Consideration in a Contract

Introduction

Consideration is one of the essential parts of a contract. Promise and consideration together form an agreement[1] and an agreement enforceable by law is a contract[2]. Section 10 of The Indian Contract Act talks about the essentials of a valid contract. Offer, acceptance, consideration, consent, capacity, and legality of the object are the five major essentials of a valid contract.

Section 2(d) of the Indian Contract Act defines consideration as, an act or abstinence done at the desire of the promisor, by promisee or any other person, on the behalf of the promise made by the promisor, is called a consideration for the promise. An agreement without consideration is void. Section 25 of The Indian Contract Act deals with the exceptions; where even without a consideration a contract will be valid. There are mainly three exceptions, the first one is the agreement made out of love, affection, or relation, second is an agreement where a person voluntarily does something for the promisor, promisee pays compensation wholly or in parts, and the third is a limitation concept.

Essential Elements of Consideration

There are four essentials of a valid consideration. The first one is a consideration only at the desire of the promisor. A desires Rs.5000 for his watch from B. B in place of Rs.5000 gives five gold coins to A. It is not a valid consideration because it is not according to the desire of A.

In the case of Durga Prasad v. Baldeo[3] the collector asked A to construct a shop at the market. A constructs the shop, B takes the same shop on lease and promises to give commission to A on his every sale. B did not pay the commission to A. Court held that B is not entitled to pay the commission to A because there is no consideration in this case. The consideration has to be on the desire of the promisor. B is the promisor as he promises to pay commission to A. But the shop that B has taken on a lease cannot be considered as a consideration as B never asked A to construct the shop. A constructed the shop as per the instruction of the collector.

The second essential of a valid consideration is consideration by a promisee or any other person. For example A gives the book to B for Rs.50. B did not give the money to A. In place of B, C who is B’s son gives money to A. This is a valid contract with a proper consideration. England follows doctrine of Privity of consideration . According to this doctrine if A and B are in a contract then, only B can consider A on behalf of whatever he is getting from A. But India considers a valid consideration as a consideration by the promisee or any other person.

In the case of Chinnaya v. Ramaya[4], A, an old lady handed over her house to her daughter B. In return A asks B to give Rs.653 annuity to A’s brothers X₁ and X₂. B promises to pay the annuity but ends up not giving it. X₁ and X₂ sued B. Court said that although X₁ and X₂ arestrangers to the contract, they can still enforce the contract against B. This was said based on the rule under Indian law which says that the consideration can be paid either by the promisee or any other person. Therefore B is liable to pay an annuity to X₁ and X₂.

The third essential of a valid consideration is that a consideration can be in the past, present, or future. This means that giving of the consideration for a contract is possible either before, during, or even after the contract. English law does not identify past consideration but Indian law does.

The fourth and the last essential of a valid consideration is that there must be an act, abstinence, or promise by the promisee to constitute consideration. The given consideration to the promisor must be of some value. It need not be adequate.

All these factors should be observed before concluding if a consideration is a valid consideration or not. But for a contract to be valid there has to be a consideration.

[1] Section 2(e) of The Indian Contract Act,1872

[2] Section 2(h) of The Indian Contract Act,1872

[3] (1881)ILR3ALL221

[4] ILR(1876-82)4 Mad 137