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.
Essentials
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
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.
Bailment
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.
End-Notes:
- 1966 AIR 193
- AIR 2000 Supreme Court 331
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