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Draft On Consideration And Exception To Consideration

Consideration

Consideration has been defined under Section 2(d) of the Indian Contract Act, 1872 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 doing something, such act or abstinence or promise is called a consideration for promise.”

Essentials Of A Valid Consideration

  1. Consideration only at the desire of the promisor

    It is necessary for a consideration to be given at the desire of the promisor and not voluntarily or at the instance of some third party.

    In Durga Prasad VS Baldeo Singh two issue were raised. First, if the contract was a valid one or not and second, if it was a proper contract or not. In this case, the district collector of the town was requested by the plaintiff (Durga Prasad) to build some shops which were rented to the defendant (Baldeo Singh) for doing business.

    The defendant had promised the plaintiff a commission of 5% on all the articles that he would sell in consideration for the construction of the building on which the plaintiff had spent a huge amount of money. When the defendant failed to pay the amount, the plaintiff filed a suit against him.

    However, due to absence of a proper contract rather a proper consideration between the plaintiff and the defendant, the court rejected the plaintiff’s claim and declared it as a void contract because the promissory had no personal benefit about the contract and was done without the intention of the promissory.

  2. Consideration by Promisee or any other person (Privity of Consideration)

    In accordance with the Indian Law, consideration might be given by “the promisee or any other person.” There is a possibility of the consideration for promise to move from a third party, who is not a part of the contract, and not from the promisee himself, in India. However, in England the position being different, the rule states that a consideration cannot be moved by anyone other than the promisee.

    For example, if X promises his watch to Y and a consideration of Rs. 2,000, for the same purpose, is given by A to X and not Y , then it will constitute as an invalid contract in England as the consideration for X’s promise to Y was not provided by Y himself. On the other hand, it will constitute as a valid contract in India as it is clearly mention under Section 2(d) of the Indian Contract Act, 1872 that “…at the desire of the promisor, the promisee or any other person” may provide consideration.

Privity Of Contract

The Doctrine of Privity of Contract mentions that only people belonging to any of the two parties of the contract can enforce the same, that is, no stranger to the contract can enforce it even if the contract has been entered into for his benefit. For example, if a contract has been entered into by X and Y, some benefit of which confers upon A, A, not being a party to the contract, cannot file a suit to enforce the same. In this case, A is a complete stranger to the contract.

The rule of Privity of Contract was reconfirmed by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. VS Selfridge & Co. Ltd.

Exceptions To The Rule That A Stranger To Contract Cannot Sue

  1. Trust of contractual rights or beneficiary under a contract: Lord Haldane in Dunlop Pneumatic Tyre Co. Ltd. VS Selfridge & Co. Ltd. had recognized one of the few exceptions to the Doctrine of Privity of Contract. In this case the question, whether it was lawful for Dunlop Pneumatic Tyre Co. Ltd. to sue Selfridge & Co. Ltd. even though there existed no contractual relationship between them or not, was raised.

    A tyre manufacturing company, Dunlop Pneumatic Tyre Co. Ltd. had entered into a contract with a trade purchaser, Dew for selling tyres at a discounted price under conditions that they would not re-sell the tyres at a price less than the listed price and that whichever re-seller wanted to buy them from Dew would have to agree on the same. Now, Selfridge & Co. Ltd. bought tyres from Dew and agreed on Dunlop’s condition and also that he would pay an amount of £5, if the above condition is violated. When Selfridge sold the tyres at a price lower than the promised price, Dunlop brought action and was successful at the trial but it was overturned by the Court of Appeal.

    This exception has been recognized by Indian Law as well through Khwaja Muhammad Khan Vs Husaini Begum’s case. The father of a boy (Khwaja Muhammad Khan, the defendant) and a girl (Husaini Begum, the plaintiff) had entered into contract which stated that if the girl married a particular boy, the the defendant would give her a certain personal allowance called Kharchi-i-pandan (betel-box expenses) or pin money out of the income of a property set aside by the defendant. Although the agreement was entered into at the time of the marriage, it was supposed to be initiated after her reception of conjugal domicile which started after 6 years of their marriage. When the defendant failed to pay the allowance, the plaintiff took necessary action. The defendant, in his defence, now said that the he had entered into the contract with the plaintiff’s father and the plaintiff herself. Thus, she being a stranger to the contract, cannot sue. Further the court said that the rule of Privity of Contract is not applicable in this case due to the uniqueness of the facts and circumstances of the case. Thus, she, being a beneficiary to the contract, was entitled to enforce her claim.

  2. Conduct, Acknowledgement, or Admission: Sometimes even if in the absence of Privity of Contract between the two parties, one of them recognizes the right of the other to sue him by this conduct, acknowledgement or admission , then he might be liable on the basis of the Law of Estoppel.

    In Narayani Devi VS Tagore Commercial Corporation Ltd. , no contract was entered into by the plaintiff and the defendants. However, the defendants had agreed to pay the plaintiff’s husband a certain amount of money, during his entire life and after him, to the plaintiff herself. Here rose the question of the plaintiff to sue the defendants. Later, it was found that the plaintiff was paid a certain amount of the money by the defendants, after er husband’s death, and was further asked for extension in the time of payment.

    It was also found that the defendants had earlier called upon the plaintiff to execute certain documents regarding this matter. This implied that they considered the plaintiff to be entitled to certain rights. Thus, it is to be taken that the defendants had created such privity with the plaintiff by their conduct, acknowledgement and admission, that the plaintiff was held entitled to her action even though there was no contract between her and the two defendants.

  3. Provision for marriage expenses or maintenance under family arrangement: Under a family arrangement, if a contract intends to secure the benefit to a third party, he may be entitled, being a beneficiary, to sue. Many cases in which partition of joint family property has taken place between the male members of the family and the female members have been given a provision for maintenance, have witnessed such an action. The rule that was laid down in Khwaja Muhammad Khan Vs Husaini Begum’s case is the basis of recognition of such an action.

Consideration may be Past, Present (Executed) or Future (Executory)

According to Section 2(d) of the Indian Contract Act, 1872, consideration is of three kinds, which are Past, Executed and Executory. The definition of consideration says when, at the desire of the promisor, the promisee or any other person:
  1. has done or abstained from doing, (the consideration is Past)
  2. does or abstains from doing, (the consideration is Executed or Present)
  3. promises to do or to abstain from doing, (the consideration is Executory or Future)

  1. Past Consideration

    When consideration for any promise is given earlier and the promise is made later on, then that consideration is called Past Consideration. It is also necessary for the act constituting the consideration to be done at the desire of the promisor.
     
  2. Executed Or Present Consideration

    Executed or Present Consideration is defined as the consideration in which the promisor demands something in exchange for the promise made by him to which the promisee provides consideration by giving him what he had requested for.
    There is a distinction between Executed Consideration and Past Consideration. On one hand, in Executed Consideration the considered is provided at the time of making the contract whereas in Past Consideration the consideration is given before the promise is made.
     
  3. Executorty Or Future Consideration

    Executory consideration is a type of consideration for promise in which the consideration is yet to be performed or the the party supposed to perform it is either bound by the contract to do so or not. It is also know as something that is either given or accepted in exchange of a promise which is to be performed in the future.

Something , i.e., an Act, Abstinence or Promise by the promisee constitutes consideration
Consideration, according to the definition under Section 2(d) of the Indian Contract Act, 1872, states that will be no act, abstinence or promise if there will be no consideration.

Consideration Received By One Of The Joint Promisors

When consideration is received by only one promisor even though many joint promisors are present, it is considered as a sufficient consideration in order to bind other joint promisors as well.

Subscription For A Charitable Purpose

A consideration is needed in return for every promise. Due to this, a small promise towards contributing some amount for a charitable purpose may not be enforceable.

Consideration Need Not Be Adequate

Even if a consideration is inadequate, a contract that is supported by consideration is considered to be a valid contract. Explanation 2 of Section 25 of the Indian Contract Act, 1872 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 maybe taken into account by the court in determining the question whether the consent of the promisor was freely given.”

The two parties involved in the contract have the freedom of making their any contract of their choice. If, with free consent, the two parties come to this conclusion that the consideration either too high or too little, the the court will not get into questioning the adequacy or inadequacy of the consideration. Even if inadequacy of contract is not considered to be a ground for invalidity of the contract, the court might take it into consideration to judge if the consent of a party was free or not.

Consideration Must Be Real

Even though adequacy of consideration is not necessary, the consideration being real and substantial is one of the most important necessities.

Performance Of An Existing Legal Duty Is No Consideration

When it comes to constituting the proper consideration, we should always keep in mind that there needs to be a presence of a promise to do something more than what a person is already bound to do.

Promise To Perform An Already Existing Contractual Duty

B's promise towards paying something additional for the same is not a consideration, if A is bound before hand to perform a particular contractual duty owed to B.

Promise To Pay Less Amount Than Due- The Rule In Pinnel's Case

As per the English law which was laid down in Pinnel's case- an agreement in which a smaller sum in lieu of a larger sum, is not called binding. This is because the agreement is without any consideration. It means, that in spite of a promise in which there was supposed to be payment and hence a smaller amount was received, the promisor can claim the whole of the due amount.

In Pinnel's Case the issues that were raised were that whether the plaintiff has accepted partial payment of debt as a satisfaction of the whole or not and that it was a general rule to pay an amount less than the one which was owed in satisfaction of a debt and payment will not be able to discharge the obligation to repay the whole amount. Pinnel, who was supposed to receive a sum of £8 10s from Cole (the defendant, in this case), sued him for recovery of the debt when he didn't received the promised amount from Cole.

Prior to this when Pinnel had requested Cole, he had paid £5 2s 6d. This he had done one month prior to the actual date when he supposed to pay and later put a statement that the agreement was such that a part payment would discharge the entire debt. When taken to the court, the general rule that part payment is not satisfactory for the whole was confirmed. Thus, the defendant had not repaid the money which he already owed to the plaintiff but provided Pinnel with more benefit by making a prior payment to him.

The rule in Pinnel's case does not appear logical. While promise to pay smaller amount in cash is void, the promise to deliver chattel is valid even if the same is of smaller value. In 1937, the Law Revision Committee recommendation has not found any place in the statute book.

The exceptions to the rule laid down in Pinnel's Case have been recognized as follows, in England:
  1. Payment in kind:
    It was held in Pinnel's case itself that the gift of a horse, hawk or robe, etc. in satisfaction (of a claim for amount) is good. For it shall be deliberate that a horse, hawk or robe, etc. may be more beneficial to the plaintiff than the money in respect of some circumstance, or otherwise the plaintiff would not have accepted it in satisfaction.

    When the promise is made to deliver some chattel in lieu of a sum due, the promise is declared to be valid even if the chattel is worthy of a smaller sum than the due amount.

  2. Payment before due date:
    Another exception, which has been recognized in the Pinnel's case is the payment and acceptance of the smaller sum of money than originally due in satisfaction of the whole, before the payment is due, “for peradventure parcel for it before the day would be more beneficial to him than the whole at the day. It means that the payment on an earlier date constitutes sufficient consideration to discharge a part of the debt.

  3. Part Payment by a third party:
    Payment of a part of the sum due, by a third party, has been recognized to be enough to discharge the whole of the debt. If one party has accepted amount from a third party, he cannot subsequently sue for the balance of the amount.

    In Hirachand Punamchand v. Temple and Welby v. Drake,3 it has been held that when the father pays smaller amount than that due by his son to a creditor, and the creditor accepts that in satisfaction of the whole debt, the son thereby gets discharged from his liability and the creditor cannot thereafter sue the son to claim.

  4. Composition with the creditors:
    A compromise between a debtor and his creditors, according to which the creditors agree to be satisfied ,with a percentage of the amount due in satisfaction of the whole debt, has also been recognized to, be a valid contract. The reason behind this exception appears to be that no creditor will be allowed to go beyond the promise , to the prejudice either of the other creditors or of the debtor himself because this would be a coercion upon all the parties concerned.

    Thus, a promise between a debtor and a single creditor for payment of lesser amount than due will come under the ban in Pinnel’s case, but an agreement between a debtor and his creditors will fall under this exception.

  5. Doctrine of Promissory Estoppel:
    This is an equitable estoppel preventing a person from denying what he asserted earlier. The person making the representation or promise becomes bound by the same, on the basis of the law of estoppel if another person has acted on the faith of such promise or representation. The promise is enforceable at the instance of the promisee not withstanding that there is no consideration for the agreement.

    For instance, if the State announces some tax concession for certain new industries for a certain specified period. with a view to giving incentives to the industries, and some industry is establish on the faith of the promise of tax concession announced by the State, the State is bound by estoppel and cannot be allowed to withdraw the concession earlier than promised by it.

Exceptions When Agreement Without Consideration Is Valid

Along with the general rule that an agreement without consideration is considered void, Section 25 of the Indian Contract Act, 1872 provides some exceptions.

25. An agreement without consideration is void unless:
  1. It is expressed in writing and registered under the law for the time being in which force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other, or unless
  2. It is promise to compensate, wholly or in part a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless
  3. It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced but for the law for the limitation of suits.
In any of these cases, such an agreement is a contract.
  1. Promise due to natural love and affection [ Section 25(1)]
    When promise to consideration is made due to natural love and affection, that kind of a promise will will be considered valid even though there was no existence of the consideration for such a promise.

    Essentials of this exception are:
    1. The parties involved in the contract must be of near relationship.
    2. Any one of the two parties should make the promise out of natural love and affection, for the other.
    3. The promise should either be in black and white or be registered.

      Neither the Act nor any judicial pronouncement defines near relationship. However, through the various decided cases it has been concluded that near relationship includes either blood relations or relations through marriage but not the ones which are only remotely entitled to inherit and are not near.

      Presence of natural love and affection between parties on your only related is very important. For example, if a brother who is not legally bound to transfer his properties to another brother of his, does so in order to maintain good relations with him, it is held as done out of natural love and affection. Such agreement is legally binding.

  2. Compensation for past voluntary services [Section 25(2)]
    Something which is done at the desire of the promisor constitutes good consideration for a subsequent promise in order to compensate for something that has already been done. The following deviation of Section 25 of the Indian Contract Act, 1872 includes cases where a person not aware of the promisor, or otherwise than at his request, it provides some service, and the promisor manages to recompense for it. The promise to make up, though without consideration, binds because of this deviation. This exception covers situations where the promise serves a voluntary cause “which the promisor was legally compellable to do.”

    Suppose if B looses his wallet which finds and B promises A a reward of Rs. 100 or if B promises to pay all of A’s expenses, who supports his infant son, the such a contract is valid even though all of A’s acts were done voluntarily.

    There can be another case scenario where the work cab be provided on one’s own wish and without the promisor having to know about it. Also the service provided should be to the promisor itself. Therefore, the work must be done for the person who is present at the time of the work performed so that the expenses by the promoter of the company is not included before the company started to run.

    An act performed for the company before its establishment is not capable of formal approval by the company after its establishment. The promise should be fit to have been contacted at the time of doing the act. So, at the time of taking a loan if the person is a minor he is not applicable to give a formal consent to that act and bind himself by making a fresh promise to pay after attaining majority for the same criteria.

  3. Promise to pay a time barred debt [Section 25 (3)]
    A promise to pay a time barred debt is another situation where contract without consideration is considered to be valid.
    Essentials of this exception are:
    1. The promise should be to pay a tame barred debt, wholly or partially
    2. The promise should be written and signed either by the person who is to be charged or his authorized agent.


Limitation Period For Non-Repayment Of Loan Amount

According to Section 25 of the Indian Contract Act, 1872, if the borrower acknowledges his debt, then the period in which the suit can be filed is saved and commences from the day the acknowledgement is made.

Promise To Pay Time Barred Debt- Not “Express” Promise

Liability to pay debt is contained under pro-note. The debtors acknowledge liability qua endorsement in pen and paper, makes partial payment and extends the time duration for payment. Whether such an endorsement is a “promise” or not can be determined only after all the evidences are pointed out or adduced by the parties at the trial session. An accusation, specifically a plaint, is not liable for rejection at threshold under Order 7, Rule 11 of C.P.C., as time barred as “promise” to pay need not be an “express” promise.

Debt Due By Whom
In Pestonji Manekji Mody VS Bai Meherbai, the Bombay High Court had made it clear that the promise under this exception should be to pay time barred debt that is due from the promisor and not from anyone else.

However, a different view was expressed by the Madras High Court in Puliyath Govinda Nair VS Parekalathil Achutan Nair, in regard of this exception. The the court held that the words “by the person to be charged therewith” are enough to cover a case of a person agreeing to take the liability for payment of a debt that is due by another person and it need not be limited to a person who is indebted from the very beginning. In comparison to this view, the one expressed by the Bombay High Court seems to be better since the intention of the legislation appears to be to permit enforcement of a certain agreement even though time barred if the the promisor prefers to revive the same by fresh promise in writing.

Wholly Or In Part
Section 25(3) of the Indian Contract Act, 1872 allows the promisee to pay a time barred debt, wholly or in part. A person who promises to pay a portion of a time barred debt can be sued only for that particular portion and not the entire debt. However, if the promise is made to pay the whole, then the entire amount can be claimed for.

There Should Be Express Promise

The promise to pay a time barred debt should be an express promise and that cannot be held to be sufficient if the intention to make the payment is left unexpressed and is to be gathered from a number of circumstances.

Admission To Pay In Court Proceedings

It was held in State Bank of India VS Dilip Chandra Singh Deo that if a legal heir of the deceased makes an appeal to the court showing his willingness to make a payment of the principal sum that was borrowed by the deceased, he might be liable to pay based on his admission, even though the recovery of the amount has been barred by the limitations.

Award Winning Article Is Written By: Ms.Anusmita Das
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