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Role of Consideration in Valid Contracts

The maxim "Ex nudo pacto non oritur actio" means No action arises from a bare promise. This legal maxim perfectly captures the essence of consideration in contract law. Consideration is what makes a contract legally enforceable. It ensures that both parties are giving something of value to each other which makes their agreement valid and binding.

Consideration is a fundamental principle under the Indian Contract Act, 1872, where it refers to something of value that is exchanged between parties entering into a contract. This could be money, goods, services or even a promise to do or not do something. It is this mutual exchange of value that gives weight to the parties' promises and makes the contract legally binding. Consideration serves several important purposes in contract law. It shows that both parties are serious about their agreement. This is important because the law only wants to enforce agreements that both sides entered into willingly and with clear benefits for each side. Consideration creates a sense of fairness and balance in contracts. This means that each party is giving something of value to the other.

Definition of Consideration
In order for an agreement between parties to be valid and enforceable consideration is a key concept in contract law that must be given. The Indian Contract Act of 1872 defines consideration as any act performed or abstained from performing as well as any promise made at the promisor's request under Section 2(d) of the Indian Contract Act, 1872.

In simpler terms, consideration involves a "bargained-for exchange" where both parties give something of value or make a promise to receive something in return. This mutual exchange distinguishes a contract from a mere promise or agreement that lacks legal enforceability.

Blackstone defines consideration as the recompense given by one party to the other for their promise and Pollock defines consideration as the price paid for the promise of the other party which makes the promise enforceable when given for value.

In the case of Chidambar Iyer v. Renga Iyer[1] the Supreme Court held that the consideration act as a reasonable equivalent or valuable benefit passed from the promisor to the promise and in the case of Commissioner v. Shiv Kumar Joshi[2] the supreme highlighted that consideration can include any benefit to the promisor or any loss or detriment to the promise and underscores the reciprocal nature of contractual obligations.

In order to create legally binding contracts under the Indian Contract Act of 1872, the valid consideration is a fundamental component of contract law. Firstly, consideration must be provided at the desire of the promisor. This means it should be given in response to the promisor's request or as per their stipulation. Acts or promises undertaken voluntarily and without such prior agreement do not qualify as valid consideration. The Consideration can move from the promisee or any other person connected to the contract. This flexibility allows for parties other than the promisee to provide consideration and provided it meets the other criteria of validity.

The consideration must adhere to legal principles. It cannot involve illegal activities, cause harm to persons or property or be contrary to any public policy. Any such consideration renders the contract void and unenforceable. And consideration must be real and possible. It must involve an act, forbearance or promise that is capable of being performed.

If the act is impossible or uncertain it cannot constitute valid consideration. While consideration need not be equal in value (adequate) but it must still hold some value in the eyes of the law. Parties are free to negotiate terms that they find mutually acceptable without judicial scrutiny of the fairness of the exchange. As long as both parties consent freely and knowingly then the adequacy of consideration is not a legal issue.

Types of consideration
Past consideration
Past consideration in contract instances where the act or forbearance that constitutes consideration has already been completed by the promisee before the promisor made their promise.

Past consideration as defined under the Indian Contract Act refers to acts or abstentions that have already been performed by the promisee or another person before any promise is made by the promisor. According to Section 2(d) consideration includes "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."

In the context of past consideration, the key aspect is that the act or forbearance was undertaken before any promise was given. This means that the consideration provided was not in response to any promise at the time of its performance. Despite this chronological sequence "where the consideration precedes the promise" past consideration can still be considered valid in certain circumstances.

Present Consideration
Present consideration is also known as executed consideration. It occurs when both parties involved in the contract exchange their promises simultaneously. This means that the consideration is given at the same time as the promise is made or shortly thereafter. It involves actions or promises that are performed concurrently or immediately upon entering into the contract. Present consideration signifies a simultaneous exchange where both parties fulfill their contractual obligations simultaneously.

Future Consideration
Future consideration is also known as executory consideration. It refers to a situation where one party to the contract promises to perform their part of the agreement at a future date or upon the occurrence of a future event. This type of consideration involves a promise that is made now for an action or forbearance that will occur or be completed in the future. It signifies an agreement where one party undertakes an obligation that is not immediately fulfilled but is scheduled or contingent upon a future event.

Exceptions of Consideration
Section 25 of the Indian Contract Act, 1872 generally refers that agreement formed without consideration are void. But there are exceptions to this norm in which agreements without consideration can still be legally implemented and valid.

Natural Love and Affection
Agreements made out of natural love and affection between parties, who are closely related such as family members or spouses, can be enforced even without consideration. These agreements must often be in writing and registered to be legally binding.

Past Voluntary Services
When someone has provided a service voluntarily to another person in the past and the recipient promises later to compensate for it that agreements are exceptions to the consideration requirement. The service must have been provided voluntarily and the promise to compensate should be clear and voluntary.

Promise to Pay Time-Barred Debt
A time-barred debt is one that has passed its statute of limitations and is therefore no longer enforceable in court. On the other hand even in the absence of fresh consideration the debtor's written pledges to return all or part of the debt signed by them or their designated representative are enforceable.

Formation of an Agency
No consideration is required in order to establish an agency relationship as stated in Section 185 of the Indian Contract Act of 1872. When a person (the principal) gives another person (the agent) permission to act on their behalf an agency is created. Without giving it any consideration this authorization can be established which is called agency.

Gift is an exception of the "no consideration, no contract" clause. When a donee receives a gift of property or assets that a donor voluntarily gives to them without expecting anything in return the gift is legally recognized and enforceable.

Section 148 of the Indian Contract Act of 1872 defines bailment as the transfer of goods from one person (the bailor) to another (the bailee) for a specific purpose. The essence of bailment is the safeguarding or use of property that the bailee accepts under specific terms and conditions set by the bailor. A bailment arrangement unlike many other transactions is legally binding without the need for consideration.

Charitable Contributions
When individuals promise to contribute to a charitable cause or organization their promises are enforceable even without consideration. This exception encourages donations and contributions for charitable purposes without imposing strict contractual requirements.

  1. 1966 AIR 193
  2. AIR 2000 Supreme Court 331

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