By Asok Nadhani
3.1 Consideration
a.
Consideration
is an act or abstinence for promise; done at the desire of the promisor, by the
promisee or any other person [sec.2 (d)]. So, it has 3 basic elements
-
It is
an act of doing something.
-
It may
also be an abstinence or forbearance.
-
A
return promise.
b.
So,
Consideration may be expressed in following ways:
i.
Consideration
is the price of fulfilling a promise. In general terms, consideration is the
benefit to accrue (though it may be abstinence, forbearance, loss to some
party) in terms of money or something of value, for which a promise is made.
Consideration is one of the essential elements of a contract and may exist in
forms other than money.
ii.
The
term 'consideration' ordinarily means quid pro quo, i.e., something in
return. This means benefit gained by a party to the contract in return of
promise made by him. A party who has undertaken any obligation under a
contract, must receive 'something in return'. This ‘something' which the party
gets in return is called as consideration.
iii.
A
valuable consideration in the sense of the law may consist of either in some
right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.
Thus, consideration must result in a benefit to one party and a detriment or
loss to the other party or a detriment to both.
3.1.1 Legal requirements of Consideration
i.
It
must give rise to some benefit to one party (or loss to the other party) in
return to the promise.
Ex. X promised to pay donation to a club. This
is not a valid contract as there is no benefit accruing to X.
ii.
It
must move through a promise. A voluntary act does not give rise to a
consideration.
Ex. A saved B’s goods from fire without being
asked by B. A cannot demand payment from B for the voluntary services not asked
by B.
iii.
Consideration
may be past, present or future, as explained below:
a. Past consideration: The consideration received by a party in
the past (i.e., before formation of the contract), is called as past
consideration. Where a party has already performed his obligation (i.e., before
formation of the contract), he has supplied past consideration.
Ex. A rendered some service to B on his
request. Later B agreed to pay A for the service done. A can now recover the
amount promised from B. Here the promise is made on past consideration.
Ex. A pays B Rs 2000 to supply certain goods.
B must deliver those goods to A. Here the promise is made on executed
consideration.
b.
Present
consideration: The
consideration which is received by a party at the time of formation of
contract, is called as present consideration. Thus, where a party performs his
obligation simultaneously with the formation of the contract, he has supplied
present consideration.
c. Future consideration: The consideration which will be received by
a party in future (i.e., after formation of the contract), is called as future
consideration. Thus, where a party agrees to perform his obligation after
formation of the contract (e.g., at a future date), it is said that he
has supplied future consideration.
Ex. A promises B to deliver some goods after a
week. B promises A to pay within 7 days of receipt of goods. Both A and B must
fulfill their respective obligations as per terms of contract. Here the promise
is made on future consideration.
iv.
Consideration
need not be adequate. The law requires that there must be consideration in
every contract. Even if it is proved that such consideration is inadequate, the
contract is valid, provided the consent of the parties is freely given.
Ex. A promised to B to sell his entire lot of
antique valuable furniture at Rs.10,000 only. Held, this is a valid contract if
A has freely consented to the agreement. The consideration need not have any
regard to the actual value of the furniture.
v.
Consideration
must be real and not illusory. A contract to do something illusory, unreal
& impossible is not valid.
Ex. A promises B to bring life to his dead
wife from the bed. This is a void contract as it is unreal & impossible.
vi.
Consideration
must not be something which is duty of the promisor. No consideration emerges
for something done which the person is bound to do under the law or a part of
duty.
Ex. A’s son is missing. He registers a police
diary. Meanwhile he also declares a reward whoever can fetch his son. A
policeman of that police station brings back his son and asks for the reward.
Held, the policeman cannot claim the reward because it is his duty to fetch his
missing son for which he has already reported to the police station.
vii.
Consideration
must not be illegal, immoral or opposed to public policy.
Ex. A promises B to pay Rs 1 lakh to abduct C.
This is not enforceable as the object is illegal.
viii. Abstinence or forbearance may be a
consideration. Sometimes, the consideration may be abstaining from doing of
some act (i.e., not to do some specified act). Non-doing of certain act
by a party results in negative consideration.
Ex. A’s verandah on
1st floor fell down and injured B in the ground floor. A threatened
to sue B unless B promised to pay Rs.500 for as compensation for B’s injury. B
promised but later refused to pay, claiming that there was no consideration for
his promise. B can recover the amount because B’s abstinence from legal suit is
a valid consideration.
ix.
Consideration
may move from promisee or any other person. Where a third party furnishes the
consideration, it is valid consideration. Thus, consideration may move from
promisee or any other person, it is immaterial to who has supplied it. This
rule is generally stated as 'Privity of consideration is not required'.
Ex. A, B and C enter into a contract under which A promises both B
and C that if B paints A's house, A will give Rs. 5000 to C. B
does the work. A must give the money to C as the consideration has moved to C.
Ex. A & B, two brothers, on partition of
joint family property, agree between themselves to invest some money to support
their mother. The mother may now enforce A & B to make the investment,
though she was not a party to the agreement (the agreement of investment was
between the 2 brothers A & B).
3.2 Contract without Consideration
In certain cases, a contract is valid even without any consideration,
such as:
i.
Promise to pay a time barred debt: It is enforceable if it is in writing and
signed by debtor or specifically authorized on his behalf [s.25(3)].
Ex.
A promises to pay B
Rs.1000 towards a past debt which is now barred by limitation. This is a valid
contract and A must pay B as per contract.
ii.
Agency: No consideration is necessary to create an Agency [s.185].
An agent may enter into a contract even if there is no consideration for him.
Ex.
A, appoints B to sell his
house giving him a power of attorney. B makes contract with C to sell him the
house on behalf of A. Held, the contract is valid if it is made by B within his
authority, even if B does not get any commission or benefit out the deal.
iii.
Compensation
for voluntary services : A promise to compensate voluntary services is
enforceable even without consideration [S. 25(2)].
Ex.
While B is away on holiday, a storm damages the roof of his house. A,
his neighbour carries out the necessary repairs. On his return, B promises
to pay A for the expenses of repairs. A can recover the money from B.
iv.
Bailment: Consideration is not necessary to effect a
valid bailment of goods (called Gratuitous Bailment).
v.
Charity:
If a person promises to
contribute to charity and on this faith, the Promisee undertakes a liability
not exceeding the promised subscription, the contract shall be valid.
vi.
Remission: Where a person agrees to receive less than
what is due to him, such an agreement is remission. No consideration is
required for a contract of remission. (Sec.
63)
vii. Guarantee: A ‘contract of guarantee’ is a contract to perform the
promise or discharge the liability of a third person, in case of his default. A
contract of guarantee is not valid if made without consideration. However, the
consideration received by the principal debtor is a sufficient consideration
for the surety and the contract of guarantee shall be valid even if no
consideration is received by the surety. (Sec. 127)
viii. Love
& Affection:
Agreements expressed in writing under the law on account of natural love and
affection is enforceable, even without any consideration in following
cases:[Sec. 25(1)]
a. The agreement is made in writing. Though oral agreement is binding on the parties, agreement out of
love & affection, without consideration, will be binding only if it is made
in writing.
b.
The agreement is registered. Ordinarily,
an agreement is not required be registered. However, an agreement falling under
this exception shall not be valid unless registered.
c.
Between the parties standing in immediate relation. The parties must stand in
‘immediate relation to each other’.
d.
Natural love and affection between the parties. The act must be out of love and affection between
parties.
Ex. Out of love and affection, X promises his
son to give Rs 1 Lac and executes a deed. It is valid contract. Though there is
no consideration for X for executing the deed for his son because this contract
has been done out of natural love and affection between the parties.
ix.
Contract
with Seal: A contract made in the form of a deed under seal is valid even if it is
made without consideration.
x.
Completed
Gifts: The consideration is not needed between donor and donee. So, the rule,
‘No consideration, no contract’ does not apply to gifts made and accepted.
Hence, gift made without consideration is valid. (Explanation 1 of sec.25)
3.3 Stranger acting in a Contract
i. As a general rule, only the parties to a contract
can sue and be sued on that contract. The Contract creates a relationship
subsisting between the parties who have entered into a contractual obligation.
This doctrine is based on following principles:
a. A person who is not a party to a contract
cannot sue upon it, even though he has supplied consideration.
Ex. D, a Tyre
b. A contract cannot confer rights or impose
obligations arising under it on any person other than the parties to it.
ii.
However,
in the following cases, a third party (who is not a party to the contract) may
also act in a contract:
a.
In
a Trust, the beneficiary
may enforce a contract. The person creating the trust is called the Author of
the trust. The person for whose benefit the trust is created is called as Beneficiary.
The person who is entrusted with the trust property and to execute the trust is
called as Trustee. The agreement creating the trust is entered into
between the Author of the trust and the Trustee.
Ex. A agrees to B to transfer some property to
B which B must hold as trustee for benefit of C (the beneficiary). Now C can
enforce the contract even if C is not party to the agreement (the agreement is
between A & B).
Beneficiary is not a party to the agreement creating a
trust. However, the trust is created for beneficiary and the trust property
belongs to the beneficiary. So, the beneficiary is entitled to sue
the trustee for the enforcement of duties of trustee even though the
beneficiary is not a party to the agreement.
b. In Marriage, partition or family settlement, the beneficiary may enforce a contract even
though he may not be a party to such settlement.
Ex. A & B, two brothers, on partition of
joint family property, agree between themselves to invest some money to support
their mother. The mother may now enforce A & B to make the investment,
though she was not a party to the agreement (the agreement of investment was
between the 2 brothers A & B).
c.
Contracts
entered into by Agent, is
enforceable if done by agent within his authority on behalf of the Principal. The
principal can enforce the contracts entered into by his agent provided the
agent has acted within the scope of his authority and in the name of the
principal.
Ex. A, appoints B to sell his house giving him
a power of attorney. B makes contract with C to sell him the house on behalf of
A. Held, the contract is valid if it is
made by B within his authority, even if B does not get any commission or
benefit out the deal.
d.
Acknowledgement. Where a person acknowledges his liability
to a third person, he is treated as an agent of such third person and so can
maintain an action in the contract.
e.
Assignment
of a contract. Assignment
is the right transferred from one person (Assignor) to another person
(Assignee), under Transfer of Property Act.
After assignment, the assignee may exercise all the
rights the assignor previously could, even though the assignee was not a party
to the contract originally made.
f.
Covenants
running with land. In
case of transfer of immovable property, the purchaser of land is bound by
certain conditions or covenants with original land owner, though he is not a
party to the original agreement of the conditions or covenants relating the
land.
For more details, refer to Mercantile Law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com
