Consideration: Contract Law

consideration

Presence of consideration is one of the essentials of a valid contract. The subject of certain exception, the general rule in India is that “an agreement, without consideration, is void”.

MEANING

  1. (a) Consideration is a quid pro quo, i.e., something in return, it may be –

(i)something benefit right, interest, loss or profit that may accrue to one party or,

(ii)some forbearance, detriment, loss or responsibility suffered on undertaken by the other party (Currie V Mussa)

(b)  According to Sir Frederick Pollock, “consideration is the price for which the promise of the other is bought and the promise is thus given for value is enforceable”.

  1. Definition 2 (d): when at the desire of the Promisor, the promise or any other person.

(a) has done or abstained from during, or (Past consideration)

(b) does or abstained from doing, or (Present consideration)

(c) promise to do or abstain from doing something (future consideration) such act or abstinence or promise is called a consideration for the promise.

  1. Example

(i) ‘P’ aggress to sell his car to ‘Q’ for Rs.50,000 Here ‘Q’ s promise to pay Rs .50,000 is the consideration for ‘P’s promise and ‘P’s promise to sell the car is the consideration for ‘Q’s promise to pay Rs.50,000.




(ii) ‘A’ promise his debtor ‘B’ not to file a suit against him for one year on ‘A’ s agreeing to pay him Rs.10,000 more. Here the abstinence of ‘A’ is the consideration for ‘B’s promise to pay.

LEGAL RULES FOR VALID CONSIDERATION

  1. IT MUST MOVE AT THE DESIRE OF THE PROMISOR

It is essential that the consideration must have been at the desire of the promisor, rather than merely voluntarily or at the instance of the same third party. Simply, the act of abstinence forming the consideration must be done at the desire of or request of the promisor. Thud acts done or services given at the desire of the third party, will not amount to valid consideration.

ILLUSTRATION

  1. Anita sees Mudita house on fire and help in extinguishing the fire. He cannot demand payment for his services because the media never asked her to come for help.

Example:

D constructed a market at the instance of the district collector. Occupants of shops promised to pay D a commission on articles sold through their shops. Held, there was no consideration because money was not spent by the plaintiff at the request of the defendants, but an instance of a third person viz. the collector and, thus the contract was void. Durga  Prasad v. Baldeo

  1. It may move from the promise or any other person who is not a party to the contract

 According to Indian law, the promise or any other person may give consideration . in India there is a possibility that consideration for the promise may move not only from the promisee but also from a third person, who is not a party to the contract.

ILLUSTRATION:

  1. A promise to give his watch to B and consideration of Rs.200000

For the same is given to A by X and not by B. Such a contract will be valid in India as sec. 2 (d) clearly provided that at the promisor, the promise or any other person may provide consideration.

CASH LAW:  A owed Rs.20000 to B. A persuaded C to sign a pro notes in favor of B. C promised B that he would pay the amount . on the faith of promise by C, B Credited the amount to A’s account. held, the discharge of A’s account was consideration by C’s promise. NATIONAL BANK UPPER INDIA V.BANSIDHAR

What is meant by privity of contract:

Stranger to contract cannot sue: The doctrine of privity of contract means only those person who is parties to the contract can enforce the same. A stranger to the contract enforce a contract even though the contract may have been entered into for his benefit.

For e.g., if in a contract between A and B some benefit has been conferred upon X, X cannot file a suit to enforce the contract because A and B are the only parties to the contract whereas X is stranger to the contract.

The principle of privity of contract is generally applicable in India, with the effect that only a party to the contract is entitled to enforce the same.

ILLUSTRATIONS:

  1. Where Manish mortgages his property to Sanjay in consideration of Sanjay’s promise to Manish that he shall pay Manish debt to Shanu,

Shanu cannot file a suit against Sanjay to enforce his promise because Shanu was not a party to the contract between the Manish and Sanjay.

CAN ‘STRANGER TO CONSIDERATION’ SUE

Yes, a stranger to consideration can sue: the rule that a stranger to contract cannot sue has to be distinguished from the rule discussed above that in Indian a person who is stranger to consideration can sue. It has been noted above that a person may not have himself given any consideration but he can enforce the contract if he is a party to the contract, because according to the Indian law consideration may be given either by the promise or a third party. That does not affect the rule of privity of contract.

A LEADING CASE DECIDED ON IT IS:

CASE 1: Chinayya v. Ramayya in this case A, an old lady, by deed of gift, made over certain property to her daughter R, with a direction that the daughter should pay an annuity to A’s brother C, as has been done by A . according ,on the same day, R, the daughter, executed a writing in the favor of her maternal uncle agreeing  to pay the annuity. Afterward, she declined to say that no consideration had moved from her uncle i.e. promise. The court held that though the uncle was stranger to the consideration (as consideration indirectly moved from the sister) and there was a separate contract between him and R, the daughter, was entitled to get the annuity. The maternal uncle could not have sued on the basis of ‘gift deed’ executed by A in favor of R because he was not a party to that contract i.e. he is stranger to that contract. thus, A person may be a stranger to the consideration but he should not be a stranger to the contract because ‘privity of contract’ is essential for enforcing any of the right arising out of the contract. It is a fundamental principle of the law of contract that ‘a stranger to a contract cannot sue, only a person who is a party to a contract can sue on it.’




ARE THERE ANY EXCEPTION TO RULE STRANGER TO CONTRACT CANNOT SUR

 The above rule that stranger to contract cannot sue is subject to the following exception:

(i) Where an express on implied trust is created :

In case of a trust, the beneficiary can sue in his own right under the trust, though he was not a party to the contract between the settler and the trustee.

ILLUSTRATION:

  1. An addressee of an insured article is entitled to sue that post office become a trustee in law for the addressee.
  2. Raja transfers his property to check to be held by Chetek in trust for the benefit of Ruchi. Ruchi can enforce the agreement i.e. trust.

(ii)  Family settlement:

Where a provision is made in a partition or family settlement for maintenance or marriage expenses of the female member, such persons even though not party to contract can sue if not maintained.

ILLUSTRATION:

  1. An entry into a contract with his father that he will maintain his mother and sister and the property of the father will be conveyed to him. In such case even though the mother and sister are strangers to the contract she can sue her son if he denies maintaining her.

(iii)   Where the defendant constitutes himself, as the agent of the third party:

ILLUSTRATION:

  1. Anu received some money from vase to be paid over Nitin and he admits of this receipt to Nitin, then Nitin can recover this amount from Anu who shall be regarded as an agent of Nitin.

(iv) In case of assignment of right under a contract in favor of a third party either voluntarily or by operation of law: the assignee can enforce the benefits of the contract.

ILLUSTRATION:

The assignee of an insurance policy or the official assignee on the insolvency of a person can sue on the contract even though originally they were not parties to the contract.

  1. Consideration may be past, present, and future:

Whether the consideration is past, executed or executor, it is essential that is much have been given “at the desire of the promisor.”

  • Past consideration

As noted above, the Indian contract ACT recognizes past consideration. it means that the consideration for any promise was given earlier and the promise is made thereafter. Simply, when something is done before the date of the agreement, at the desire of the promise, it is called ‘past consideration’.

ILLUSTRATION:

  1. Sanjana teaches the son of Sudhir at Sudhir,s request in the month April, and in May he promises to pay Sanjana a sum of Rs.1000 for his services. The services of Sanjana will be past consideration.
  • Present consideration

The consideration that moves simultaneously with the promise i.e., if both parties have done their part under the contract it is called ‘present consideration’.

ILLUSTRATION:

  1. A makes an offer of reward of Rs.100 and anyone who find out the lost dog and delivers the same to A. When B does so, that amounts to both the acceptance of the offer, which results in a binding contract under which A is bound to pay Rs.100 to B, and also simultaneously giving consideration for the contract.
  2. A sells his pen to B and B pays its price immediately.

(C) Executory or future consideration

When one person makes a promise in exchange for the promise by the other side, the performance of the obligation by each side to be made subsequent to the making of the contract, the consideration is known as the executor.

ILLUSTRATION: A agrees to supply certain goods to B on a future date i.e., 5 January and B agree to pay for them on the same day this is a case of executor consideration.

  • Under English law, Past consideration is no consideration.
  • Present consideration: cash sale
  • Future or executor consideration: A promises to B to deliver him 100 bags of sugar at a future date, B promise to pay first on delivery.
  1. Consideration should be real and not illusory, Illusory consideration renders the transaction void consideration is not valid if it is.
  • Physically impossible
  • Legally not permissible
  • Uncertain
  • Illusory (Fulfillment of a pre-existing obligation )
  1. Must be legal:

Consideration must not be unlawful, immoral or opposed to public policy.

  1. Consideration need not be adequate. A contract is not void merely became of the fact that the consideration is inadequate. The law simply requires that contract should be supported by consideration. So long as consideration exists and it is some value, courts are not required to consider its adequacy:

Example: A agreed to sell a watch worth Rs .500 for Rs. 20, A’s consent to the agreement was freely given. The consideration, though inadequate. Will not affect the validity of the contract. However, the inadequacy of the consideration can be considered in order to know whether the consent of the promise was free or not.

  1. The performance of an act what one is legally bound to perform is not a consideration for the contract mean’s something other than the promisor’s existing obligation:

Ex. Nudo Pacto non-oritur,i.e, an agreement without consideration is void.

The exception to the Rule  “No consideration. No contract”.

  1. Written and registered agreement arising out of love and affection:  25 (1)
  • Expressed in writing and registered under law for the time being in force for registration of the document
  • Natural love and affection
  • Between parties standing in a near relation to each other.

Example:- An elder brother, on account of natural love and affection, promised to pay the debt of his younger brother. The agreement was put to writing and registered. Held, the agreement was valid.

Exception: Rajlukhy Dabee v/s Bhootnath Mukharjee

  1. Promise to compensate 25(2)
  • Promise to compensate wholly or in part
  • Who has already voluntarily done something for the promisor
  • Something which the promisor was legally compellable to do.

Example- A finds B’s purse and give to him. B promise to give A Rs. 500. This is a valid contract.

  1. Promise to pay a time-barred debt.25(3)
  • A debt barred by limitation cannot be recovered. Hence, a promise to pay such a debt is without any consideration.
  • Can be enforced only when – in writing and sighed by the debtor or his authorized agent.

Example- A owes B Rs. 10,000 but the debt is barred by Limitation Act. A signs a written promise to pay B Rs. 8,000 on account of debt. This is a valid contract.

  1. Completed gift:

A gift (which is not agreement) does not require it in order to be valid. In such a case, it is not necessary that there should be natural love and affection or nearness of relationship between the donor and done.

  1. Agency(185):

According to the Indian Contract Act. No consideration is necessary to create an agency.

  1. Bailment (148):

Consideration is not necessary to effect a valid bailment of goods. It is called Gratuitous Bailment.

  1. Charity: If a person promises to contribute to a charity and on this faith, the promises undertake a liability to the extent not exceeding the promised subscription, the contract shall be valid.

 

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