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Adequacy of Consideration

Consideration is one of the essentials of forming a valid agreement. The consideration needs to be lawful. The Section 2(d)[1] of the Indian Contract Act, 1872 defines consideration as,

"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 to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise."[2]

The classic definition of valuable consideration as defined by Lush J. in the case of Currie v. Misa[3] is, "A valuable consideration in the sense of law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other."

The Section 10[4] of the Indian Contract Act, 1872 prescribes that there must be a lawful consideration for an agreement to be a contract.

Also, it has been laid down by Subba Rao J. of Supreme Court in case of Chidambara v. P.S. Renga[5] that consideration "shall be 'something' which not only the parties regard but the law can regard as having some value.[6]

The English common law insists that "the consideration must be of some value in the eyes of the law." In the case of White v. Bluett[7], Sir Charles Edward Pollock said, "It would be ridiculous to suppose that such promises could be binding. In reality, there was no consideration whatever."

Since it is necessary to have lawful consideration to form a valid agreement, agreement without consideration is void. Hence, the Section 25[8] of the Indian Contract Act, 1872 prescribes that an agreement without consideration shall be void except the exceptions specified in the section itself.

What is Adequacy of Consideration?
'Adequate consideration' generally is one 'which is a fair and equivalent in value for benefit obtained.' It is under all circumstances 'honest reasonable, and free from suspicion,' whether or not strictly 'adequate' or 'full'.

As the term suggests, inadequate consideration is a consideration that is not sufficient for or of equal worth to the thing conveyed. It is crucial to differentiate between the existence of consideration for a contract and the issue of its worth because there is a big difference between inadequate consideration and no consideration at all.[9]

This leads us to the question whether consideration needs to be economically 'adequate' in order to be considered a lawful consideration. This project tries to answer the question along with examining the importance of 'inadequacy of consideration' as a factor determining the free consent of the parties.

Consideration Need Not be Adequate
In general, 'adequate consideration' is one that is 'fair and commensurate in value for benefit gained.' It is always 'honest, rational, and free from suspicion,' whether precisely 'adequate' or 'full.' The consideration for a promise does not have to be adequate as long as it is adequate. It indicates that there is no requirement for the consideration to be economically commensurate to the promise made, if it is viewed as having some value in the eyes of law and is provided at the request of the promisor.

There is a distinction to be made between 'sufficient' and 'adequate' consideration. Sufficient consideration suggests that the courts will not enforce a promise unless something having value in the eyes of law is provided in exchange for the promise. While adequate consideration implies whether adequate economic value has been given in return for the promise or whether the agreement is harsh or one-sided. Consideration cannot be based on mere feeling, and consideration cannot include a vow to give up a right that is not possessed.[10]

The explanation 2 of the section 25 of the Indian Contract Act, 1872 explicitly prescribes that mere inadequacy of consideration does not make a contract void but it can be considered by the courts in order to determine the free consent of the promisor. The explanation 2 of the section 25 of the ICA reads as follows:

"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 was freely given."

The illustration (f) of the section 25 of the ICA also explicitly mentions that mere inadequacy of consideration does not make a contract void. The illustration (f) reads as follows:

"A agrees to sell a horse worth Rs. 1,000 for Rs. 10. As consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration."

Small Amount of Money as Adequate Consideration

Thomas v. Thomas
In the case of Thomas v. Thomas[11], before his death, Mr Thomas declared his desire for his wife to have the house they resided in for the rest of her life. This request, however, was not included in his will. Following his death, his executors agreed with Mrs Thomas that she would pay a peppercorn rent of 1 per year in exchange for the right to reside in the property. They later attempted to depose her. It was argued that no contract existed since Mrs Thomas offered inadequate consideration because the rent was nothing resembling a commercial rent for the property.

The statement of the executors did not form a contract because it just conveyed their motive for entering into the contract. The 1 rent, on the other hand, was seen as good consideration. J. Patteson, "Motive is not the same thing as consideration. Consideration means something which is of some value in the eye of the law, moving from the plaintiff."

The transaction was just a voluntary gift without consideration. Mrs Thomas, on the other hand, had supplied consideration by consenting to pay rent in exchange for the right to remain in the property, even if the rent was not economically adequate or comparable to a commercial rent for the property. Therefore, the contract was enforceable.

Mountford v. Scott
In Mountford v. Scott[12], the defendant signed an agreement for 1 that gave the plaintiff a six-month option to buy his residence for 10,000. Later, the defendant notified the plaintiff in writing that he was withdrawing his offer to sell. The plaintiff exercised their choice, but the defendant contested the agreement's binding nature and refused to comply. The plaintiff sought specific performance. The defendant claimed that 1 was not a valued consideration under the law.

It was determined that in the eyes of the law, 1 is an adequate and valuable consideration. Although the consideration was insufficient, it was adequate. There is no basis to argue that the consideration was insufficient or that any additional specified performance should not be imposed. Consideration must have some monetary worth, no matter how minor. The Court of Appeal ruled that this option agreement was enforceable against defendant and that the fact that plaintiff's compensation may be regarded as a token amount was immaterial.

Devji Shivji v. Karsandas Ramji
In Devji Shivji v. Karsandas Ramji[13], the plaintiff executed an assignment deed in favour of the defendant with respect to the transfer of goodwill and the entire company assets. The plaintiff claimed that the assignment deed was benami or farzi, and that a consideration of Rs. 1000 was specified in the deed for income tax reasons.

The plaintiff's claim was dismissed by the court. It was decided that the fact that a modest consideration of Rs. 1000 was imposed cannot be regarded as a circumstance supporting the plaintiff's farzi argument. The defendant said unequivocally that he would not accept the gift of goodwill or assets unless some consideration was included, and therefore Rs. 1000/- was determined as the consideration.

A modest consideration can support a large commitment, and mere undervaluation cannot exclude a man from making a transaction for valued consideration without purpose. In this case, the plaintiff demanded such a modest amount out of love and devotion. The consideration was deemed acceptable because it was agreed upon by both parties.

The consideration will be considered sufficient, regardless of how minor or inconsequential the act is. If a party receives what he has asked for and it is of some value, however small or large, it will be regarded adequate consideration, and the courts will not decide what should be adequate consideration for a promise.

If the promised consideration has a monetary worth, no matter how little, there is a valued consideration, and the Court will not inquire into its sufficiency. The courts will not make negotiations for the parties, and if a person receives what was agreed upon, they will not question if it was an equivalent to the promise offered in exchange.[14]

In an interesting case of Chappel & Co Ltd v. Nestle Co. Ltd[15], the appellant held the copyright of a well-known song. Nestle, a chocolate company, promised to give out recordings with the song to anyone who purchased 1s 6d plus three chocolate wrappers from their 6d chocolate bars. The appellant claimed that he did not receive enough royalties from the sale of the album. The House of Lords had to decide whether wrappers formed part of consideration.

The majority of the judges decided that the chocolate wrappers were adequate consideration. Nestle's objective in record sales was to encourage the sale of its chocolate. Nestle gained from the increased chocolate sales and exposure produced by the deal, therefore the obligation to send in chocolate wrappers was a key element of the contract for Nestle. A contracting party may agree to any consideration he choose. It might be of little or no use to him. In this example, the chocolate wrappers were useless and were discarded, yet they accounted for an adequate consideration. The notion that the wrappers had no intrinsic value to the corporation was dismissed.

According to the Peppercorn Theory, something as modest as a peppercorn might be adequate consideration when provided in exchange for a promise. "A contracting party can stipulate for whatever consideration he likes," Lord Somervell[16] says. If it is proved that the promisee does not like pepper and will toss away the corn, a peppercorn remains a good consideration."

In the case of De La Bere v. Pearson[17], the defendants, who owned a newspaper, advertised in their daily that their city editor would provide financial advice to the queries recieved from the readers of the newspaper. In response, the complainant wrote to them, requesting a secure investment as well as the name of a "decent stockbroker." The editor suggested a name, which he knew was an outside broker.

The outside broker was an undischarged bankrupt, which was unknown to the editor, who could have easily verified his financial situation if he had inquired. In reliance on the proposal, the plaintiff provided funds for investment, which were soon plundered. It was debated whether there was adequate consideration for the advice to be given.

It was decided that there was adequate consideration. Because the promisee, in this case, newspaper editors, stands to gain from such a promise, it amounts to adequate consideration. The contract was closed as soon as the reader put in his query, the general offer being more than just an invitation, but a contract proposition. Furthermore, the bother of making an enquiry is an adequate consideration on the reader's behalf.

Reason For Such Rule
The reason for this rule is that courts of law will not make bargain for parties, who, while entering into a contract, must look after themselves. As Pollock observes, the attitude of English positive law and English school of jurisprudence is characteristic. Parties, in the exercise of their free will, are left to make their own bargains. In the words of Hobbes "The value of all things contracted for is measured by the appetite of the contractors, and therefore the just value is that which they contended to give.[18]

The justification for this rule is that courts of law will not make bargains for parties who must look after themselves when entering into a contract. Pollock observes that the attitude of English positive law and the English school of jurisprudence is distinctive. Parties are permitted to strike their own deals in the exercise of their free will. "The worth of all things negotiated for is measured by the hunger of the contractors, and hence the right value is that which they contended to give," Hobbes said.[19]

As a result, the law does not require that the consideration be full or equivalent to the economic value of what is received in return. It is because contract law is unconcerned with whether the parties are receiving a decent bargain. It would be wrong if only contracts in which the court determined the full market value of performance had been charged were considered enforceable.[20]

Parties Should Decide on Adequacy
A promise is not enforceable under the doctrine of consideration until it has received some value in the eyes of law. However, as a general rule, the courts do not get involved in whether adequate consideration was provided, or whether the agreement is one-sided or unduly severe for one party. If a party receives too much or too little consideration, the parties must decide whether the amount is adequate to constitute consideration or not based on their own convenience.

The courts are unlikely to settle what should be the proper value for a promise. It is totally up to the parties to make a decision. If a party receives what he has contracted for and it is of some worth, however vast or small, the courts will not inquire if it was comparable to the promise he made in exchange.

In the case of Vijaya Minerals Ltd v. Bikash Chandra Deb[21] the plaintiff filed a suit for specific performance of an agreement. The agreement specified the price at which the defendant was to sell the ores to plaintiff and also stated in paragraph 6 (a) that plaintiff had previously paid an advance sum to defendant. Despite receiving the agreed-upon payment, the defendant refused to sell and deliver the ore. The defendant asserted that the consideration is so minimal that the courts should conclude that the plaintiff unfairly influenced the defendant and that the agreement is void due to fraud.

It was decided that in the absence of undue influence or duress courts could not declare a contract nugatory owing to inadequacy of consideration. The Courts do not accept inadequacy of consideration as a reason for refusing to execute contractual commitments. Furthermore, both sides had agreed on the amount of compensation. As a result, the consideration was adequate, and the agreement was valid.

In the case of Bolton v. Madden[22], Blackburn J. remarked, "the adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced".

The courts should not be regarded as unconcerned about the issues created by unequal or unjust agreements. A pledge cannot be declared void simply because adequate value for consideration was not provided. Courts can only intervene if the consideration was formed by fraud or misrepresentation. The usual norm is that the courts will enforce a contract if some value has been provided as consideration.

It was further held in the case of Sudhakar Sahu v. Achutananda Patel[23] that the passage of consideration cannot be disputed except by parties to the contract or those who claim through those parties. Only the contract's parties can decide on the issue of adequacy. Third parties are not permitted to decide or contest the presence of adequate consideration.

Also, in the case of Desigovda v. Karnataka Industrial Area Development Board[24], landholders who accepted compensation for property acquisition under voluntary agreements could not challenge this sum later when the civil court awarded compensation at a substantially greater rate in respect of identical areas.

Nominal Consideration and Inadequate Consideration
A nominal consideration is one provided by one party to an agreement that has little or no value in comparison to the consideration offered by the other party to the agreement.

Inadequate consideration must be separated from nominal consideration. A nominal consideration is one that is purposely inserted by the parties in order to bind a gratuitous pledge. Inadequate consideration is one that is much less than the promised performance. The Act makes no distinction between the two, and any nominal consideration is sufficient to sustain a contract in the eyes of the law.

While the court may consider inadequate consideration in deciding whether or not assent to a contract was freely granted, nominal consideration is more likely to be conveyed with proper care and thinking. The text of the paper may not reflect the underlying objective, as these contracts are sometimes designed to disguise the genuine nature of the transaction.[25] Although the parties are allowed to contract for a minimal fee, the prejudice created to third parties is undesirable and may be dealt with under other laws governing fraudulent transactions.

As common law courts will not inquire into the adequacy of consideration, the court will not refuse to enforce a contract because the consideration is inadequate, provided the parties were on an equal footing when entering into the agreement and the element of fraud was absent.[26]

If the consideration is inadequate, an agreement to which the promisor willingly consents is not void simply because the consideration is inadequate, pursuant to Explanation 2 under section 25[27]. However, the Court may consider the inadequacy of the consideration when deciding whether the parties' consent was freely granted.

Conclusion and Suggestions
It can be concluded that the courts will not intervene on the issue of adequacy of contemplation; that decision is left to the parties. If a party receives too much or too little, it is up to them to decide if it is enough or not while making the contract. The courts are unconcerned about whether the parties are receiving a good bargain or not, because it would be wrong if only those contracts were deemed binding in which the court judged that the full market value of performance had been charged.

It has not been prescribed by the law that the consideration be equal to or greater than the economic worth of what is received in exchange. Because contract law is indifferent to whether the parties are getting a good deal. It would be incorrect to deem enforceable those contracts in which the court judged the full market value of performance had been charged.

According to Explanation 2 of Section 25[28] of the Indian Contract Act, 1972, if the consideration is inadequate, an agreement to which the promisor freely consents is not void just because the consideration is inadequate. However, while determining whether the parties' consent was freely offered, the Court may consider the inadequacy of the consideration.

End-Notes:
  1. The Indian Contract Act, 1872 (9 of 1872) s 2 (d).
  2. ibid.
  3. Currie v Misa [1875] 10 LR Ex 153.
  4. The Indian Contract Act, 1872 (9 of 1872) s 10.
  5. Chidambara Iyer v P S Renga 1966 1 SCR 168.
  6. Avtar Singh, Contract and Specific Relief (12th edn, Eastern Book Company 2017) 109
  7. White v Bluett [1853] 23 LJ Ex 36.
  8. The Indian Contract Act, 1872 (9 of 1872) s 25.
  9. Warren H. Hyman, 'Adequacy of Consideration and the Unconscionable Contract' (1981) 86 Com LJ, 500.
  10. Jill Poole, Textbook on Contract Law (13th edn, OUP Oxford 2016).
  11. Thomas v Thomas (1842) 2 QB 851.
  12. Mountford v Scott 1975 2 WLR 114.
  13. Devji Shivji v Karsandas Ramji AIR 1954 Pat 280.
  14. Laurence Koffman and Elizabeth Macdonald, The Law of Contract (7th edn, Oxford University 2010) 68.
  15. Chappel & Co Ltd v Nestle Co Ltd, 1960 AC 87,114
  16. ibid
  17. De La Bere v Pearson 1908 1 KB 280, 287
  18. C. G. Weeramantry, The Law of Contracts (Lawman India 1999) 251
  19. Laurence Koffman and Elizabeth Macdonald, The Law of Contract (7th edn, Oxford University Press 2010) 66
  20. Janet A O'Sullivan and Jonathan Hilliard, The Law of Contract (5th edn, Oxford University Press 2006) 97
  21. Vijaya Minerals Ltd v Bikash Chandra Deb AIR 1996 Cal 67
  22. Bolton v Madden [1873] LR 9 QB 55, 57
  23. Sudhakar Sahu v Achutananda Patel AIR 1967 Ori 89
  24. Desigovda v Karnataka Industrial Area Development Board AIR 1996 Kant 197
  25. Frederick Pollock, Dinshah Fardunji Mulla & R. G Padia, Indian Contract & Specific Relief Acts (13 edn. Lexis Nexis 2007) 100
  26. The Harvard Law Review Association, 'Inadequacy of Consideration as a Bar to Specific Paerformance' (1902) 15 (9) Harvard Law Review <http://www.jstor.org/stable/1323758> accessed 10 November 2022
  27. The Indian Contract Act, 1872 (9 of 1872) s 25.
  28. The Indian Contract Act, 1872 (9 of 1872) s 25.
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