Introduction

• Consideration is an integral part of the contract. The rule of consideration states that it is essential to have consideration for a valid contract.
• The legal definition of consideration is based on the concept of ‘bargained-for exchange.’ This means that both parties are getting something that they've agreed to, usually something of value for something of value.
• Section 2(d) of the Indian Contract Act,1872(ICA) defines the term ‘consideration’. 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.

Essentials of a Valid Consideration

• The Consideration must move at the desire of the Promisor: This implies that the consideration will only be valid when the promisor has requested it. Effectively, any act done voluntarily does not constitute valid consideration.
• The Consideration may move from the Promisee to any other Person: It is not necessary for the promisee to supply the consideration. It may move from any other person. Even if you are a stranger to consideration, you can sue as long as you are a party to the contract.
• The Consideration must be Lawful: An illegal consideration is not valid and makes the contract void. The ICA declares consideration unlawful if it is a forbidden act under any law, if it causes injury to a person or his property, or if it is immoral.
• The Consideration must be Real and Possible: An impossible act cannot be classified as valid consideration. Whatever is decided and agreed to as consideration must be capable of being performed. Impossibility may be legal or physical. Moreover, the consideration must not be uncertain.
• The Consideration may not be Adequate: The Indian law states that adequacy of consideration is not necessary. The parties are free to bargain. A poor negotiation by one party does not make the contract void. However, the decision must be made with the free consent of both parties.

Types of Consideration

• Past Consideration:
  • In case of past consideration, the promisor had received the consideration before the date of promise, such consideration is called Past Consideration.
  • Section 2(d) of the Contract Act uses the word ‘has done or abstained from doing,’ which signifies that such considerations were made in the past. In English Law past consideration is no consideration.
  • Example: A's Bike on his way to the office is stopped due to lack of petrol. A requested B who was petrol seller, B gave petrol to him. Later A promised B to pay Rs. 500/- in consideration of his past consideration.
• Present Consideration:
  • Present consideration is one in which one of the parties to the contract has performed his part of the promise, which constitutes the consideration for the promise by the other side it is known as present consideration.
  • In Present consideration both parties promise to perform their part of the promise simultaneously. It is also known as executed consideration.
  • Example: You buy fruit from a vendor and immediately pay him the price. This payment is taken as executed or present consideration.
• Future Consideration:
  • Future consideration is a type of consideration in which one party performs his part of the promise immediately, and the other party promises to perform his part of the promise on a future date. It is also known as executory consideration.
  • Example: A agrees to supply wheat bags to B and B agrees to pay for them on a future date. This consideration is the future consideration.

Exception of Consideration

Section 25 of Contract act opens with the declaration that an agreement made without consideration is void but there are some exceptions to this general rule such as

• Natural Love and Affection:
  • An agreement made without consideration is valid if it is made out of love, nature and affection such agreements are enforceable when the agreement is written and registered,
  • Example: Ram, out of natural love and affection, promises to give his son Shyam his house. Ram puts his promise to Shyam in writing and registers it. This is a valid contract
• Compensation for Past Voluntary Services:
  • A promise to compensate wholly or in part, a person who has already voluntarily done something for which the promisor is enforceable.
  • A service should have been rendered voluntarily for the promisor, if it is involuntarily rendered at the desire of promisor then such service will not cover under this exception.
  • Example: A husband by a registered document, after quarrels and disagreements between him and his wife, promised to give his wife a sum of money for her maintenance and separate house, such a promise is unenforceable.
• A Promise to Pay Time Barred Debt:
  • A time barred debt cannot be recovered as per the law of limitation. However, a promise to repay such debt without consideration is valid under Section 25 (3) of the act.
  • Agreement to pay a time-bared debt in enforceable if the following conditions:
    • The debt is a time bared debt.
    • The debtor promises to pay the time barred debt.
    • The promise is written.
    • The debtor has signed the promise.

Consideration under:

• Gift:
  • The rule ‘no consideration, no contract’ does not apply to completed gifts. According to Explanation 1 Section 25, nothing in Section 25 shall affect the validity, as between the donor and the donee, of any gift actually made.
  • Thus, transfer of properties by one person to the other as a gift according to the provisions of the Transfer of Property Act, 1882 (i.e., by a written and registered document) is valid and a person transferring the property cannot subsequently demand the property back on the ground that there was no consideration.
• Agency (Section 185):
  • Under Section 185 of the ICA, no consideration is necessary to create an agency, i.e., a transaction of agency. For giving a person authority to act as agent, consideration is not necessary.
  • Example: If A authorises B to act on his behalf (act as an agent) before C, and B agrees to do so, the contract is enforceable at the court of law although no consideration is moving from A to B. A will be bound by the acts done by B on his behalf as against C.

Case Laws

• Tweddle v. Atkinson (1861):
  • In this case the Court of Queen’s Bench ruled that a Promisee cannot bring an action unless the consideration of the Promisee moved to him.
  • Consideration must move from party entitled to sue upon the contract. No legal entitlement is conferred on third parties to an agreement.
• Chinnaya v. Rammaya (1882):
  • In this case an old lady, by a deed of gift made over certain property to her daughter D under the direction that she should pay her aunt, P (sister of the old lady), a certain sum of money annually.
  • The same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the amount on the plea that no consideration had moved from P to D. Madras High Court held, P was entitled to maintain the suit as consideration had moved from old lady, sister of P, to the daughter D. It was ruled that consideration need not be moved from the Promisee personally.

Conclusion

Consideration is an important element to fulfill the entire requirements of a legitimate contract. The failure of consideration would cause the cancellation of the whole agreement. But the statutory exceptions also cannot be ignored.

It’s very clear and expressly as long as the situations so explained above would fall in exception to the overall rule of the consideration applicable general principles.