Exceptions to Consideration under Indian Contract Act

Can you make a legal agreement without consideration? No. 

As per Section 10 and Section 25 of the Indian Contract Act 1872, consideration is essential in a valid contract. In simple words, no consideration, no contract. Hence, you can enforce a contract only if there is a consideration.

While considerations are integral to a contract, the Indian Contract Act, 1872, has listed some exceptions to consideration whereby an agreement made without consideration will not be void.

What is Consideration under Indian Contract Act?

Consideration under the Indian Contract Act refers to something of value that is exchanged between the parties involved in a contract. It is an essential element in the formation of a valid contract. Consideration can be an act, abstinence or a promise to do or not to do something.

According to Section 2(d) of the Indian Contract Act 1872, consideration is defined as “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 to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

In simpler terms, consideration is the benefit or detriment that each party in a contract gives or receives due to the agreement. It is the basis for the mutual exchange of promises between the parties and indicates the intention to be bound by the contract. 

Without consideration, a contract is generally considered invalid and unenforceable, except in certain exceptional cases as specified in the Indian Contract Act.

Features of Consideration

For consideration to be legally valid within a contract, it should possess the following characteristics:

Consideration Should be Real

The consideration provided by both parties must be genuine and believable. An agreement lacking consideration is considered void. Furthermore, the consideration should not involve any illegal activities or actions that are fraudulent, immoral or potentially damaging to individuals or property.

Consideration Should be on the Desire of the Promisor

Consideration should be given at the request or desire of the promisor. Any services or actions offered voluntarily cannot be considered valid consideration, and the person providing such services cannot demand anything in return. For example, if A voluntarily takes care of B when B is sick, A cannot claim consideration for their actions. Without consideration, a contract cannot be formed.

It Can Involve a Third-Party

 According to the Indian Contract Act of 1872, the promisee can provide consideration to either the promisor or a third party if the promisee has no objections. In such cases, the third party has the right to sue the contracting parties.

Consideration Can be in the Past, Present or Future

Consideration can be classified into three types based on timing – past, present and future considerations. Present and future considerations are referred to as executed and executory considerations, respectively. 

An executed consideration denotes a service already performed by the party making the promise. On the other hand, an executory consideration represents a service that has been promised but not yet fulfilled by one of the contracting parties.

Exceptions to Consideration

Section 25 also lists the exceptions under which the rule of no consideration no contract does not hold, as follows: “no consideration no contract”

The exceptions are:

Natural Love and Affection

Suppose two parties with close relationships, such as blood relatives or spouses, make a written and registered agreement out of natural love and affection. In that case, that agreement can be enforced even without consideration. Hence, agreements out of natural love and affection are an exception to consideration under Contract Law.

For example, let’s consider Peter and John, who are brothers. In their father’s will, their father names Peter as the sole owner of his entire property after his death. John challenges this and takes Peter to Court, seeking his rightful share of the property. 

However, John loses the case. Later, Peter and John reach a mutual understanding where Peter agrees to give half of the property to his brother, and they register a document to formalise this agreement.

However, Peter fails to fulfil his promise, so John takes legal action to recover his share in the property. The Court determined that since the agreement was based on natural love and affection, the rule of “no consideration, no contract” does not apply in this case. Therefore, John has the right to seek recovery of his share in the property.

Past Voluntary Services

Suppose someone has voluntarily provided a service in the past, and the recipient of the service promises to pay at a later date. In that case, the contract is considered legally binding under the following conditions:

• The service was rendered voluntarily in the past.
• The service was rendered to the promisor.
• The promisor was in existence when the voluntary service was performed (this is particularly relevant when the promisor is an organisation).
• The promisor has expressed a willingness to compensate for the voluntary service.

For instance, let’s take the example of Peter finding John’s wallet on the road and returning it to him. John is grateful to have his lost wallet back and promises to pay Peter Rs 2,000 as a gesture of appreciation. 

In this case, the rule of “no consideration, no contract” does not apply. The contract between Peter and John is considered valid, as Peter had voluntarily provided a service in the past (returning the wallet), and John promised to compensate him for it.

Promise to pay a Time-Barred Debt

The promise to pay any debt barred by time is an exception to consideration. Suppose an individual makes a written promise, signed by them or their authorised representative, to pay a debt that has become time-barred. In that case, the promise remains valid even without consideration. The promise can involve full or partial payment of the debt.

For instance, consider Peter, who owes Rs 100,000 to John. Peter had borrowed this money from John five years ago but has not made any payments since then. Now, Peter signs a written promise stating that he will pay Rs 50,000 to John as a final settlement of the loan. In this scenario, the rule of “no consideration, no contract” does not apply. The contract between Peter and John is still considered valid, as Peter’s written promise to pay holds legal weight despite the time-barred nature of the debt.

Creation of an Agency

According to Section 185 of the Indian Contract Act 1872, it is not necessary to have consideration to establish an agency. In other words, a contract of agency can be formed without consideration.

Gifts

According to Explanation (1) to Section 25 of the Indian Contract Act, 1872, “no consideration, no contract” does not apply to gifts. In the context of gifts, if a donor gives a gift and the recipient accepts it, the agreement is considered valid and enforceable, even without consideration.

Bailment

Section 148 of the Indian Contract Act, 1872 defines bailment as the delivery of goods from one person (the bailor) to another (the bailee) for a specific purpose. 

This delivery is made under a contract, where it is agreed that after the purpose is fulfilled, the goods will either be returned to the bailor or disposed of as per the bailor’s instructions. Importantly, a contract of bailment does not require any consideration to be valid and enforceable.

Charity

If an individual assumes a responsibility or liability based on the promise of another person to contribute to a charitable cause, the resulting contract is considered valid. In such cases, the rule of “no consideration, no contract” does not apply, and this is an exception to consideration.

For example, let’s consider the case of Peter, who serves as the trustee of a charity organisation in his town. Peter aims to construct a small pond in the town to enhance greenery and provide residents with a pleasant place to walk in the evenings. To raise funds for this project, Peter appeals to the public to contribute to the cause. Many respond by becoming subscribers to the fund and agreeing to pay their share once Peter enters into a contract to construct the pond.

After successfully collecting half of the required funds, Peter proceeds to hire contractors for the pond’s construction. However, at the last moment, ten individuals withdrew their promised contributions. Peter filed a legal suit against them to recover the promised amounts. 

The Court rules in Peter, ordering the ten individuals to fulfil their commitment and make the payments. Despite the absence of consideration, the contract is deemed valid and enforceable by law because Peter had assumed a liability based on the promise made by the individuals to contribute.

Conclusion

Exceptions to consideration under Indian Contract Act include natural love and affection, past voluntary services, promise to pay a time-barred debt, creation of an agency, gifts, bailment and charity.