Consideration is essential for a valid contract. It is the price for a promise- a quid pro quo. It is the value received as incentive for the promise. A contact without consideration is not binding on the parties.
Blackstone defined consideration as “the recompense given by the party contracting to the other”. Pollock took consideration to be “the price for which the promise of the other is brought, and the promise thus given for value is enforceable”.
Section 2(d) of the Indian Contract Act, 1872 defines consideration in the following words:
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 a consideration for the promise.
Essentials for a valid consideration
1. It is given at the desire of the promisor
The action or abstinence from action must be done at the desire of the promisor. If the promisee has done something or abstains from doing something at the desire of a third-party or voluntarily, it is not valid consideration. The consideration has to be done at the instance of the promisor or the promisee will not be able to enforce the same.
2. It may move from any person
It does not matter who furnishes the consideration. The consideration may be moved by the promisee himself or any other person
3. It can be past, present or future consideration
A. Past Consideration
Consideration is a price for a promise and thus, it is usually given in response to and as inducement for the promise. If the consideration is given earlier than the date of promise by the promisor, then it is known as past consideration.
For instance, the promise to pay a debt that one is already under an obligation to pay is past consideration. Past consideration is usually not considered to be consideration for the new promise because it has not been given in exchange for the new promise.
Past consideration is good consideration under Indian law as long as it was given at the desire of the promisor.
Past Voluntary Service
A person may render voluntary service to another without any request or promise. In some cases, the receiving party may subsequently make a promise to pay for the services rendered. Such a promise is enforceable in India under section 25(d) of the Act.
Section 25(d) also covers acts done at request and for which promise to pay is given later. Every request for an act carries an implied promise to pay.
B. Present Consideration
When consideration and promise take place simultaneously, it is called present or executed consideration.
For example, in cash sales, the promise to pay the price and promise to deliver the goods are performed at the same time. Executed consideration is good consideration.
C. Future Consideration
If the consideration for a promise moves after the formation of the contract, it is called future or executory consideration.
It is a promise to do, abstain or suffer which is made by one party in return for a similar promise from the other party.
4. It must be real and possess value. It must not be illusory
Consideration must have some value in the eyes of the law. A worthless act cannot satisfy the spirit of the definition.
While the consideration must be real, it does not to be adequate for the promise. It is for the parties to consider what is adequate consideration for them.
A contract which is supported by consideration is valid irrespective of the fact that the consideration is inadequate. However, the Court may look into the inadequacy of the consideration to ascertain whether the consent of the party was free or not. Consideration need not be adequate but it must be sufficient in the eyes of the law.
‘Forbearance to sue’ refers to a scenario where a part has a right of action against the other party or a third person and he refrains from bringing action in consideration of promise by the other or third-party. Forbearance to sue is valuable consideration provided such action does not give rise to an illegal contract.
5. It must be something other than the promisor’s existing obligation.
Performance of an existing obligation or legal duty is no consideration for a promise.
6. It must be lawful.
The consideration must not be unlawful or opposed to public policy.
Contracts without consideration
Consideration is one of the essential features of a contract as per section 10 of the Indian Contract Act, 1872. Section 25 further provides that an agreement without consideration is void.
Section 25 also lists the exceptions to this rule that an agreement without consideration is void as given below:
1. Natural love and affection
A registered written agreement made on account of natural love and affection between near relatives is valid even though it is without consideration. ‘Near relatives’ includes persons related by blood or marriage.
In case of Rajlukhy Devi Vs Bhootnath Mookerjee, [(1900) 4 Cal. WN 488] the husband promised to pay his wife a certain sum of money per month for her separate residence and maintenance. The agreement also mentioned quarrels and disagreement between them. It was held that the agreement was without consideration and void for there was no love and affection between the parties as evidenced by their separation because of quarrels and other conflicts.
2. Promise to compensate for Past Voluntary Debts
Section 25(d) lays down that a promise to pay whether wholly or in part for the past voluntary service is binding as long as the requirements are made:
- the act was done or service was performed voluntarily
- that act or service was to promisor
- the promisor was in existence at the time when the act or service was done
- the promisor agreed to compensate the promisee’s voluntary service.
For example, work done by a promoter of a company before its formation cannot be claimed as work done for the company (Ahmedabad Jubilee, S&W Co. Vs Chottalal Chagulal (1908) 10 BOM L.R. 141)
3. Time Barred Debts
A promise to pay a time barred debt is enforceable as long as it is in writing and signed by the promisor or his agent. Section 25(3) envisions an express promise and not an implied or vague intentions. For example, an acknowledgement of debt with an undertaking to pay interests is valid under Section 25(3).
In R. Suresh Chandra and Co. Vs Vadnese Chemical Works (AIR 1991 BOM. 44), it was held that a statement in a balance sheet (of a firm) which is signed by a partner will make the firm liable in respect of the stated sum the same transforms and acts like an implied promise to pay.
Explanation 1 to Section 25 makes it abundantly clear that the rule ‘a contract without consideration is void’ does not apply to gifts made by the donor and accepted by the donee.
No consideration is needed to create a valid agency.