Adequate Consideration: An Essential for a Valid Contract

Introduction:

Section 2(h) of The Indian Contract Act, 1872 enshrines the term ‘Contract’ itself. In accordance with it, a legally implementable agreement turns out to a contract. This legal admissibility or enforceability is verified by the provisions of the legal machinery under Section 10 of the Indian Contract Act, 1872 which postulates the fundamentals of a legitimate contract. Pertinent to Section 10 of The Indian Contract Act, An agreement satisfying the following essentials brings forth a valid contract.

These essentials are as follows:

1. An agreement outlined under Section 2(e) (Comprising of an offer and its acceptance)
2. Intention to create a legal relationship,
3. Lawful Consideration outlined under Section 2(d) and 25,
4. Lawful Objective outlined under Section 23,
5. Competent parties or capacity to contract outlined under Section 11, and 12,
6. Free and genuine consent outlined under Section 14,
7.  Agreement not declared void outlined under Section 2(g) and 24 to 30

Meaning Of Consideration

Consideration with regard to a contract means an advantage or benefit moving from one party to another. The agreement becomes legally admissible only when both the parties give something and get something reciprocally. Consideration must be lawful for the purpose of a legitimate contract to exist.

Illustration:

A offers B his land and in consideration he wants B to kill C. The consideration for this particular agreement is unlawful and is not legally binding. The same would not amount to the existence of a valid contract.

Section 2(d) of The Indian Contract Act outlines the term Consideration as a benefit given by the promisee or any other person to the promisor for an act done or refrained from being done by the promisee or any other person at the inclination of the promisor itself.

Consideration as specified in section 2(d) and Section 25 of The Indian Contract Act requires certain rudiments to be fulfilled:

Consideration must move at the will of the Promisor

In the case of Durga Prasad v. Baldeo[1], the appellant built certain shops at the desire of the collector. Subsequently, the defendant occupied certain shops there and promised to provide commission on the articles sold. Having failed in doing so, the appellant moved to court to make the defendant liable but it was held that the consideration did not move at the desire of the promisor but at the desire of the collector who was not a party to the contract so the appellant could not succeed in his claim.

Consideration by Promisee or any other third person

In India, the consideration may be fixed by the promisee or any other third party but in England, Consideration is to be fixed by the promisee itself and no other person.

In the case of Chinnaya v. Ramaya[2], it was held that as the defendant’s mother though being a stranger to the contract has performed the consideration instead of the promisee, the consideration followed the fundamentals, and hence it was a proper lawful consideration.

Adequacy of Consideration

A Contract that is clogged with consideration does not require consideration itself to be adequate. Adequacy of Consideration means that the value of the consideration should be equal to the worth of the promise made by the promisor. The same is not a benchmark for the contract to be legally enforceable. A contract without consideration is void whereas a contract devoid of adequate consideration is not void. Adequacy of Consideration is not a condition for the admissibility of a contract.

As long as the consent of the parties to the contract is free and genuine, the court of law is not distressed by the fact that the consideration is inadequate or unsatisfactory. The question of inadequacy falls in the hands of parties to the contract at the time of making the contract and not with the court to decide its enforceability on inadequate consideration ground.

Illustration:

A offers to sell his land worth Rs.500000 to B for an amount of Rs 50,000. A has wilfully consented to this particular agreement so although the consideration offered here is inadequate, the contract is legally binding.

Inadequacy of consideration is not a condition to declare an agreement void but this inadequacy might be a subject of an appeal to verify whether the consent was given freely or under compulsion or various other constraints mentioned in Section 14 of The Indian Contract Act.

Illustration:

A agreed to sell his car worth Rs. 6, 00000 to B for Rs 50,000. When this matter reached the court, A revealed that he was under compulsion when he consented to the said contract. In this case, the inadequacy of consideration was taken as corroboration to verify whether the consent was genuine or the particular agreement satisfies the Essential Elements of a Valid Contract under Section 10 of The Indian Contract Act.

Laws Related to Inadequacy of Consideration

Section 25 of the Indian Contract Act specifies that an agreement devoid of adequate consideration is not void unless the parties to the contract are not under any constraints of their will.

Explanation 2 of Section 25 states that “An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor is freely given”

Section 2(f) illustrates with an example that A agrees to sell his horse worth Rs 1000 to B for Rs 10. A’s consent was freely given. The agreement though not satisfying the adequacy of consideration is still enforceable and legally binding.

Case Laws

In the case of Tulsidas Kilachani v. CIT[3], the Supreme Court defined the meaning of the term “adequate consideration” as mentioned in 16(3)(b) of the Indian I.T Act, 1922 and section 25 of the Indian Contract Act, 1872. It was held that the words “adequate consideration” denote consideration other than mere love and affection which in the case of Plaintiff’s wife, maybe the presumption. When the law insists that there should be “adequate consideration” and not “good consideration”, it excludes mere love and affection. They may be considered as “good consideration to substantiate a contract, but “adequate consideration” to avoid taxes could not be condoned. There lies a well-defined distinction between “good” and “adequate” consideration. As far, the question of love affection is considered they may be considered “good” consideration but not “adequate” consideration.

In the case of Browning v. Johnson[4], Both parties were doctors by profession. They entered into a contract of sale whereby the appellant seller agreed to sell his practice and apparatus to the defendant buyer. The seller, later on, refused to sell and wanted to get released from his contractual obligation. The parties then entered into a contract canceling the sale contract, whereby the seller promised to pay the buyer $ 40,000 if the buyer would agree to let go of the contract of sale. The seller later regretted the decision and filed a suit for declaratory judgment and restitution. The seller contended that his promise to pay the buyer in return for the buyer’s promise to cancel the sale contract was not backed up by consideration. The trial court held that the contract canceling the sale contract was supported by “adequate” consideration, judgment was delivered in favor of the buyer, and a contract canceling the sale agreement was enforced.

Conclusion

Consideration is an essential element of a valid contract and in absence of a lawful consideration, an agreement so formed turns out to be void. A void agreement has no legal significance and is thereby non-enforceable. Consideration must be sufficient and need not be Adequate. A Sufficient consideration concentrates on the value of the object as a factor whilst an adequate consideration focuses on the equitable value of the object. An adequate consideration means that the worth of the consideration should justify the objective of what is being offered. Precisely, the consideration must be of equal worth to that of the promise made by the promisor or the obligation promised. As already stated, Adequacy is not a bare minimum requirement of a valid contract because the judiciary is not concerned with maintaining the balance in obligation and consideration and it believes that it falls in the hands of the parties to the contract to decide for inadequacy if there is one, at the time of agreeing. Inadequate consideration is not void but it may create an arena of doubt as to whether the consent of the parties was free from any constraints like coercion, undue influence, and duress.

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References:

[1] 1880 3 ALL. 221

[2] (1882) I.L.R. 4 Mad.

[3] [1961] 42 ITR 1

[4] 1972 SCC Online US SC 83 : 405 US 727 (1972) : 92 Sc.D. 1361 : 31 L.Ed.2d 636