If Ram says to Shyam, “I promise to give you Rs. 1000 on June 1,” and Shyam replies, “I gratefully accept your promise,” should Shyam be able to enforce Ram’s promise in a court if Ram refuses to pay him Rs. 1000 on June 1? From a moral standpoint, it may seem that the court should enforce Ram’s promise simply because he made it. However, from a legal point of view, the question arises whether the power of the Government should be used to enforce such a promise where no economic exchange has taken place. The transaction between Ram and Shyam does not involve an exchange. Ram’s promise is simply gratuitous — a gift. Gratuitous promises such as Ram’s are not enforceable at law. A promise is enforced by law only if it is supported by consideration.
Section 10 of the Indian Contract Act, 1872, describes lawful consideration as one of the essential ingredients to constitute a valid contract, which means that an agreement without consideration is void. This is the doctrine of consideration. Bare words of promise have no binding effect on either party. The law enforces only those promises made for consideration because gratuitous or voluntary promises are often made rashly and without due deliberation. In contract law, the problem is to determine the presence or absence of consideration or the facts that will create legal duties and legal relations. The law disfavors an exchange of promises that results in one party obtaining something for nothing. It provides no means or remedy to compel the performance of an agreement made without sufficient consideration.
However, the presence or absence of consideration may not always conclusively prove the existence or non-existence of an enforceable contract. Consideration does not always have to possess economic value. The legality of the consideration also affects the enforceability of the contract. These are the issues to be considered in understanding the doctrine of consideration under Indian contract law.
What is Consideration
Consideration means something in exchange. It is an essential element generally required in a contract. The idea behind the requirement of consideration is that one party to an agreement should not be bound if the other party is not similarly bound. Generally, if an agreement lacks consideration, neither party can enforce it, even if it is in writing.
Stated positively, the concept of consideration requires that both parties to a contract must have given and received something as the price of their respective promises. For example, if X promises to install a home air conditioning unit for Y, and Y promises to pay X Rs. 1,100 for the job, then the price X has received in return for his obligation to install the unit is the right to receive Rs. 1,100 from Y upon completion. Similarly, the price Y has received for her promise to pay Rs. 1,100 is the right to have the air conditioning unit installed.
In the English case of Currie v. Misa, consideration was defined by Lush J. as follows: a valuable consideration in the sense of the law may consist 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. The second part of this description is more important because it emphasizes that consideration is reflected more in the abandonment of some legal right by one party rather than the profit received by the other. It does not matter whether the party accepting the consideration gains any visible benefit. It is enough that he accepts it and that the other party assumes some burden or loses something of value.
Section 2(d) of the Indian Contract Act defines consideration 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 to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.” Based on this definition, consideration consists of an act, abstinence, or forbearance done at the desire of the promisor by the promisee or any other person, which can be either already executed, in the process of execution, or yet to be executed. For instance, if A desires B to paint a picture for him at an agreed remuneration, the painting of the picture by B is consideration moving from B, and the remuneration is the consideration moving from A.
Essential Elements of Consideration
Consideration Must Move at the Desire of the Promisor
An act or abstinence not requested by the promisor is a voluntary act and does not fall within the definition of consideration. Similarly, an act or abstinence done at the request of someone other than the promisor is not valid consideration. The act must be performed at the promisor’s desire.
In one example, A sees B drowning and saves him. A cannot demand payment for saving B’s life because it was a voluntary act and B never asked A to save him. In Durgaprasad v. Baldeo, the collector of a district requested D to spend money to improve a market. D did so, and the shopkeepers later promised to pay D a commission from their sales. When they refused to pay, the court held that D could not claim the commission because he had acted at the collector’s request, not at the request of the shopkeepers. Similarly, when a bank mistakenly paid out an overdraft on a depositor’s cheque that exceeded the account balance without any request from the depositor, there was held to be no consideration, and the depositor was not legally bound to repay the excess. Another case involved a father failing to repay a loan for which he gave a promissory note. The court held that the promissory notes were without consideration because the advances had not been made at the son’s request, who was the promisor.
Consideration May Move from the Promisee or Any Other Person
As long as consideration exists, it does not matter who provides it. It can come from the promisee or any third person, provided the promisor has no objection. In marine insurance, a broker’s undertaking to pay the premium can be valid consideration even though it comes from a third party. In another case, an old lady gifted property to her daughter under the condition that the daughter would pay a sum annually to her aunt. The daughter agreed with the aunt to make the payment. The daughter later refused to pay, claiming the aunt had given no consideration. The court held the agreement valid because the consideration had come from the old lady, the aunt’s sister.
However, consideration from a third party who is a minor is not valid, as seen in a case where the Bombay High Court held that such consideration was not acceptable.
Consideration Can Be an Act, Abstinence, Forbearance, or Detriment
Consideration is often misunderstood as involving only monetary exchange. However, legally, consideration includes acts, abstinence, forbearance, and detriments.
When a person executes an undertaking in favor of a bank and receives the benefit of an overdraft account, the provision of that facility is not without consideration—it is the result of the act. Abstinence means refraining from doing something one is legally entitled to do. For example, if X promises to pay his nephew Y Rs. 50,000 if Y refrains from drinking, smoking, gambling, and swearing until he turns 21, and Y does so, then Y’s abstention constitutes valid consideration. Even if the uncle dies without paying, Y can claim the money from his estate. His restraint on lawful activities was a legal detriment and a valid form of consideration.
Forbearance, meaning giving up a legal right or claim, is also valid consideration. For example, if a creditor refrains from executing a decree and allows time for payment at the debtor’s request, it constitutes consideration. In another case, an agreement to accept a court decree and not appeal when the party had the right to appeal was also held to be valid consideration.
Detriment to the promisee or another party can also serve as valid consideration. For example, if A lends B Rs. 1000 and C promises to repay the loan if B defaults, the act of lending the money is a detriment to A and is sufficient consideration to make C’s promise enforceable. In another case, X promises to run Y’s ads at half price for a year if Y loans Rs. 5,000 to X’s nephew. When Y gives the loan and X fails to run the ads, Y can sue. Y’s action of giving the loan was a detriment and valid consideration.
The promisor doesn’t need to receive a benefit as long as the promisee or someone else suffers a detriment.
Consideration Can Be Past, Present, or Future
Past consideration refers to an act already done before a promise is made. For instance, if A performs work for B in April without expecting anything in return, and B later promises to pay in June, this is a valid contract under Indian law, as the act qualifies as past consideration. In a case where an employee was promised a bonus for extra work done earlier, the court held it to be valid past consideration.
Unlike English law, which does not accept past consideration, Indian law validates it due to the words “has done or abstained from doing” in Section 2(d) of the Indian Contract Act.
Present or executed consideration refers to consideration that moves simultaneously with the promise. An example is a cash sale where both buyer and seller perform their parts of the contract simultaneously. Another example is a marriage contract, where both parties simultaneously perform their obligations.
Future or executory consideration refers to promises of future performance. For example, A promises to marry B in return for B’s promise to marry A. Here, each promise is consideration for the other. In another case, M agrees in April to build a pool for B in June, and B agrees to pay Rs. 2,500. If M later refuses to build the pool, B can sue for breach of contract.
Legal Rules Regarding Valid Consideration
Under Section 2(d) of the Indian Contract Act, 1872, consideration is defined as something that the promisee or any other person does or abstains from doing, has done or abstained from doing, or promises to do or abstain from doing at the desire of the promisor. For consideration to be valid and enforceable in a contract, the following legal rules must be fulfilled: Consideration must move at the desire of the promisor. This means the act or abstinence forming the consideration should be done at the request or desire of the promisor. If a person voluntarily does something without the request of the promisor, such an act is not a valid consideration. Consideration may move from the promisee or any other person. Indian law differs from English law in this respect. As per Indian law, it is not necessary that the consideration should move only from the promisee. A third party may also furnish consideration. This principle was established in the case of Chinnaya v. Ramaya (1882). Consideration may be past, present, or future. Past consideration refers to a benefit already conferred before the promise is made. Present consideration is given at the time of the contract. Future consideration refers to a promise to do or not do something in the future. Each of these is valid under Indian law. Consideration must be real and not illusory. It must have some value in the eyes of the law. If ththe e consideration is physically impossible, legally forbidden, or uncertain, it is not considered valid. Consideration need not be adequate. The law only requires that consideration must exist; it need not be equivalent to the value of the promise. However, courts may examine adequacy in determining whether the contract was entered into under undue influence or coercion. Consideration must be lawful. As per Section 23 of the Indian Contract Act, the consideration must not be forbidden by law, must not defeat the provisions of any law, must not be fraudulent, must not involve injury to a person or property, and must not be immoral or opposed to public policy.
Types of Consideration
Under the Indian Contract Act, consideration is broadly classified into three types: Past Consideration: This refers to consideration that has already been executed. It involves an act done before a promise is made. For example, A renders some services to B without B’s request. Later, B promises to compensate A for the services rendered. This is valid past consideration. Present Consideration: Also known as executed consideration, it refers to something done simultaneously with the promise. For example, A delivers goods to B and B pays for them at the same time. Future Consideration: Also known as executory consideration, it involves a promise to do something in the future. For example, A agrees to sell goods to B, and B agrees to pay after one month. This is a promise supported by future consideration.
Exceptions to the Rule “No Consideration, No Contract”
As per the general rule under Section 25 of the Indian Contract Act, an agreement without consideration is void. However, there are a few exceptions to this rule, which are as follows: Agreement made out of natural love and affection: If an agreement is made out of natural love and affection between parties standing in a near relation to each other, and is expressed in writing and registered under the law, it is valid even without consideration. For example, a father promises in writing and registers a document to gift property to his daughter. Such a promise is enforceable even without consideration. Compensation for voluntary services: A promise to compensate a person who has voluntarily done something for the promisor, or something which the promisor was legally bound to do, is valid without consideration. For example, A finds B’s purse and returns it. Later, B promises to pay A Rs. 500. This is enforceable. Promise to pay a time-barred debt: If a person makes a written and signed promise to pay a debt that has become barred by the law of limitation, it is enforceable even without consideration. Completed gift: A gift once made and accepted is valid and binding even though no consideration moves from the donee. Agency: As per Section 185 of the Indian Contract Act, no consideration is necessary to create an agency. Charitable subscription: If a person subscribes to a charitable cause and the promisee incurs liabilities on the strength of such promise, it becomes enforceable even without consideration.
Consideration and Privity of Contract
The doctrine of privity of contract states that only a person who is a party to the contract can enforce it. A stranger to a contract cannot sue upon it, even if the contract is for his benefit. However, under Indian law, there are certain exceptions to this rule. In some cases, a person who is not a party to the contract but has furnished consideration may be allowed to sue. Indian courts have recognized exceptions to the privity rule in the following circumstances: Beneficiary under a trust: If a contract is made between two persons for the benefit of a third person who is named as the beneficiary in a trust, then the beneficiary can enforce the contract. Marriage settlement, partition, or family arrangements. In such cases, a person who is not a party to the agreement but derives a benefit from it can sue to enforce it. Acknowledgement or estoppel: If a party admits or acknowledges the rights of a third party, they may be prevented from denying those rights later. Assignment of contract: The assignee of a contract can enforce the terms of the original agreement. Contracts entered into by agents: Contracts entered into by authorized agents are enforceable by the principal, who may not be a direct party to the transaction.
Unlawful and Illusory Consideration
For consideration to be valid, it must be lawful. Section 23 of the Indian Contract Act specifies the types of consideration that are considered unlawful. Consideration is unlawful if: It is forbidden by law, involves injury to person or property, is fraudulent, is immoral, or is opposed to public policy. An agreement with unlawful consideration is void. Illusory consideration refers to a promise that appears to be consideration but, on closer inspection, is meaningless or without substance. For example, if A promises to pay B if he feels like it, such a promise is illusory because it imposes no real obligation on the promisor. Courts do not enforce agreements based on illusory consideration.
Case Laws on Consideration
Indian and English courts have developed the concept of consideration through a range of judgments. Some notable cases include: Durga Prasad v. Baldeo (1880): The court held that if the act is not done at the desire of the promisor, it cannot be valid consideration. Chinnaya v. Ramaya (1882): Held that consideration may move from a third party, not just the promisee. Abdul Azeez v. Masum Ali (1914): A promise to pay a charitable subscription is not enforceable unless some liability has been incurred on the strength of that promise. Kedarnath v. Gorie Mohamed (1886): Distinguished from the Abdul Azeez case; the court upheld a promise to contribute to the construction of a town hall because the promisee had incurred expenses based on the promise. Union of India v. Chaman Lal Loona (1957): Affirmed the rule that consideration may move from a third party.
Consideration Must Be at the Desire of the Promisor
One of the fundamental conditions for valid consideration is that it must be provided at the desire or request of the promisor. This means that if a person does something voluntarily or at the desire of a third party, it does not qualify as valid consideration. The Indian Contract Act, under Section 2(d), emphasizes that the act or abstinence that forms consideration must be done at the request of the promisor. This ensures that both parties willingly enter into a contract and that the promisor had a specific intention to obtain the benefit.
For instance, if A voluntarily repairs B’s house without being asked, and later demands payment, B is not legally bound to pay because the act was not done at B’s request. However, if A undertakes the work at B’s request, a valid consideration is established. This requirement ensures that gratuitous or self-imposed actions are not mistaken for contractual obligations, thereby preventing unjust claims.
Consideration May Move from the Promisee or Any Other Person
Unlike English law, which generally requires that consideration must move from the promisee, Indian law permits consideration to move from the promisee or any other person. This principle, unique to Indian jurisprudence, has been upheld by courts, including in the landmark case of Chinnaya v. Ramaya (1882). In that case, it was held that even if the consideration moved from a third party, the contract would still be valid, provided it was done at the promisor’s request.
This broadens the scope of who can furnish consideration and is particularly useful in family arrangements or contracts involving multiple stakeholders. For instance, if A makes a promise to B, and C furnishes the consideration on behalf of B, the contract remains enforceable in India. The Indian Contract Act’s inclusive definition ensures that beneficial arrangements are not invalidated merely because consideration did not move directly from the promisee.
Consideration May Be Past, Present, or Future
Another important feature of Indian contract law is its recognition of past, present, and future consideration. Each type of consideration is valid, provided it meets the legal criteria:
Past Consideration refers to a benefit that has already been provided before the promise is made. For example, if A saves B’s goods from fire, and B later promises to reward A for the help, this promise is enforceable in India because A’s act, though done in the past, was at B’s request or for B’s benefit.
Present Consideration is when the act or abstinence takes place simultaneously with the promise. For instance, A delivers goods to B at the time B promises to pay, making it a case of present consideration.
Future Consideration involves a promise to do something in the future. For example, A agrees to construct a house for B, who promises to pay upon completion. This is a future consideration, and it is valid as long as both parties agree to it.
This flexibility in recognizing all three forms of consideration allows Indian contract law to accommodate a wide range of commercial and personal arrangements, thus enhancing its applicability and fairness.
Consideration Must Be Something of Value
The Indian Contract Act does not prescribe a monetary value for consideration but insists that it must be something of value in the eyes of the law. It need not be adequate, but it must be real and lawful. Courts generally do not interfere with the adequacy of consideration unless there is evidence of fraud, coercion, or undue influence.
For example, if A sells a valuable asset to B for a nominal price, the transaction is still valid as long as there is mutual consent and no compulsion. The court’s primary concern is the presence of consideration, not its equivalence in value. This principle ensures that contractual freedom is maintained and that parties are allowed to negotiate their terms without excessive judicial oversight.
However, a mere moral obligation or a natural love and affection does not constitute valid consideration unless it is expressed in writing and registered. This distinction reinforces the legal requirement that consideration must have tangible or legally recognized value to be enforceable.
Consideration Must Be Lawful
Section 23 of the Indian Contract Act lays down that the consideration must be lawful. Any consideration that is forbidden by law, defeats the provisions of any law, involves fraud, or is immoral or opposed to public policy is considered unlawful. Contracts with such consideration are void.
For instance, a contract to pay someone to perform an illegal act, such as smuggling, is not enforceable. Similarly, a contract that promotes fraud or is immoral—such as a contract encouraging divorce for monetary gain—is void. The doctrine ensures that the law does not support or legitimize unethical or illegal transactions.
In Pearce v. Brooks (1866), a woman hired a carriage for prostitution. The contract was held void as the consideration was immoral. Indian courts follow a similar approach, as evident in Gherulal Parakh v. Mahadeodas Maiya, where a wagering contract was held unenforceable.
This requirement acts as a safeguard against the misuse of contractual freedom and reinforces the integrity of the legal system. It aligns private agreements with public morality and legal standards.
Exceptions to the Rule “No Consideration, No Contract”
While consideration is a crucial element in a valid contract, the Indian Contract Act provides specific exceptions where an agreement without consideration is still enforceable. These exceptions, listed under Section 25, are:
- Natural Love and Affection: An agreement made without consideration is valid if it is in writing, registered, and made out of natural love and affection between parties standing in a near relation. For example, a father’s registered gift deed in favor of his son.
- Compensation for Voluntary Services: A promise to compensate for something already done voluntarily is valid. For instance, A finds B’s lost dog and returns it. Later, B promises to pay A ₹1,000. This promise is enforceable.
- Promise to Pay a Time-Barred Debt: If a person promises, in writing and signed by him, to pay a debt that has become barred by the law of limitation, the promise is valid even without fresh consideration.
- Completed Gifts: A completed gift does not require consideration. Once a gift has been delivered, the absence of consideration does not affect its validity.
These exceptions reflect the pragmatic and equitable approach of Indian contract law. They allow for the enforcement of certain promises even in the absence of consideration, thereby upholding moral and social obligations where appropriate.
Doctrine of Privity of Contract and Its Relation with Consideration
The doctrine of privity of contract is closely linked to the concept of consideration. According to this doctrine, a contract cannot confer rights or impose obligations arising under it on any person except the parties to it. Only those who are party to a contract can sue or be sued under it. In English law, this principle was firmly established in the case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. In this case, the court held that only a person who is a party to a contract can sue upon it. In Indian law, however, there are certain exceptions to the rule of privity of contract. Though the Indian Contract Act does not explicitly mention the doctrine of privity, Indian courts have recognized and applied it in various cases. One of the landmark cases on this subject is Jamna Das v. Ram Avtar, where it was held that a stranger to a contract cannot sue upon it. However, Indian law also recognizes several exceptions where a person who is not a party to the contract may be allowed to sue. These exceptions make Indian law more flexible than English law in this regard.
Exceptions to the Doctrine of Privity of Contract
The Indian legal system recognizes the following exceptions to the doctrine of privity of contract:
Beneficiary under a trust: If a contract is made for the benefit of a third party, that third party can enforce the contract. This is possible when a trust is created in favor of the third party, and the beneficiary can sue to enforce the contract. 2. Marriage settlements, partition, or family arrangements: Where a provision is made for a person in a marriage settlement or family arrangement, even though the person is not a party to the agreement, he or she can sue upon it. 3. Acknowledgment or estoppel: If a person admits that he is liable to a third party or acknowledges the existence of a contract in favor of a third party, he may be stopped from denying the obligation, and the third party can sue. 4. Assignment of contract: A contract may be assigned to a third party, either by the act of the parties or by operation of law. The assignee can enforce the contract. 5. Covenants running with the land: In some cases, covenants relating to land are enforceable by or against persons who are not parties to the original contract but who acquire an interest in the land.
Validity of Agreements without Consideration
Under Section 25 of the Indian Contract Act, an agreement made without consideration is void. However, there are certain situations where an agreement without consideration is valid. These exceptions are as follows:
Natural love and affection: An agreement made on account of natural love and affection between parties standing in a near relation to each other is valid, provided it is in writing and registered. For example, a written and registered agreement between a husband and wife, made out of love and affection, is enforceable. 2. Compensation for voluntary services: If a person voluntarily does something for another person and the latter promises to compensate him later, such a promise is binding even though there is no consideration at the time the act is done. 3. Promise to pay a time-barred debt: A promise to pay a debt barred by the law of limitation is valid if it is in writing and signed by the debtor or his authorized agent. 4. Agency: No consideration is necessary to create an agency, as per Section 185 of the Indian Contract Act. 5. Completed gifts: According to the Explanation 1 to Section 25, the rule that an agreement without consideration is void shall not affect the validity of any gift made. A gift, once completed, is valid even if there is no consideration. 6. Charitable subscriptions: If on the strength of a promise of a subscription, the promisee undertakes a liability, the promisor cannot deny the obligation to pay. Courts have held such promises enforceable on the ground of promissory estoppel.
Consideration in Case Law
Indian courts have interpreted and clarified the concept of consideration through various decisions. Some important cases are discussed below:
Durga Prasad v. Baldeo: In this case, the plaintiff constructed some shops at the instance of the collector. Later, the defendants who occupied the shops promised to pay commission to the plaintiff. The court held that the plaintiff did not do anything at the desire of the defendants, so there was no consideration for the promise. 2. Kedarnath v. Gorie Mohammad: Here, the defendant promised a donation for the construction of a town hall. On the strength of that promise, the plaintiff incurred liabilities. The court held that the plaintiff had incurred liability relying on the promise, so the defendant was bound to pay. 3. Abdul Azeez v. Masum Ali: A person promised to donate money for the construction of a mosque. The trustees did not incur any expense on the faith of the promise. The court held that the promise was unenforceable for want of consideration. 4. Rangaswamy v. Rangachariar: A man promised to pay maintenance to his stepmother out of natural love and affection. The promise was in writing but not registered. The court held that the promise was void because it lacked the required registration.
Distinction between Consideration and Motive
Consideration must be distinguished from motive. Consideration refers to something of value in the eyes of the law that is given in exchange for a promise, whereas motive is the reason why a person enters into a contract. Motive may be noble or selfish, but it is not relevant to the formation of a valid contract. For instance, a man may agree to sell his land at a low price to help a friend. The motive here is to help a friend, but the consideration is the amount paid. Courts are not concerned with the adequacy or fairness of consideration, as long as there is something of value exchanged.
Sufficiency and Adequacy of Consideration
As per the Indian Contract Act, consideration must be something of value, but it need not be adequate. Courts are not concerned with whether the consideration is equivalent in value to the promise. The adequacy of consideration is a matter left to the parties. This principle was reaffirmed in various cases where courts refused to interfere with the bargains struck by the parties, provided the consent was free and lawful. However, inadequacy of consideration can be taken into account in determining whether consent was freely given. For example, if a person sells property worth one lakh rupees for just one thousand rupees, the court may examine whether there was coercion, fraud, or undue influence.
Consideration in the Context of E-Contracts and Modern Transactions
With the rise of digital transactions, e-contracts, and online agreements, the concept of consideration remains relevant. Courts have adapted the traditional principles of contract law to digital contexts. Consideration in electronic contracts is often in the form of digital goods, services, or electronic payment. The Indian Information Technology Act, 2000, gives legal recognition to electronic contracts, provided they meet the requirements of the Indian Contract Act, including consideration. One common form of online consideration is when a user clicks “I agree” on a website’s terms and conditions in exchange for access to a service. Such click-wrap agreements are considered valid contracts, and the consideration lies in mutual promises and access to services.
Conclusion
Consideration is an essential element of a valid contract under the Indian Contract Act. It ensures that promises made in a contract are supported by something of value, thereby making the agreement legally enforceable. The Indian legal framework recognizes past, present, and future consideration and provides for exceptions to the general rule that agreements without consideration are void. Additionally, exceptions to the doctrine of privity and modern interpretations have made the concept of consideration more flexible and adaptive to evolving commercial practices. Courts have played a vital role in shaping the understanding of consideration, especially in relation and promissory estoppel. Thus, understanding consideration is fundamental to the law of contracts in India, and it continues to evolve with societal and technological changes.