CONSIDERATION CONTRACT LAW NOTES
QUESTION: ‘Consideration is a necessary element of binding contract.’ Discuss.
ANSWER:
It is true that ‘Consideration is a necessary element of a binding contract as an agreement to be enforceable must be supported by consideration. Under an agreement, whatever a party gains from the other is called consideration.
A valid Consideration means something in return which means Quid Pro Quo. It is a price that the promisor agrees to pay to the promisee to constitute a valid contract.
As per section 2 (d) of 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 abstain from doing, something, such act or abstinence or promise is called consideration for the promise”.
The analysis of above definition shows that:
1. CONSIDERATION MAY BE AN ACT: It means doing something. It is a consideration in the positive sense.
Example: X agrees to construct Y’s house for ₹1,00,000. For Y’s Promise to pay ₹ 1,00,000, the X’s consideration is to construct the house.
2. CONSIDERATION MAY BE AN ABSTINENCE: Abstinence means promise not to do something. It means a person may buy the inaction of the other.
Example: A promises to B to pay him ₹10,000 if B agrees not to file a suit against A. The consideration in the form of abstaining the B not to file the suit is a valid Consideration.
3. CONSIDERATION AS A RETURN PROMISE: The promise of the promisor is a consideration for the promisee and the promise of the promisee is the consideration of the promisor.
Example: X promises to grant a fresh loan after a month to the Y if the Y promises to repay the previous loan within 15 days. These promises made by the parties form the valid consideration.
ACCORDING TO BLACKSTONE
“Consideration is the recompense given by the party contracting to another.”
ACCORDING TO POLLOCK
“Consideration is the price for which the promise of another is bought.”
Consideration:
- Must move at the Desire of the promisor
- Need not to be adequate a sufficient
- Must be real not illusory
Example: X agrees to sell his TV to the Y for ₹8,000. TV set is the consideration of Y and ₹8,000 is the consideration of the X.
ESSENTIALS OF VALID CONSIDERATION
The rules governing the valid consideration are as follows:
1. CONSIDERATION MUST MOVE AT THE DESIRE OF THE PROMISOR
An act or abstinence or a promise which forms the consideration for the promise must have been done at the desire of the Promisor. The desire of the promisor may be Express or Implied.
An act or abstinence done voluntarily or at the instance of third party, by a promisor does not constitute a valid consideration.
CASE: DURGA PRASAD V. BALDEO
The plaintiff (Durga Prasad) constructed a market at the request of the District Collector. The defendants (Baldeo) who occupied the shops, promised to pay to the plaintiff a commission on the articles sold through their agency, in consideration of the plaintiff for the recovery of the commission. The court finds that the market was constructed at the request of District Collector and not at the request of shopkeepers. As a result, the consideration is not valid between the parties.
It is not compulsory that the consideration must benefit the promisor only. It may result in the benefit of the third party. The leading case in this respect is as follows:
CASE: KEDAR NATH V. GORI MOHAMMED
D had agreed to subscribe ₹100 towards the construction of a Town Hall at Howrah. P, the secretary of the committee, on the faith of the promisor called for plans and entrusted the work to the contractors and undertook liability to pay the. D refused to pay the promised amount and P brought a suit against him. It was held that though the promise was to subscribe to a charitable institution and there was no benefit to the D, yet it was supported by a consideration in that P, the promisor suffered a detriment in having undertaken a liability to the contractors on the faith of the promise made by the D.
2. VALID CONSIDERATION MAY MOVE FROM THE PROMISEE OR ANY OTHER PERSON
According to Section 2(d), Consideration may moved from the promisee or any other person. It means the third party i.e. stranger may also furnish the consideration. The requirement of a valid promise is that it must be supported by a consideration and it is immaterial who furnishes it. The stranger who is a party to the contract can sue another party of the contract. This is the “Doctrine of Constructive Consideration”
CASE: CHINAYYA V RAMAYYA
In this case an old lady Lakshmi Rani made a over a certain property to the defendant (Ramayya), her daughter by a registered deed of gift with a stipulation that the daughter would pay a certain amount of money annually to the plaintiff (Chinayya) who is her maternal uncle. On the same day, the defendant executed an agreement in the favour of the plaintiff, promising to carry out the terms of the gift deed.
Afterwards the defendant declined to fulfill her promise saying that no consideration had moved from maternal uncle. But a stranger to the consideration can maintain the suit as Section 2 (d) of the Indian Contract Act, 1872 states that ‘Consideration may move from the promisee or any other person’.
3. CONSIDERATION MAY BE PAST, PRESENT OR FUTURE
As per section 2 (d) of 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 abstain from doing, something, such act or abstinence or promise is called consideration for the promise”.
This definition states the three types of consideration:
Past consideration: If the consideration by a party for a present promise was given in the past i.e. before the date of the promise, it is called a past consideration. It is also known as executed consideration. Example: Sunil find Anil’s purse and return it to the Anil. Anil promises to pay ₹100 to Sunil after 5 days. Thus, the consideration provided by the Sunil’s consideration for Anil’s promise to pay is past consideration i.e. something done before Anil makes the promise.
Present Consideration: The consideration which moves simultaneously with the promise is called present consideration. It is in the process of execution. Cash sales are the most common examples of present consideration, as both parties furnishes consideration at the time of formation of the contract. Example: K sell the goods to the S and in return S pays the price for the goods immediately. This is a Present Consideration.
Future Consideration: The consideration which moves after the formation of a contract is called future consideration or executory consideration. In the case of future consideration both the parties have to perform their obligation after the formation of the contract. Example: Suresh promises to deliver hundred quintals of rice to Y after a month and Y promises to make payment a month after the delivery of the rice. The consideration is future as the consideration moves from the parties after the contact.
4. CONSIDERATION NEED NOT TO BE ADEQUATE
The consideration by one of the parties may not be adequate. The consideration may be adequate, inadequate or grossly inadequate. The adequacy of the consideration is for the parties to decide and the law does not interfere for the same. The only thing require by the law is that the amount of consideration must be of some value statutorily, no matters how small it may be.
Section 25 (2) of Indian Contract Act, 1872 states that inadequacy of the consideration my be taken into account by the court in determining the question that the consent of the parties to the contract was free or not.
EXAMPLE
There is a contract between A and B. the terms of the contract specifies that A has given his house on the rent of ₹1 to B. Court decides that it is a valid contract as consideration need not to be adequate.
5. VALID CONSIDERATION MUST BE REAL
Consideration must be real, competent and not illusory. The promise to do something which the person is already bound to do by law is not the valid consideration. If consideration is physically impossible or vague or illegal, the contract cannot be enforced. The consideration may not be real due to:
- Physical Impossibility: Amar promises Anthony to make his dead wife alive if Anthony pays him ₹10,000. This is invalid consideration as to make a dead person alive is physically impossible.
- Legal Impossibility: X files a suit against Y for non-payment of a debt. Y feels disturbed and approaches X’s brother Z who promises to withdraw the suit for a consideration of ₹500. The promise of Z is legally impossible as the suit can be withdrawn only by X and not by Z.
- Uncertain Consideration: X agrees to pay Y an adequate amount for a certain work. In this, the consideration ‘adequate amount’ is uncertain and hence the agreement is unenforceable.
- Illusory Consideration: There is a case of Ramachandra Chintaman V. Kalu Raju, in which the plaintiff, an advocate, accepted the Vakalatnama to appear on the behalf of the defendant in a certain suit. Subsequently, the defendant agreed to pay the plaintiff a certain sum in addition to his fees, if the suit was successful. The defendant failed to pay the amount and the plaintiff brought an action for recovery. It was held that plaintiff having accepted a Vakalatnama was already bound to render his best service as a pleader. So, the additional fee for the same work is an illusory consideration.
6. VALID CONSIDERATION MUST BE LAWFUL
The consideration for an agreement must be lawful. An agreement is void if it is based on the unlawful consideration. The consideration of an agreement is lawful unless it:
- Is forbidden by law
- Is fradulent
- Defeats the purpose of the law
- Involves injury to the person or property
- Is immoral or opposed to the public policy
CASE: NAPIER V. NATIONAL BUSINESS AGENCY
The plaintiff entered into an agreement of service with the defendant by which it was agreed that he should be paid the sum of $6 per week for the “expenses”. His expenses were very much lower, therefore, this provision was merely device to defraud the Income Tax Authority. It was held that consideration for the agreement was such as it defeats the provisions of the law and hence the agreement was void.
7. VALID CONSIDERATION MUST BE SOMETHING WHICH THE PROMISOR IS NOT ALREADY BOUND TO DO
A promise to do what one is already bound to do either by general laws or under an existing contract, is not a good consideration for a new promise, since it adds nothing to the pre-existing legal or contractual obligation. Likewise a promise to perform public duty by a public servant for something in return is not a valid consideration.
CASE: STILK V. MYRICK
The two seamen deserted the ship in the course of voyage. as the captain of the ship could not find any substitute, he promised the rest of the crew extra wages if they would work the ship home. a seamen filed the case against the captain for the extra wages promised by him to bring the ship home. It was held that the agreement was void for want of the consideration as the seamen had not done anything more what they were bound to do. To bring, the ship safely to its destination or destined port is the duty of the seamen according to the pre-existing contract.
