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Essentials of Consideration (Contract Act)


Essentials of Consideration (Contract Act)
Essentials of Consideration (Contract Act)

Content:-



Consideration meanind


The term "Consideration" is defined in Section 2 (d) as follows:


"When, at the desire of the promisor, the promisee or any other person has performed or refrained from performing an action, or promises to do so, such action, refraining, or promise constitutes consideration for the promise.



" This "action" may involve "some benefit, right, interest, or profit accruing to one party, and, correspondingly, it may involve some forbearance, responsibility, detriment, or loss suffered or undertaken by the other party." (Lush J, in Currie vs Misa (1875) L. R. 10 Ex. 162).



Therefore, consideration encompasses both positive actions and negative refrains, which may relate to the past (already performed or refrained from), the present (currently being performed or refrained from), and the future (yet to be performed or refrained from).



In the words of Sir Frederick Pollock, consideration is "an act or forbearance of one party, or the promise thereof, which is the price for which the promise of the other is bought, and the promise, thus given for value, is enforceable."



In simpler terms, consideration is what the promisor demands in exchange for their promise.


In essence, "consideration" operates on the principle of "quid pro quo," meaning "something in return" for the promise made by one party. In other words, while one party promises to give or do something, the other party must reciprocally promise to give or do something in return. 


Conversely, if the exchange of giving or doing something is one-sided, it would indicate that the crucial element of consideration is absent in such a promise.


Consequently, this would not constitute an agreement, as it lacks consideration, which is the most significant and essential element of any legally enforceable agreement.



Significance of Consideration


The significance of "Consideration" is unequivocally stressed in Section 25, which states that "An agreement made without consideration is void."


Thus, the fundamental principle, "No Consideration, No Contract," clearly underscores the paramount importance of consideration for the validity and enforceability of a contract in law. Conversely, in the absence of consideration, the contract is typically deemed void.


However, Section 25, along with some other sections, also delineates specific exceptional cases where an agreement without consideration (referred to as gratuitous) may still be considered valid and enforceable in law. These exceptions are discussed later in this chapter.



Examples:


1. Prakash agrees to sell his car to Dwarka for Rs 50,000. In this scenario:


   (a) Prakash's promise to sell his car constitutes the consideration for Dwarka's promise to pay Rs 50,000.


   (b) Conversely, Dwarka's promise to pay Rs 50,000 serves as the consideration for Prakash's promise to sell his car.



2. Consider another example: Vikas pledges to donate a sum of Rs 5,50,000 to a cancer hospital. In this case, upon applying the principle of "quid pro quo" ("something in return"), it becomes evident that the hospital has not promised to give or do anything in return for Vikas's donation.


Thus, it is evident that there is no element of consideration involved in this instance. Consequently, this promise is void from the outset.



Essential Ingredients of Valid Consideration


1.  Consideration Should be at the Desire of the Promisor

The requirement that consideration should be at the desire of the promisor is crucial. This means that an act performed at the behest of a third party does not fulfil the necessary condition for consideration.



The case of Durga Prasad vs Baldeo [(1880) 3 All. 221] illustrates this legal principle clearly.


The Collector of the area requested Durga Prasad, a wealthy individual, to construct a market in the town. Durga Prasad proceeded to construct the market, and Baldeo subsequently occupied one of the shops therein.


Later, Baldeo promised to pay Durga Prasad a certain commission based on his sales in the shop, acknowledging that Durga Prasad had built the shops.



However, Baldeo reneged on his promise.


It was determined that since the act of constructing the market was carried out by Durga Prasad not at the request of Baldeo, the promisor, as required to establish valid consideration, but at the behest of the Collector, there was no valid consideration in this scenario.


Consequently, in the absence of this essential element of valid consideration, Baldeo's promise was not legally binding on him.



2. Consideration Could Come from the Promisee, or Any other Person


While it's imperative that the initial consideration should originate solely at the desire of the promisor himself, and no one else, in the case of reciprocal consideration, it may stem from the promisee, typically, or even from any third party unrelated to the agreement. 



This distinction arises from a careful examination of the wording of Section 2 (d), which states: "at the desire of the promisor, the promisee or any other person."


Notably, the phrase "or any other person" appears after "promisee," as the comma following "promissor" serves to separate the clause "or any other person" from it. 



Chinnaya vs Ramayya [(1882) 4 Mad.137] stands as a seminal case elucidating this point. In this case, an elderly woman (referred to as Amma) transferred a portion of her land to her daughter, Ramayya, through a deed of gift.


In return, Ramayya committed to providing an annual maintenance allowance to her aunt, Chinnaya, as Amma had previously done. Ramayya formalised this agreement in writing in favour of Chinnaya on the same day.


However, Ramayya failed to fulfil the promised payment, arguing that Chinnaya hadn't made a corresponding promise (constituting consideration).



Ramayya's argument was dismissed on the grounds discussed earlier, namely, that consideration could indeed originate from the promisee (Chinnaya) or any other person (in this case, Amma).


However, under English law, the consideration of a stranger (third party) is not considered valid.



3. Consideration may be past, present and future


Consideration can be categorised into three temporal dimensions: the past, the present, and the future.



(a) Past Consideration:


Past Consideration arises when a person has already undertaken an action in the past at the request of another person, without receiving any promise in return at that time. However, a promise is made at a later date.


Example:

A patient, 'P,' seeks treatment from his doctor friend, 'D,' for an ailment. D provides treatment without asking for payment. Later, P offers to pay D Rs 1,000, which D accepts, forming a promise from P to D.



(b) Present Consideration:


Present Consideration, also known as executed consideration, occurs when the consideration is provided immediately upon entering into the contract, rather than at a later date.



Example:

Ramesh agrees to purchase a second-hand car from Rakesh for cash. Rakesh delivers the car, and Ramesh pays the agreed amount immediately in cash. All terms of the contract are fulfilled at that moment.



(c) Future Consideration:


Future Consideration pertains to situations where the consideration, in response to the promise, is yet to be provided at a later date.



Example:

On November 1, 2008, Ramesh agrees to buy a second-hand car from Rakesh, with payment due on November 30, 2008. Until November 30, 2008, the contract remains executory as none of the terms have been fulfilled. Therefore, the consideration in this scenario remains future-oriented.



4. Consideration may be Either an Act or even Abstinence


consideration encompasses both positive actions and negative abstentions. In essence, it may involve an action, constituting a positive aspect of consideration, as demonstrated in the majority of the examples provided earlier.


However, it can also entail a negative aspect by agreeing to refrain from doing something in exchange for something else.



5. Consideration must be Lawful


It's crucial that the consideration, whether it involves giving or receiving something (not exclusively money), is both lawful and genuine. Conversely, any consideration that is unlawful or unreal would render the contract void.



Furthermore, according to Section 23, the consideration and the object of an agreement are deemed unlawful in the following circumstances:



  1. If either is prohibited by law,

  2. If either is of a nature that, if permitted, would contravene any law,

  3. If either is fraudulent,

  4. If either involves or implies harm to the person or property of another, and

  5. If the Court deems either as immoral or contrary to public policy.



6. Need not be adequate but must be real


The principle that consideration need not be adequate has been established by the Court, as observed in the case of Bolton vs Maden, [L.R. 9 Q.B. 55], stating: "Adequacy of 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."


In essence, even if the consideration appears inadequate, it will be deemed valid if it is obtained voluntarily. 



Section 25 (Explanation 2) reinforces this point, stating that the agreement's validity is not affected by inadequate consideration, but the Court may consider it when assessing whether the promisor's consent was freely given.



Example:

Ganga Ram sells his car worth Rs 2 lakh to Sohan for just Rs 10,000. Despite the apparent inadequacy of the price, the contract remains valid.


However, if Ganga Ram claims that his consent was coerced or obtained through fraud, the Court would take the price's inadequacy into account when determining the voluntariness of his consent.



Consideration must also be real, not worthless or illusory. For instance, A agreeing to sell his horse worth Rs 1,000 for Rs 10 constitutes valid consideration because there is value exchanged between the parties.


However, a promise like turning an iron rod into gold through a chemical process is not valid consideration as it is impossible and illusory.


Additionally, consideration must not be a pre-existing duty. If a person is already obligated to perform a duty under law or contract and promises to do the same for additional payment, it does not constitute valid consideration.



Examples:

(i) If a person is summoned by the Court to testify and another party promises extra payment for attending, it lacks consideration because the person is already obligated to appear by law.


(ii) If a client promises an extra amount to a lawyer for winning a case, it lacks consideration because the lawyer is already obligated to provide the best possible representation.

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