Consideration under Indian Contract Act

Section 10 of the Indian Contract, 1872 states that, “All agreements are contracts if they are made by the free consent of the parties and competent to contract, for lawful consideration and with a lawful object and are not hereby expressly declared to be void.”
The one component among all required essentials for the formation of the contract is lawful consideration. The simplest definition of consideration has been given by Blackstone. He said, “Consideration is the recompense given by the party contracting each other.”
Meaning of Consideration under Indian Contract Act, 1872
Section 2(d) of the Indian Contract Act, 1872 defines consideration. It states that 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, something such act or abstinence or promise is called consideration of the promise.
So, the consideration is basically the price paid for the fulfilment of the promises between two parties. Here, Promisor is the one who is making the proposal and Promisee is the one who is accepting the proposal.
Section 2(f) of the Indian Contract, 1872 defines reciprocal promises. It says that promises that form the consideration or part of consideration for each other, are called reciprocal promises.
Carlill v. Carbolic Smoke Ball Co.1
The defendant has given an advertisement for its product which states that it will prevent influenza if it is used as directed. Plaintiff believing in the same bought the carbolic smoke ball and used it accordingly but she got affected with influenza. She filed a suit against the defendant. The court held that the plaintiff is entitled to recover as it is an expressed consideration.
Nature of Consideration
There are mainly two natures of consideration as derived from the types of contracts given on the basis of the nature of consideration. They are as follows:
- Unilateral: After the contract, if the consideration is to move in only one direction, then it is said to be unilateral consideration and the contract so formed is known as a unilateral contract.
- Bilateral: After the contract, if the consideration is to move in either direction, then it is said to be bilateral consideration and the contract so formed is known as a bilateral contract.
Lawful consideration under Indian Contract Act:
Section 23 of The Indian Contract Act,1872 tells about the consideration and objects which are lawful and not lawful. It says that consideration or object of an agreement is lawful unless it is:
- Forbidden by law: This implies that people have been refrained from doing it or abstaining from doing it by the rule of law.
- Of such a nature that if permitted it would defeat the provisions of any law: Any such act which if permitted can cause a break in any provision of the rule of law followed in the country.
- Fraudulent: Consideration for any act which involves fraud will be considered unlawful and the contract will be void for the same.
- Involving or implying injury to the person or property of another: Any act which involves or implies injury to any person or the property of any person will be considered unlawful.
- Immoral as per courts or opposed to public policy: An act which is regarded by the court as an immoral act and is opposed by public policy is also considered unlawful.
This section has given the conditions for consideration to be unlawful. Other than these, every other condition will be taken as lawful ground for consideration and object of an agreement.
Section 24 of The Indian Contract Act, 1872 shows the effect of being an unlawful consideration. It states that if any part of a single consideration for one or more objects or any part of the several consideration for a single object is unlawful, the agreement is void.
Nudum Pactum:
It is a Latin maxim whose literal meaning is ‘Naked Agreement’. It basically defined as an agreement without consideration is no agreement as it is not dressed in the required essential consideration and hence not enforceable by law and will be termed as a void agreement.
For example – A told B that he wants to sell his refrigerator but A didn’t told B the selling price of the refrigerator which should be mentioned as a corresponding offer with the offer to sell the refrigerator.
The Doctrine of Consideration under the Indian Contract Act
The doctrine of consideration says that there must be some form of consideration to support the agreement formed. It also says that consideration is possible only if the promise was made by both parties and both parties have mutually agreed to the promise.
Exception:
Section 25 of The Indian Contract Act, 1872 is about the exceptions of the consideration. It says that the Agreement without consideration is void unless
- It is made 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 and affection between parties standing in near relations to each other.
Rajlukhy Dabee v. Bhootnath Mookherjee2
In this, Defendant has promised to give his wife a certain amount as maintenance every month and it was also in writing. The wife filed a case for recovering the entire amount. The court gave the decision in favour of the defendant stating that there was no natural love and affection between them so the defendant is not liable to pay.
- It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do.
Sindha Shri Ganpatsingji Himatsingji v. Abraham Alias Vajir Mahomed Akuji3
Plaintiff rendered services to the defendant when he was a minor. When the defendant became major, he asked the plaintiff to continue services and promised to compensate him. In this the court held that the minor is not entitled to compensate as he is not liable and also plaintiff has rendered the services voluntarily to the minor defendant.
- It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised on that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
- Promissory Estoppel is also one of the exceptions for consideration. It is the legal principle that a promise is enforceable by law, even if it is made without formal consideration when a promisor has made a promise to a promisee who then relies on that promise to his subsequent detriment.
Essentials of the Consideration under the Indian Contract Act
- Consideration should move at the desire of the promisor: It should be made at the desire of the promisor and the parties involved in the agreement. It should not be formed at the desire of the third party.
- Consideration should move from the promisee or any other person: The contract should move from the promisee in English law but here, in Indian law, it can move from promisee or any other person. In Chinnayya v. Ramayya4, A by gift deed transferred some property to her daughter B whereas she also asked B to pay annuity to A’s brother C. B made in writing in favour of C giving an annuity. B denied to fulfil her promise and sued C. As there was no consideration for the C’s words, the court held that C should maintain the suit.
- Consideration should be real consideration not an illusionary consideration: The consideration of contract should be real not any illusionary consideration should be accepted. It should have some value in the eye of the law and should be legally possible, physically possible and should be certain consideration.
- Consideration must be either past or present or future:
- Past consideration – The consideration of a contract should be given in past that is before the date of promise. For ex. A gave some goods to B on the latter’s desire. After a month, B promised to compensate A for the goods given to him. This is a past consideration.
- Present consideration – The consideration of a contract should be given at the same point in time while making the promise. For ex. When a person buys the product and pays at the same time, it will be considered as present consideration.
- Future Consideration – The consideration of a contract is to pass subsequently for the making of a contract. For ex. A promised B to deliver his car after a week and B promised to pay A after 2 days. Both promises are subsequent here. This will be considered as Future consideration.
- Consideration of the agreement must be a lawful consideration– Consideration of a contract should be lawful according to section 23 of The Indian Contract, 1872. If consideration is unlawful, it will end up making the contract void as said in section 24 of the Indian Contract Act, 1872 but only if there are no exceptions involved which are given under Section 25 of The Indian Contract Act, 1872.
- Consideration is not necessary to be adequate– Adequacy of consideration refers to a fair price which is given by an offeree to the offeror as a return price which is either equal in measure or reasonably proportional to each other for making a lawful agreement between the two parties. In simple words, it may be referred to as the mutual exchange of a fair price in comparison to the promise which is taking place. But in Indian law, it is not necessary for an agreement because it will not be possible for courts to decide on a specific reasonable and fair price. As a matter of principle, it is obvious that the court should not interfere in such issues which are already pre-decided.
The Doctrine of Privity to Contract
The doctrine of privity is a common law doctrine which prevents a stranger to the contract which means a person who is not involved as a party to the contract to sue or to be sued or from enforcing a term of that contract.
For ex. A has borrowed some money from B and A owns a car which he sold to C and asked C to pay to A. Here A cannot sue C if he does not pay B because he is no party to the contract or a stranger to the contract.
The leading case of Tweddle v. Atkinson5 immediately got the doctrine of privity into effect and showed it by defying the intent of the parties. But there are some common law principles which acted as exceptions for the doctrine such as agency, negligence etc.
Exceptions to Doctrine of Privity to Contract
A Stranger can sue in the following cases –
- Trust: Contract made between the trustee of a trust and another party, then the beneficiary of the trust can sue to enforce his right under the trust.
- Family Settlement: Contract between a family, then any member of the family can sue provided he/she should be a member of the family.
- Contract through an agent: If an agent has done a contract under his authority or his principal, he can be sued under the contract.
- Assignment of a contract: If a contract is made for the benefit of a third person, then the third person can sue the parties even being a stranger.
- Acknowledgement or Estoppel: If in the contract it is needed for a party to pay a certain amount to a third party then it becomes an obligation to do so. Then the third party can sue to be a stranger. The acknowledgement can also be applied.
- A Covenant running with the land: If a contract of land is made in which a person buys land with a notice that the owner is responsible for all the duties and liabilities of the land, then he can sue the previous land owner and settler even if they are strangers to the contract.
References
1 – EWCA Civ 1,,1 QB 256 (CA)
2 – (1900) 4 CWN 488
3 – (1895) 20 Bom 755
4 – (1882) 4 Mad 137
5 – Tweddle v. Atkinson(1861), 1 B&S 393, 121 ER 762
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