Consideration is one of the basic contract law elements that must be met for a contract to exist. It ensures that in any contract, both parties are involved in giving something of value, thus creating a form of mutual obligation. Absent consideration, a promise often remains unenforceable except in certain exceptions recognized by law. Let's further discuss its definition, necessary features, types, exceptions, and key cases.
What is Consideration?
As defined under Section 2(d) of the Indian Contract Act, 1872: "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 simple words, consideration is:
Something of value given in exchange for a promise.
The reason why both parties agree to be bound by the contract.
Consideration may be either a benefit to one party or a detriment to the other. For example, if A agrees to sell his car to B for ₹1,00,000, B's paying him is the consideration for A's promise to deliver the car, and A's delivery of the car is the consideration for B's promise to pay.
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Breakdown of Section 23 of Indian Contract Act, 1872
Section 23 defines the criteria for lawful agreements and makes unlawful agreements void. Key considerations include legality, morality, public policy, and harm to others. It provides clear boundaries for lawful contractual conduct to uphold justice and societal norms.
Key Provisions
The consideration or object of an agreement is lawful unless:
1. Forbidden by Law:
Agreements that contravene legal provisions.
Example: Selling drugs or engaging in activities banned by law.
2. Defeats the Provision of Any Law:
Agreements that, if allowed, would negate the purpose of an existing law.
Example: Concealing assets during bankruptcy to avoid payment to creditors.
3. Fraudulent:
Agreements made with the intention to deceive.
Example: A contract entered into with forged documents.
4. Causes Injury to Person or Property:
Agreements causing harm to another person's body or property.
Example: A contract to damage someone's property.
5. Immoral or Opposed to Public Policy:
Agreements that violate societal moral standards or public welfare.
Example: Agreements for prostitution, bribery, or human trafficking.
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Effect of Unlawful Consideration or Object
Any agreement with unlawful consideration or object is void. Let's look out each at examples of lawful and unlawful agreements:-
1. Lawful Agreements:
(a) Sale of house for ₹10,000 is valid as the consideration is lawful.
(b) Promise to pay on failure of a third party is valid.
(c) Insurance for a ship’s value is valid.
(d) Promise to maintain a child for annual payment is valid.
2. Unlawful Agreements:
(a) Fraudulent division of gains: Void due to unlawful object (fraud).
(b) Employment in public service for payment: Void due to unlawful consideration (illegal gratification).
(c) Agent conceals fraud for monetary benefit: Void due to fraud.
(d) Dropping prosecution for restoration of stolen goods: Void due to unlawful object (illegal settlement).
(e) Purchase of estate by defaulter through another: Void as it defeats the purpose of revenue laws.
(f) Using influence as an agent for money: Void due to immoral consideration.
(g) Hiring daughter for concubinage: Void due to immorality.
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Key Elements of Consideration
To qualify as a valid consideration as per Section 23 of Indian Contract Act, it should have certain attributes. Here are the essential features that make consideration valid, including legality, mutual consent, and the concept of benefit and detriment.
1. It Must Move at the Desire of the Promisor
Consideration must be given at the request or desire of the promisor. Acts done voluntarily or at the request of third parties do not qualify.
For example: If A paints B's house without B's request and later demands payment, B is not liable to pay because the act was not done at B's desire.
2. It Can Move from the Promisee or a Third Party
Indian law differs from many legal systems as it allows consideration to move from either the promisee or a third party. This means that even someone who is not a party to the contract can provide the consideration.
3. It Can Be Past, Present, or Future
Past Consideration: Acts or services done before the promise is made.
Present (Executed) Consideration: Simultaneous exchange of promises or actions.
Future (Executory) Consideration: The promise to do some act in the future.
4. It Must Be Lawful
No illegal act, fraud, immorality, or something opposed to public policy can make up consideration. The promise to pay someone for smuggling is not valid.
5. It Must Be Real and Possible
Consideration has to be real and possible. The moon cannot be brought to the earth, so a promise to do so is no valid consideration.
6. Adequacy is Irrelevant
Courts do not assess whether the consideration is adequate or fair, as long as it has some value. Even nominal consideration (e.g., ₹1) is sufficient if freely agreed upon by the parties.
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Types of Consideration
These are the three primary types of consideration—past, present, and future—and how they shape contractual agreements.
Past Consideration
Refers to acts done before the promise is made.
For instance, if A saves B’s property from fire and later B promises to reward A, A’s past act of saving the property qualifies as consideration.
Present (Executed) Consideration
This takes place when both parties exchange value simultaneously.
For instance, buying commodities in a shop and paying immediately.
Future (Executory) Consideration
This is the case when both parties make promises to perform acts in the future.
For instance, A agrees to build a house for B, and B agrees to pay after the completion of the work.
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Legal Rules Regarding Consideration
There are a few foundational legal principles that determine the validity and enforceability of consideration in contract law.
1. Consideration Must Be for a Promise
Only promises supported by consideration are enforceable. Gratuitous promises (e.g., gifts) are not contracts unless supported by reliance or exceptions like promissory estoppel.
2. Performance of Pre-Existing Legal Duties
A promise to perform a legal or contractual obligation cannot constitute new consideration unless additional effort or responsibility is undertaken.
For example, a police officer cannot demand extra payment for performing their duty to maintain law and order.
3. Part Payment of a Debt
Paying a lesser amount than what is owed does not discharge the entire debt unless accompanied by new consideration (e.g., paying earlier than agreed).
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Exceptions to the Rule "No Consideration, No Contract"
Although consideration is generally necessary for enforceable contracts, certain exceptions exist:
1. Natural Love and Affection
Agreements made between close relatives, if written, registered, and based on love and affection, may be valid without consideration.
Example: A father gifting property to his son in writing.
2. Voluntary Services
A promise to compensate for voluntary services already rendered is enforceable if made voluntarily and in good faith.
3. Time-Barred Debts
A written and signed promise to pay a debt barred by the statute of limitations is binding, even without fresh consideration.
4. Agency Agreements
No consideration is required to create an agency relationship.
5. Promissory Estoppel
If a promise is accepted for his detriment, estoppel may be set upon the other party to deny it.
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Case Laws on Consideration
These landmark cases illustrate the practical application and evolution of consideration in Indian and international contract law.
1. Kedarnath Bhattacharji v. Gorie Mahomed (1886)
Court: Calcutta High Court (India)
Principle Established: Promises leading to liabilities can create enforceable contracts.
Details:
In this case, a contractor agreed to construct a town hall based on promises of contributions from individuals. One contributor failed to pay, and the contractor sued. The court ruled that when the contractor undertakes liabilities based on the promise, the promise becomes enforceable.Significance: This case established that consideration exists if liabilities are incurred due to a promise.
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2. Aloka Bose v. Parmatma Devi & Others (2009)
Court: Supreme Court of India
Principle Established: Adequacy of consideration and the enforceability of oral agreements.
Details: In this case, the appellant, Aloka Bose, entered into an oral agreement to purchase property from Parmatma Devi. The agreement was followed by part payment, but no formal written contract was executed. Subsequently, the respondent sold the property to another party, leading to a legal dispute.
Judgment: The Supreme Court held that an oral agreement, accompanied by part payment, constitutes a valid contract under the Indian Contract Act, 1872. The Court emphasized that the adequacy of consideration is irrelevant as long as it is lawful and has some value.
Significance: This judgment reinforces that oral agreements with consideration are enforceable, and courts will not assess the adequacy of consideration if it is lawful.
3. P. Subburaj v. V. Balraj (2022)
Court: Madras High Court
Principle Established: Validity of contracts involving consideration during the demonetization period.
Details: The case involved a dispute over a financial transaction that took place during India's demonetization period in 2016. The plaintiff sought to enforce a contract where the consideration was paid in demonetized currency notes.
Judgment: The Madras High Court held that for a contract to be valid, the consideration must be in legal tender. Since the currency notes used were demonetized and ceased to be legal tender, the consideration was invalid, rendering the contract unenforceable.
Significance: This case underscores the necessity for consideration to be in the form of legal tender recognized by law, highlighting the impact of government policies on contractual obligations.
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Summing Up
Consideration is the cornerstone of contractual obligations, ensuring that agreements are reciprocal and legally enforceable. While it may seem like a technical requirement, its role in fostering fairness and accountability in contracts cannot be overstated. Understanding its nuances—such as its types, rules, and exceptions—helps individuals and businesses navigate legal agreements effectively. As the foundation of contract law, consideration remains a vital concept in both legal theory and practice.
Consideration in Contract Law FAQs
Q1. What is consideration in contract law?
Consideration is a token of value that two contracting parties exchange, including but not limited to money, goods, services, or even promise. This makes the two parties' agreement valid for law.
Q2. Is consideration necessary for all contracts?
Yes, however, consideration is generally required unless excepted by certain provisions as are agreements based on love and affection, debts beyond time-barred periods and promissory estoppels.
Q3. What is an example of past consideration?
When A assists B in getting his car repaired, and after that B promises to pay A ₹500 for his help, A's previous act is past consideration.
Q4. Whether consideration can be from a third party?
Yes, in India, consideration can be moved from a third party and the contract is valid.
Q5. What happens if the consideration is illegal?
When the consideration involves unlawful activity, the contract is held to be void and incapable of being enforced.
