CONSIDERATION IN CONTRACT

BY Ankit Burman, Anoushka Coutto and Harshini

INDIAN CONTRACT ACT AND THE CONSTUTION

Our constitution is a set of rules and regulations which lays down the framework delimiting fundamental political code, structure, procedures, powers, and duties of government institutions and sets out fundamental rights, directive principles, and the duties of citizens. No laws, acts, rules, regulations, or codes can go beyond the constitution. It can also be said that the constitution is the source of all the laws prevailing in India. According to Art. 372 of the Indian Constitution, all the laws in force in the territory of India immediately before the commencement of this Constitution, "When at the desire of the promisor, the promisee or any other person has done or abstained all the laws in force in the territory of India immediately before the commencement of this Constitution shall continue in force therein until altered or repealed or amended by a competent Legislature or other competent authority subject to the other provisions of the Constitution. The contract law is one such law. Indian Contract act, 1872 or contract law is also one of those laws which has constitutional validity in civil law system. Contract law consists of various significant principles, concepts and doctrines which is of utmost importance from the angle of law. It might not be important from the angle of a layman as there is a lack of legal knowledge. The state plays a very vital role in making contract when it comes to the civil-law system. Various methods are used such as going through legislatures and courts, supplying, and applying the proper terms of the agreement so as to ensure with a more extensive understanding of Social values. The state also has the power to punish any misdemeanours which can occur by sentencing punishments like Enforcing penalty clause, providing specific performance, and making it harder to diluting the contractual responsibility. The judiciary also plays a crucial role in interpreting the laws and its concepts and intentions. There are many supreme court judgements from which references can be taken.

SIGNIFICANCE OF CONSIDERATION IN CONTRACT ACT

Consideration in a contract plays a very important role. Generally, people make contracts and do not even consider it for a moment that they made the contract. A contract is a promise or an agreement between the parties which is enforceable by law. Once it is enforceable by law, it legally binds the parties to such an agreement. There is a Legal maxim which says ‘pacta sunt servanda’[i] and it means that ‘the agreements must be kept’. The parties who entered into the contractual agreements are obliged to respect the agreements. Consideration is also an essential element of the contract. This concept is so wide that it has three categories, exceptions, important case laws, etc. Another point is that promise made without any obligations is very rash and there are no deliberations. That’s why the promises that are backed by the consideration are only enforceable. Another reason for making consideration is that it levies a sort of burden on the parties so that they can fulfil the terms of contract.

INTRODUCTION OF CONSIDERATION (IT'S PROVISION IN CONTRACT ACT)

The relation of consideration without contract is the same as leaves without plant. If we talk in general sense also, then without any benefit, advantage, money no contract arises. For a contract or deal to arise, there must be a proper consideration on the part of both the parties. In common parlance, consideration is a term which means something in return or ‘quid pro quo’. It is basically give and take relationship. This Latin maxim is used for the term consideration. And that something must be agreed by both the parties. That means, the consideration must not be under any coercion or undue influence. There must be mutual consent between the parties.

Section 2(d) of the Indian contract Act, 1872 defines the consideration as:[ii]

"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".

CASE ANALYSIS OF CHINNAYYA VS. RAMAYYA [iii]

Facts: A lady gifted a property consisting of some land by a gift deed to her daughter (defendant). The deed was registered to the proper authorities in which one of its terms was that the daughter had to pay a sum of Rs.653 annually. Later the old lady died. The defendant refused to pay the money to the sister whom she had promised to pay so. Hence, , the defendant is sued by the plaintiff for the recovery of the same.

Issue: Whether an action could be brought by the plaintiff against the defendant for the amount promised in a contract where the consideration for such promise has been furnished by the defendant’s mother (plaintiff’s sister)?

Appellants argument: The consideration for getting the property was a promise to the plaintiff to pay the amount annually.

Respondents argument: The plaintiff was not a party to contract; hence he had no right to compel respondent for paying the promised amount.

Judgement: it was held by Madras High Court that in this agreement between the defendant and plaintiff the consideration has been furnished by her own sister (respondents mother) on behalf of the plaintiff (sister). Although the plaintiff was stranger to the consideration but since he was a party to the contract he could enforce the promise to the promisor, since under law. under section 2(d) of Indian Contract Act,1872 Consideration may be given by the promise or anyone on her behalf.

Thus, consideration furnished by the old lady constitutes sufficient consideration. And this consideration is for the plaintiff to sue the defendant on her promise.

At last, it was held that the sister was entitled to a decree for payment of the annual sum of money.

CONSIDERATION CAN BE DIFFERENTIATED MAINLY INTO THREE TYPES:[iv]

1) Past Consideration - In Past consideration, the promisor receives the consideration before the date of the promise.

2) Present (executed) consideration - Executed consideration can be seen as an act in return of a promise.

3) Future (executory) consideration - Executory Consideration could be something that is done.

• Performance of legal obligations

Consideration, as it is generally said, must be ‘something’. And that ‘something’ must be more than what the promisee is already bound to do. A person may be bound to do something by law or by contract. “Performance of a legal duty is no consideration for a promise”. even before the contract act came into force his principle of English law was adopted by the Madras high court in P.Sashannah Chetti v.P.Ramaswamay Chetti (1868)[v]

Performance of contractual obligation

A) Pre existing contract with promisor

The performance of a duty is already owed is usually not considered as a good consideration for a promise. Even when it is concerned with public policy, it is essential to not encourage a party to use improper pressure or any other means of threatening the party to break one’s contract unless the other party sticks to paying or promises to do so. The promisee must find it beneficial to perform the promise immediately rather than paying for its breach which may not fully compensate the promisor.

B) Promise to pay less than the amount due

A promise to pay less than the amount due in a particular contract cannot be seen as consideration. This rule was first introduced in Pinnell’s case, the court had held that a smaller amount cannot in whole satisfy the larger sum. However, a gift of a horse or a robe etc., can be seen as a good consideration because under certain circumstances it is considered to be more beneficial than money, otherwise, the person would not accept it.

This judgement however has received its fair share of criticism from several jurist, they argued that if a party to the contract is content to receive any amount even if the amount is less and if the lesser amount satisfies him, then it should be be considered as a valid consideration. However, despite of all the criticisms received the Pinnell’s judgment is continued to be applied unanimously in various circumstances.

The law revision committee in its report in 1937 recommended abolition of this rule[vi]. The courts have tried to avoid the awkward results of the rule by admitting exceptions to it. The exceptions are as follows:

A. Part payment by the third party - in the first place, part payment by a third party may be a good consideration for the discharge of the whole of the debt

B. Composition - Secondly, payment of a lesser sum is a good satisfaction for a larger sum where this is done in pursuance of an agreement of compromise entered by the debtor with his creditors.

C. Payment before time - Thirdly, payment of a lesser sum before time, or in a different mode or at a different place than appointed in the original contract or “the gift of a horse, hawk, or robe, etc., in satisfaction is good”.

D. Promissory estoppel - If a person who have contractual rights against other induce by their conduct those against whom they have such rights to believe that such rights will either not be enforced or will be kept in suspense or abeyance for some particular time, in that case those persons will not be allowed by a court of enquiry to enforce the rights until such time has passed.

E. The doctrine of promissory estoppel can be considered as a departure from the doctrine of consideration. A promise that was made not now but in the future is known as estoppel. If the promise is made with the intent of acting upon it and then in actuality was acted on, then the promisor cannot be allowed to back out and this contract could be enforced in a court of law.

THE DISTINCTION BETWEEN CONSIDERATION AND MOTIVE

Consideration should be differentiated from motive or a pious desire to fulfil an obligation. “Motive is not the same thing as consideration”. This well-known phrase occurs in the judgment of Patterson J in Thomas v. Thomas[vii]. Consideration is not the same as motive or even a mere desire. Consideration plays a vital role in the formation of a contract and a contract absolutely cannot be satisfied with merely a moral obligation. Consideration for a promise is always taken as a motive for the promise, unless it is nominal or invented, while a motive for a promise doesn’t always necessarily be considered as consideration to it.

STRANGERS TO CONTRACT–EXCEPTIONS[viii]

There is a simple rule – no consideration, no contract. For a contract to be valid, it must have a consideration otherwise the contract is void and unenforceable. As stated earlier, there is a give and take relationship between the parties to the contract. But in some cases, this rule is not followed. Consideration without contract is not acceptable with subject to section 25 of Indian Contract Act, 1872. Those cases are categorically mentioned below:

1. According to section 25(1), when the promise is made out of natural love and affection is valid even without consideration. The following four elements are essential for such agreement to be valid. They are as follows:

i. The agreement must be written.

ii. The agreement must be registered under the prevailing law.

iii. The parties to the agreement must be intimately related. For e.g., Father- son, husband- wife, etc.

iv. There must be love and affection between the parties.

For e.g., 1. A promise to give Rs. 2,00,000 to his son B because of his love and affection for latter. A makes the promise in writing and registers the same. The promise, in this case, is a valid contract because of the very near relationship between the two.

2. A promises to present a watch B on his birthday. If A does not do that, B cannot sue A because there is no consideration for A for his promise made to B.

2. According to section 25(2), when the promise is made to compensate for voluntary service, it can be made without the consideration. An agreement made without consideration may be valid in case when it is a promise to compensate wholly or in part a person who has already voluntary done something for the promisor.

3. But to apply this rule, the following essentials must exist:

i. The act must have done voluntarily

ii. The act must have done for the promisor.

iii. The promisor must be in existence at the time when the act was done.

iv. The promisor must agree now to compensate the promisee.

Example: A finds B’s purse and gives it to him. B promises to give to A Rs.100. this is a contract.

4. According to section 25(3), When the promise is made to pay a time barred debt, then it is a contract without the consideration. A promise by a debtor to pay a time-barred debt is enforceable provided it is made in writing and is signed by the debtor or his agent generally or specially authorised on this behalf.

Example: A owes Rs.1,00,000 to B, but the debt is time-barred under the law of limitation. Even so, if A gives a written promise to B to pay 50,000, it is deemed a valid contract.

5. According to section 25(4) and sec. 185, when the contract is of agency, then it is a contract without consideration. Agent is a person who act on behalf of the principle. So, in this case contract without the consideration is possible.

6. According to section 25(5), when the contract is for gratuitous, bailment, consideration is not necessary. A bailment arises when one person (the bailor) transfers his possession to another person (the bailee) on the condition that the bailee will restore such possession to the bailor after the purpose for which the transfer was made is accomplished. No consideration is necessary when such bailment is gratuitous, like A lends his furniture to B on the occasion of the marriage of the latter’s daughter.

7. According to section 25(6), when the promise does not have any consideration. Therefore, a promisor of charity or donation is not liable to keep his promise and cannot be enforced to do so. But there is also one exception to this.

Example: 1. A makes a verbal promise to donate Rs.5,000 towards the consideration of a room in a mosque, and later refuses to give the amount. Here, A is not lawfully bound to do so.

But if the promisee, on the strength of the promise, makes a commitment that can result in loss to the promisee if the promisor does not fulfil his promise, the promisee can lawfully claim such damage.

Kedar Nath vs. Gauri Mohammad

In this case, A promised a sum of money for the construction of the town hall in Howrah, and the secretary had planned and given the job to a contractor whom he was liable to pay for the job. Later, A refused to pay the amount promised. It was held that even though the promise for a donation but because the secretary of the committee had incurred a liability because of it, then in this case A will be liable for the payment.

8. In case of the Completed Gift, the rule of No consideration, no contract shall not affect validity of any gift naturally made between the donor and the donee.

9. In Case of Guarantee under section 127 of the Indian Contract act, 1872, A contract of Guarantee is made without consideration.

CONCLUSION

In layman’s point of view, the concept of consideration does not have any serious concern. But from the legal perspective, it forms a very crucial part of the contract. A detailed analysis of consideration is provided in the article however, to give you a brief outlook Section 2d of the Indian Contract Act,1872 provides the definition for consideration. Without consideration, contract is impossible. It can be said that consideration is the heart of the contract. Consideration may be given by the promisor or any other person in Indian law. Consideration can be past, present, or even future but must only concern the parties to a contract and not any third party. From the above points, it can be concluded that contract cannot be made without consideration, but there are certain exceptions where contract becomes valid even without consideration. These exceptions are merely added to protect the interest of the parties to a contract. The concept and its exceptions have also been well defined in the act. Many important case laws explain the features, functions, and significance of consideration. Apart from that, illustrations have also been the helping hand to highlight this concept more precisely.

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[i] Article on pacta sunt servanda by Diva Rai available at https://blog.ipleaders.in/pacta-sunt-servanda/amp/ [ii] Bare Act of Indian Contract Act, 1872 also available at https://indiankanoon.org/doc/877630/ [iii] ILR (1876-82) 4 Mad 137 and available at https://lawlex.org/lex-bulletin/case-summary-chinnaya-vs-ramayya/23389?amp=1 [iv] Types of consideration available at https://www.srdlawnotes.com/2017/06/what-is-consideration-and-what-are.html [v] (1869) MHCR7 [vi] 6th Interim Report, paras 35,40. [vii] (1842) 2 QB 851,859. [viii] Article on exceptions of consideration on July 19, 2019 available at https://www.legalbites.in/exceptions-to-the-rule-of-consideration/