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The Concept of Consideration under the Indian Contract Act, 1872

Section 25 of the Indian Contract Act opens with the declaration that an agreement made without consideration is void…. This section then goes on to provide certain exceptions to the rule. The questions of consideration do not arise unless there is an agreement.

Consideration is the sixth essential element necessary for the formation of a valid contract.

Definition and its Requirements:
Consideration has been differently defined by many.

The simplest definition is by Blackstone [1]:

Consideration is the recompense given by the party contracting to the other. In other words, it is the price of the promise. The definition of consideration as a price of the promise has been commended by Cheshire and Fifoot. The Calcutta High Court in a case made the observation that, consideration is the price of a promise, a return or quid pro quo, something of value received by the promisee as inducement of the promise. [2]

Although, the most widely accepted definition is the one attempted by LUSH J in Currie v Misa [3]:
A valuable consideration in the sense of the 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.

In section 2(d) of the Indian Contract Act, consideration is defined as follows:
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.

It is a rather practical definition and lays emphasis on the fact that consideration is any act done or abstained, promised to do or abstain from doing, at the desire of the promisor.
The definition of section 2(d) requires:
  1. that the act or abstinence which is to be consideration is to be done at the desire of the promisor; and
  2. it should be done or executed by the promisee or any other third party subject to prior consent of the promisor; and thirdly, the act or abstinence may have been executed, in the process of being executed or may be still executory, which is promised to be done.

Promissory Estoppel: At the desire of the promisor
The definition of consideration laid down by Section 2(d) lays great emphasis on the fact that an act shall not be considered to be a good consideration for a promise unless it is executed at the desire of the promissor.

In Durga Prasad v Baldeo [4]
At the order of the collector, on his own expense, the plaintiff built certain shops in a bazar. The shops came to be occupied by the defendants who, as a consideration to the plaintiff for having expended finances for the construction of the shops, promised to pay him a commission on certain articles sold by their agency in the bazar. The action of the plaintiff to recover the commission was rejected.

The only ground for the making of the promise is the expense incurred by the plaintiff in establishing the Ganj (market) but it is clear that anything done in that way was not ‘at the desire’ of the defendants so as to constitute consideration. The act was not the result of the promise but of the collector’s order.

Whereas, on the other hand, an act done or abstained from doing at the desire of the promisor, furnishes a good consideration for a promise even if it is of no personal significance to him (the promisor).

In Kedarnath Bhattacharji v Gorie Mahomed [5]
A town hall was to be erect at Howrah, for the purpose of which the municipality commissioners thought appropriate to obtain necessary and sufficient funds through public subscription. On the faith of promised subscriptions, the plaintiff established a contract with the contractor and entered into the performance of the act.

The defendant being a subscriber to this fund for Rs. 100 and having signed his name in the subscription book for this purpose and amount, failed to pay the amount and contended that there was no consideration for his promise.

He was however held liable as persons were asked to subscribe knowing the purpose of such subscription and knowing well in advance that the on the faith of the subscription an obligation to pay the contractor for the work was to be incurred.

The act of the plaintiff in entering into contract with the contractor was done at the desire of the defendant (the promisor) so as to constitute consideration within the meaning of Section 2(d).

Unilateral Promises
A unilateral promise can be defined to be a promise from one side only and is intended to induce some action by the other party. a unilateral contract refers to a gratuitous promise where only one party makes a promise without any return promise. [6]

In this case, the promisee is not bound to act for he had given no promise from his side. But if he carries out the act at the desire of the promisor, he can hold the promisor to his promise.
It should be notes that a liability arises only when the promisee held by doing some act, on the faith of the promise. Therefore, no liability arises if the promisee has done nothing, hence, there is no consideration.

In Abdul Aziz v Masum Ali [7]
The defendant promised to pay an amount of Rs. 500 for the purpose of reconstruction of a mosque, though nothing had been done to carry out the repairs and initiate reconstructions. Therefore, the subscriber was not held liable.

Revocation of Unilateral Promises
It is a known fact that a promise given in return for an act is revocable before the promisee begins to act upon it. Although, it is impossible to revoke a promise if the promisee has entered into performance of the promise.

Privity of Contract and of Consideration:
The rule of privity of contract’ which means that a stranger to a contract cannot sue takes its roots from the English Common Law.

Promisee or any other person
Another notable feature highlighted in the definition of consideration in Section 2(d) is that the act which is to constitute a consideration must be done by the promisee or any other person. Therefore, in other words, as long as there is a consideration for a promise, it is immaterial as to who has furnished. It may be moved by the promisee or from a third party at the consent of the promisor.

In Duttan v Poole [8]
A person who had a daughter to marry, in order to provide for her marriage portion, he intended to sell wood that he had in his possession at the time. His son (the defendant) promised that if ‘the father would forbear to sell at his request he would pay the daughter £1000’. The daughter and the husband sued the defendant for such amount.

The defendant here was held liable as it was clear that he gave his promise to the father and it was the father who furnished consideration for the promise by abstaining to sell such wood. The plaintiff was neither privy to the contact nor interested in the consideration but it becomes equally clear the whole purpose of the contract was to provide a portion to the plaintiff as it would have been inequitable to deprive the sister of the portion and yet allow the son to keep the wood.

Promise of Beneficiary who is not Party
In Tweddle v Atkinson [9]
The bench in this case refused to follow the principle mentioned above.

The plaintiff was to marry the daughter of G, against which G and the plaintiff’s father entered into a written contract to provide the plaintiff with a sum of money as consideration. G failed to pay such amount and the plaintiff sued his executors.

WHITMAN J considered it to be an established principle ‘that no stranger to the contract can take advantage of a contract, although made for his benefit’.

Thus, although the sole purpose of the contract was to secure a benefit to the plaintiff, he was not allowed to sue due to the very reason that the contract was made with his father and not him.

This particular case laid the foundation of what subsequently came to be known as the doctrine Privity of Contract, which means that a contract is a contract between parties only and no third person is allowed to sue upon it even if it is avowedly made for his benefit.

Position in India: Decisions following English Law
In India, there has been a divergence of opinions in the courts as to how far a stranger to a contract can enforce it. There are multiple decided cases which declare that a contract cannot be enforced by a person who is not a party to a contract. Although, there is no such provision in the Indian Contract Act either for or against such rule.

The Privy Council extended the rule to India in its decision in Jamna Das v Pandit Ram Autar Pande [10]

A borrowed an amount of Rs. 40,000 by executing a mortgage against her zamindari in favour of B. Subsequently, A sold the land to C at a sum of Rs. 44,000 and allowed C, the purchaser, to retain Rs. 40,000 in order to redeem the mortgage if C deemed appropriate. B sued C for the recovery of the mortgage money but he could not succeed since C was no party to the agreement between A and B.

Thus, where a party transfers property to another and stipulates for the payment to a third part, such stipulation cannot contend in a court of law. Although, the party making the contract can and may sue for specific performance to secure the benefit of the third party.

Consequently, based on the same principle, a Hindu assured’s wife’s claim was denied for the recovery of insurance money due under her deceased husband’s policy. Though a nominee under the policy, it was concluded that she was not a party to the contract between the deceased husband and the insurance company and could not therefore enjoy benefits under the policy merely because she was named in the policy.

The Supreme Court upholds Privity
The Supreme Court of India presented itself in favour of the principle laid down by Tweddle v Atkinson. [9]

In Jamna Das v Ram Autar Pande [10]
The Judicial Committee pointed out that the purchaser’s contract to pay off the mortgage could not be enforced by the mortgagee who was not a party to the contract.
Therefore, it was well-established that other than in cases of a beneficiary under a fund/trust or family arrangements, no right may be enforced by a person who is not a party to the contract.

Exceptions to Privity Rule
Eventually, over a period of time the courts have certainly introduced certain exceptions to the rule of privity of contract from preventing a person from enforcing a contract made in his benefit but of which he is not a party to. These exceptions are connected with the special branches of the law of contract, such as agency, negotiable instruments, transfer of property, railway receipts, bill of lading etc.

Beneficiaries under trust or charge or other arrangements
If a charge or other interest in some specific property has been created in favour of a person who is not a party to the contract, such person may have the power to enforce such a contract.

In Nawab Khwaja Muhammad Khan v Nawab Hussaini Begum [11]

The appellant executed an agreement with the respondent’s father that as consideration for the respondent’s marriage with the appellant’s son (both minors at the time), he would pay a sum of Rs. 500 a month to the respondent for petty expenses and charged certain properties with the payment, with power to the respondent to enforce it. The husband and wife separated due to a quarrel and the suit was brought to court by the plaintiff-respondent for the recovery of the arrears of this annuity.

It was concluded that although the respondent was no party to the agreement, she was clearly entitled to proceed in equity to enforce her claim.

Here the agreement executed by the defendant (appellant) specifically charges immovable property for the allowance which he binds himself to pay to the plaintiff (respondent); she is the only person beneficially entitles under it.

Marriage settlement, partition or other family arrangements

Where an agreement branches out from marriage settlement, partition or other family arrangements, carrying a provision to secure the benefit of a person, he or she may enjoy such benefits and advantages of such agreement although not being a party to the agreement.

In Rose Fernandez v Joseph Gonsalves [12]
The father of the girl entered into an agreement with the defendant for the purpose of the girl’s marriage, it was realised that the girl, after attaining majority age could file a suit for damages for breach of the promise to marry and the defendant could not make a plea, although she was no party to the agreement.

In Daropti v Jaspat Rai [13]
The wife of the defendant left him owing to the claim of cruelty. The defendant later entered into an agreement with the wife’s father, promising to treat her properly and if, upon failing to do so, promised to pay her monthly maintenance and provide her with a dwelling. Subsequently, the defendant continued the maltreatment and finally the wife was driven out. It was later concluded that she was held eligible to enforce the promise made by the defendant to her father.

Acknowledgement or estoppel
Where a person is required to make a payment to a third party owing to the terms of a contract and he acknowledges such obligation, thereby a binding liability is incurred towards him. Acknowledgement may be express or implied.

In N. Devraja Urs v Ramakrishniah [14]
A sold a house to B under a registered sales deed and left a part of the sales amount in his hands to pay this amount to his creditor, C. subsequently, B made part payments to C and informed him that they were out of the sale price and the balance would be remitted immediately. However, B failed to remit the balance and as a consequence C sued him for the same.
The suit was held to be maintainable.

Though originally there was no privity of contract between B and C, B having subsequently acknowledged his liability, C was entitled to sue him for recovery of the amount.

Covenants running with land
The rule of privity of contract may also be modified to make exceptions for principles relating to transfer of immovable property.

In Tulk v Moxhay [15]
The principle of this famous case is that any person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land, shall be bound by them although he was not a party to the agreement.

Past, Present and Future Consideration:
…Has done or abstained from doing…
This means that consideration is an act or abstinence which has been executed at the desire of the promisor or is in the process of execution or is promised to be done in the future.
An act or abstinence which has already been done against a promise, at the desire of the promisor is known as an executed consideration.

Past Consideration
It is known to be an old age principle of the English Law that consideration to any promise should be simultaneous to or contemporaneous with the promise.

Consideration is supposed to be a price for the promise and it should be in response to or as an inducement for the promise. If the act or abstinence is done before there is any promise, it is referred to as past consideration and past consideration is no consideration.

In Roscorla v Thomas [16]
Where an agreement being completed between parties for the sale of a horse had a subsequent warranty for the horse’s soundness. It was later discovered that the horse was vicious is behaviour. The buyer consequently sued and it was concluded that the promise for the soundness of the horse was unsupported by consideration and subsequent to the completion of the contract and hence, it was based on past consideration.

Position in India
  1. Past voluntary service
    A voluntary service is one which is rendered without any promise and there is a subsequent promise to pay.
    For example: If A saves B from drowning and B later promises A a reward.
    According to English Law, A cannot rely on his action as consideration for B’s promise for it is past in point of time.
    Although, in India, such a promise to reward would uphold owing to Section 25(2) of the Indian Contract Act, which provides that a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor.
     
  2. Past service at request
    This is the only area where uncertainty is acceptable as this domain has not been expressly articulated in either Section 2(d) or Section 25(b).
    Section 2(d) requires that the act should be done at the desire of the promisor.

    This presupposes the existence of a promise to pay for the act and even if construed literally the provision cannot apply to an act done at request but without a promise to pay.
    For example: J and T, the joint owners of a patent, wrote a letter to their manager saying: We now have pleasure in stating that in consideration of your services as the practical manager in working both our patents, we herby agree to give you one-third share of the patents. The court held that here for past services there is ample justification for the promise to give the third share.

    The Bombay High Court in Sindha Shri Ganpatsinghji v Abrahman [17] laid down that any services rendered to a minor at request and were continued after majority at the same request, were good consideration for his promise to pay.

Past and Executed Consideration
A past consideration is different from an executed consideration. Past consideration is an act executed or abstained without a promise. Whereas, an executed consideration is an act or abstinence done in response to a positive promise.

In Union of India v Chaman Lal Loona & Co. [18]
S.K. Das J of the Supreme Court said: An executed consideration consists of an act for a promise. It is the act which forms the consideration. No contract is formed unless and until the act is performed, e.g., the payment for a railway ticket, but the act stipulated for exhausts the consideration, is merely a nundum pactum [19]. In an executed consideration the liability is outstanding on one side only; it is a present as opposed to a future consideration.

Executory Consideration
Consideration can also consist of an act which is only promised to be executed at some time in future.

There may only be a single exchange of promises where each promise acts as a consideration for the other.
For example: A agrees to sell to a B a commodity at a stipulated price, in other words, A promises to sell and B promises to pay.
So, until the time the goods are actually delivered to B, the consideration remains executory.
Under Section 2(d), consideration may consist of a past, present or future act.

Such act, abstinence or promise is called consideration
Consideration must be of some value
Consideration as defined by the act is any act, abstinence or promise executed on the part of the promisee or any other third person at the desire of the promisor. Thought, by no means does the act imply that any worthless act will suffice as a good consideration, provided it is done at the desire of the promisor. In order for a consideration to be regarded as good consideration, the act must hold some value not just for the parties but also in the eyes of the law.

For example: The defendant owed a sum of money under a promissory note to his father. The defendant perpetually complained to his father for being unfair towards him amongst all the siblings. The father promised to discharge all liability of the son in respect of the loan if the son stopped complaining as consideration against the father’s promise to discharge such liability.

In Chidambara Iyer v P.S. Renga Iyer [20]
It was laid down by the Supreme Court that consideration shall be ‘something’ which not only the parties regard but the law can also regard as having some value.
Though the Indian Contract Act does no imply that consideration must be good or valuable to sustain a contract, but it had always been understood that consideration should be of some value in the eyes of law. Consideration must not be unreal, or illusionary, whether adequate or not.

Value need not be adequate (adequacy of consideration)
However, it is not necessary that the consideration be adequate to the promise. It is hard for the courts to assume whether or not something makes up for an ‘adequate consideration’ for a promise. It is dependent upon the parties to determine the adequacy of consideration at the time of the making an agreement and not for the courts to interpret at the time of its enforcement.

For example:
A agrees to sell a horse worth Rs. 1000 for Rs. 10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

In Devji Shivji v Karsandas Ramji [21]
The transfer of the goodwill and the whole of the assets if a business for a bare Rs. 1000 has been upheld.

Forbearance to Sue
Forbearance to sue has always been regarded as a valuable consideration, since it is a kind of abstinence, which has been expressly elucidated and recognised as good consideration in the definition provided by the Indian Contract Act itself.

Forbearance to sue means that the plaintiff has a certain right to action against the defendant or a third party and as consideration against a promise by the defendant, he refrains from bringing that action.

In Debi Radha Rani v Ram Dass [22]
The Patna High Court held that: Where a wife who is ready to sue her husband for maintenance allowance has forborne to sue on husband’s agreeing to pay her monthly allowance by way of maintenance, the contract is supported by consideration as wife’s forbearance to sue amounts to consideration for husband’s agreement for payment of maintenance allowance.

Compromise good irrespective of merits
A compromise of a pending suit is also considered to be a good consideration for the agreement of compromise. But it is essential that the dispute be bona fide.
Although, in Rameshar Mistri v Babulal Pandit [23], the Patna High Court held that a compromise is binding even if the suit was based on false claim.

In CWT v Her Highness Vijayaba [24]
Two brothers were in dispute over the division of their deceased father’s property. Consequently, their mother persuaded the younger brother to give up the struggle with a promise that the elder brother would provide him a sum of money, failing which the mother would subside him. The promise was held to be enforceable as it was given to be a good and valuable consideration since it was an attempt to purchase family peace and happiness.

Exceptions to Considerations
  1. Natural love and affection
    A written and registered agreement made out of or based on natural love and affection between near relatives is enforceable without consideration. Although, the act does not expressly mention or define the term ‘near relative’ and nor has such expression been judicially construed. So, it is concluded, the term ‘near relative’ will compromise of blood relations and marriage.

    In Bhiwa v Shivaram [25]
    A sued B, his brother, for a share in a certain piece of land. The suit was held not to be maintainable as B confirmed that the property in question was ancestral, although B then agreed and registered to give A one-half of the property in dispute. The present suit was brought to obtain the share.

    It was concluded by the Bombay High Court that this is just the case to which Section 25(1) should be held to apply. The defendant had such natural love and affection for his brother that in order to be reconciled to him, he was willing to give him his property.

    Although, in certain situations and owing to certain external circumstances, the degree of instinctive love and affection between partier near related may sometimes be overruled.

    In Rajlukhy Dabee v Bhootnath Mookerjee [26]
    The defendant in this case promised to pay his wife a fixed amount of monthly payment for separate residence and maintenance. The court in this situation could not find any trace of love and affection as the quarrels between the couple had forced them to separate.
     
  2. Past voluntary service
    A promise to compensate wholly or in part, to a person who voluntarily rendered any service to the promisor in the past, is legally binding. It is necessary to note that the service so rendered should have been voluntary in nature. Hence, a subsequent promise to pay for an act done in the past is enforceable.
     
  3. Time-barred debt
    A promise to pay a time-barred debt, wholly or in part, is enforceable, given that it should be in writing. It should also be signed by the promisor or by his agent generally or specially authorised in that behalf. Moreover, the debt must be such of which the creditor might have enforced payment but for the law for the limitation of suits.

    Although, it is not explicitly mentioned or interpreted whether or not it is necessary that the promise should be given by the person who was liable for the original time-barred debt.

In Pestonji Manekji Mody v Bai Meherbai [27]
The Bombay High Court has held that a promise made by a person who is under no obligation to pay the debts of another… does not fall within the clause.
Whereas in Puliyath Givinda Nair v Parekalathil Achutan Nair [28]

In the opinion of the Madras High Court the words ‘by the person to be charged therewith in Section25(3) are wide enough to include the case of a person who agrees to become liable for the payment of a debt due by another and need not be limited to the person who was indebted from the beginning.

Also, in SBI v Dilip Chandra Singh Deo [29]

An admission by the legal heir of a deceased debtor in his deposition in the court to the effect that he was willing to pay the principal time-barred amount was held to be a promise to pay making him liable.

The promise referred to in Section 25(3) must be an express one and cannot be held to be sufficient if the intention to pay is unexpressed and gas to be gathered from a number of circumstances. There must be a distinct promise to pay before the document can be said to fall within the provisions of the section.

End-Notes:
  1. Commentaries
  2. Fazalaldin Mandal v Panchanan Das (1957) AIR Cal 92
  3. Currie v Misa (1874) ILR 10 Ex 153
  4. Durga Prasad v. Baldeo and Ors, [1881] ILR 3 ALLAHABAD 221.
  5. Kedarnath Bhattacharji v Gorie Mahomed, (1886) ILR 14 Cal 64
  6. Aloka Bose v Parmatma Devi, (2009) 2 SCC 582: AIR 2009 SC 1527
  7. Abdul Aziz v Masum Ali, (1934) AIR All 22: ILR (1914) 36 All 268.
  8. Duttan v Poole, (1678) 2 Lev 210
  9. Tweddle v Atkinson (1861) 1 B&S 393.
  10. Jamna Das v Pandit Ram Autar Pande, (1916) ILR 38 All 209
  11. Nawab Khwaja Muhammad Khan v Nawab Hussaini Begum, (1910) 12 BOMLR 638
  12. Rose Fernandez v Joseph Gonsalves, (1924) ILR 48 Bom 673
  13. Daropti v Jaspat Rai, (1904) PR 171. 2
  14. N. Devraja Urs v Ramakrishniah, (1952) AIR Mys 109
  15. Tulk v Moxhay, (1848) 41 ER 1143
  16. Roscorla v Thomas, (1842) 3 QB 234; 11 LJ QB 214
  17. Sindha Shri Ganpatsinghji v Abrahman, (1896) ILR 20 BOM 755
  18. Union of India v Chaman Lal Loona & Co., (1957) AIR 652, (1957) SCR 1039
  19. Nandum Pactum (Latin): naked promise or bare promise
  20. Chidambara Iyer v P.S. Renga Iyer, (1966) AIR 193, (1966) (1) 168
  21. Devji Shivji v Karsandas Ramji, (1954) AIR Pat 280
  22. Debi Radha Rani v Ram Dass, (1941) AIR Pat 282
  23. Rameshar Mistri v Babulal Pandit, (1946) AIR Pat 97
  24. CWT v Her Highness Vijayaba, (1979) 2 SCC 213: AIR (1979) SC 982[25] Bhiwa v Shivaram, (1899) 1 Bom LR 495
  25. Rajlukhy Dabee v Bhootnath Mookerjee, (1899-00) 4 CWN 488
  26. Pestonji Manekji Mody v Bai Meherbai, (1928) AIR Bom 539
  27. Puliyath Givinda Nair v Parekalathil Achutan Nair, (1940) AIR Mad 678
  28. SBI v Dilip Chandra Singh Deo, (1998) AIR Ori 129

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