

In Devji Shivji v. Karsandas Ramji, the plaintiff executed an assignment deed transferring goodwill and company assets to the defendant for Rs. 1000, which he claimed was a nominal amount meant for tax purposes. The court dismissed the plaintiff’s claim, affirming that Rs. 1000 was sufficient consideration. This case reinforces that even modest consideration can support substantial commitments if agreed upon by the parties.

Chappell & Co Ltd v. Nestle Co. Ltd

In Chappell & Co Ltd v. Nestle Co. Ltd, Nestle offered records of a popular song in exchange for 1s 6d plus three chocolate wrappers. The appellant argued that this did not provide sufficient royalties. The House of Lords held that the chocolate wrappers were part of the consideration, despite their minimal intrinsic value. The decision highlighted that any consideration agreed upon by the parties, no matter how trivial, is valid if it has some value in the eyes of the law.

De La Bere v. Pearson

In De La Bere v. Pearson, a newspaper offered financial advice to readers who submitted queries. The plaintiff, relying on this advice, incurred a financial loss. The court ruled that there was adequate consideration for the advice provided, as the newspaper benefited from increased reader engagement. This case illustrates that the effort of making an inquiry can be sufficient consideration.

Peppercorn Theory

The “Peppercorn Theory” is encapsulated in these cases, emphasising that even something as trivial as a peppercorn can be valid consideration if it is bargained for. As Lord Somervell stated, “A contracting party can stipulate for whatever consideration he likes,” indicating that the adequacy of consideration is a matter for the parties to determine, not the courts.

Reason For Such Rule

The rationale for the rule that consideration need not be adequate stems from the principle that courts should not interfere in the bargains struck by parties entering into contracts. As Pollock notes, English law and jurisprudence emphasise the freedom of parties to make their own deals, reflecting a laissez-faire attitude. This approach aligns with Hobbes’ assertion that “the value of all things contracted for is measured by the appetite of the contractors and therefore the just value is that which they contended to give.”

This rule is justified by the notion that individuals are best suited to determine what is of value to them in a transaction. Courts recognise that the subjective value of an agreement can vary significantly between parties. By not requiring consideration to be economically equivalent, the law acknowledges that what matters is the mutual consent and intent to form a contract, rather than the market value of what is exchanged.

Contract law focuses on the presence of consideration as a sign of a binding agreement, not on the adequacy of the deal. Enforcing only those contracts where the court assesses the market value would undermine the autonomy of parties and stifle the freedom to negotiate terms. Thus, as long as some value is given in exchange, the law upholds the agreement, respecting the parties’ judgment and intention.

Parties Should Decide on Adequacy

Under the doctrine of consideration, a promise is not enforceable until it has received some value recognised by law. However, courts generally do not evaluate whether the consideration provided is adequate or whether an agreement is one-sided or unduly severe for one party. The adequacy of consideration is left to the discretion of the parties involved in the contract. If a party receives what they contracted for, regardless of its value, the courts will not question its adequacy.

In Vijaya Minerals Ltd v. Bikash Chandra Deb, the plaintiff sought specific performance of an agreement where the defendant was to sell ore to the plaintiff for a specified price. Despite receiving the agreed payment, the defendant refused to deliver the ore, claiming the consideration was minimal and the contract was void due to fraud. The court ruled that, absent undue influence or duress, it could not invalidate a contract based on inadequate consideration. The parties had agreed on the compensation amount, making the consideration adequate and the agreement valid.

Similarly, in Bolton v. Madden, Blackburn J. noted, “the adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced.” This underscores that parties, not the courts, are responsible for determining the sufficiency of consideration when entering into a contract.

In Sudhakar Sahu v. Achutananda Patel, it was held that only the parties to a contract or those claiming through them can dispute the passage of consideration. Third parties cannot challenge the adequacy of consideration. This reinforces that the evaluation of consideration’s sufficiency is a matter strictly for the contracting parties.

Moreover, in Desigovda v. Karnataka Industrial Area Development Board, landholders who accepted compensation under voluntary agreements could not later challenge the sum when the civil court awarded higher compensation for similar areas. This case further illustrates that once consideration is agreed upon by the parties, it is deemed sufficient and binding.

The courts recognise that individuals are best positioned to determine what is of value to them in a transaction. By not requiring consideration to be economically adequate, the law respects the autonomy of the contracting parties and upholds their agreements as long as there is some consideration, even if it appears economically disproportionate. This approach ensures that the freedom to negotiate terms remains intact and that the courts do not interfere with the parties’ judgment and intentions, unless there is evidence of fraud, misrepresentation or undue influence.

Nominal Consideration and Inadequate Consideration

Nominal consideration is provided by one party to an agreement that has little or no value compared to the consideration offered by the other party. It is often intentionally included to formalise a gratuitous promise. In contrast, inadequate consideration is significantly less than the promised performance. The law treats both as sufficient to sustain a contract, though their implications differ.

Nominal consideration is purposely inserted to bind a promise, reflecting proper care and intent, even if minimal in value. It ensures that a contract is legally recognised despite the apparent lack of substantial value exchanged. Inadequate consideration, however, may indicate a disproportionate exchange but remains legally sufficient as long as the parties freely consent.

The court may examine inadequate consideration to determine if assent was freely given, but it does not invalidate a contract solely on that basis. Nominal consideration, being a deliberate inclusion, typically involves more deliberate thought, even if it serves to mask the true nature of the transaction. Such arrangements may be scrutinised under laws addressing fraudulent transactions.

According to common law, courts do not assess the adequacy of consideration; they will enforce a contract if some value exists, provided no fraud or duress is involved. Explanation 2 under Section 25 of the Indian Contract Act, 1872, states that an agreement with freely given consent is not void due to inadequate consideration, although courts may consider inadequacy when assessing the voluntariness of consent. This principle ensures that agreements are upheld based on mutual intent rather than economic equivalence.

Conclusion

The adequacy of consideration is a cornerstone of contract law that underscores the principle of freedom of contract. While the courts do not evaluate the fairness or equivalence of the exchanged value, they ensure that contracts are supported by legally recognised consideration. This approach promotes autonomy and enforceability while providing avenues for addressing instances of fraud or undue influence.