By Siddharth Dey
What is consideration?
Section 2(d) of the Contract Act provides for a lengthy and quite complicated definition of what is “consideration”. But, then, that’s why you need to come to law school in the first place! So, long story short, anything done or abstained from at the “desire of the promisor” is defined as consideration. This thing can be done/abstained from not only by the promisee, but also by a third party.
Consideration is anything that is received by the promisor from the promisee in return of the offer. So, when Jasmine goes to a shop to purchase a pen for Rs. 20, the pen is her consideration in exchange for her offer of Rs. 20 to the shopkeeper.
The concept of consideration is founded in the fact that Contracts are a legal, quid pro quo relationship, and not one of gratuity. As you’ll recall anything done simply out of friendly relations does not constitute legal intention, which is an essential for a contract. For that reason, a contract without consideration would be void under Section 25 of the Indian Contract Act, barring certain exceptions.
Nature of Consideration
Consideration must comply with certain requirements in order to be valid. These are:
1) Must not be in the past.
Consideration cannot be given for any act done in the past. Why? So, consider that if X met with an accident, and Y simply drops him off at a hospital, and X calls him later promises to reward him handsomely, can Y rightfully claim the reward? No, since i) Y’s act was not done “at the desire of” X (the promisor) ii) they did not have a contract in place. In other words, the consideration cannot be perfomed before the promisor makes the promise.
2) Must have value in the eyes of law.
It must be something that has legal value. Monopoly notes do not. I think you knew that, though. Of course any items, which can be sold for a price will also have “value in the eyes of the law”, therefore, consideration may also be other things other than money. However, if I get a Rs. 25 marker in return for a Rs. 20 felt-tip pen, what does the law say about that?
“Kya hai tumhare paas?” Is it sufficient consideration?
3) Must be sufficient, not adequate.
Let us understand it this way – adequate consideration would be to recompense Rs. 20/- with Rs. 20/-; sufficient consideration would be to recompense Rs. 20/- with any amount, as long as the other party agrees or consents to it, and it has value in the eyes of the law. This is because the courts recognize that parties are free to decide the price between themselves. If the courts started enforcing “adequacy of consideration”, then shopkeepers would earn no profit, since a consumer would have to pay the exact value of the goods and nothing more.
Therefore, in the same way, a house worth Rs. 10 crores can be sold for Re. 1, and that would be perfectly legal. (Note: being sufficient doesn’t prohibit the consideration from being adequate. A good can still be sold and purchased for it’s exact value if the parties wish. Also, a question of inadequacy can be raised, especially if it seems that there was a lack of free consent in the agreement).
4) Must move from the promisee to the promisor.
The concept of privity of contract disallows anyone who is not a party to the contract from enforcing it. In the same way, anyone who was not a party to the contract is not required to fulfil/comply with it.
If Parag & Qader bet on the outcome of a Manchester United v. Liverpool game, and United win 3-0, and Qader dies out of grief before he can pay the wager to Parag, Parag cannot claim it from Q’s son, Saif (even if Saif is the heir to Q’s property) since he was not the promisee.
Coming back to privity, it allows third parties to claim from a contract, if they stand to directly benefit from the enforcement of the contract. The best example is that of a trust document
What is not Consideration?
1) Existing contractual duty.
It is obvious that if I engage a servant, and pay him wages, he cannot demand anything outside of that. The work that he is doing (consideration) is already paid for/will be paid (wages). However, if I ask the sweeper to substitute as a driver for two weeks, that will be valid consideration for which I need to pay him apart from his wages as a sweeper, since that act goes beyond his existing contractual duty.
2) An existing public duty will not amount to valid consideration.
As opposed to what is the unfortunately the practice in quite a few places, a person performing a public duty cannot demand payment for his work as consideration. He is already being paid by the authority to aid the public.
3) Section 23 of the Indian Contract Act.
Provides that certain considerations and object of an agreement are unlawful if it:
i) Is prohibited by law.
ii) Is of such nature that, if permitted, defeats the provisions of a law – if “sale of arms in the territory of India” is an offence and X makes a deal with Y on an airplane in flight, that would be deemed to be defeating the provisions of the law/defeating the whole purpose of the law.
iii) Is fraudulent.
iv) Involves or implies injury to another person or property of another.
v) Is immoral or against public policy.
Section 25 of the Contract Act provides for three exceptions, where consideration need not be provided.
1) Must be in writing and registered and made on the account of natural love & affection between closely related parties.
2) To compensate, either wholly or partly, for a voluntary act done for the promisor,(*) or something which the promisor was legally compelled to do – so if a person pays for the renewal of your car pollution certificate, on the last day before expiry, you are compelled to pay him back.
The part preceding the (*) is to be only applied when it is specifically provided as a part of the principle. Otherwise, the general rule that a promise precedes the consideration will apply, and such promises will not lead to a valid contract. In any case, this will apply if an act is voluntarily done – such helping an accident victim to the hospital, out of personal goodwill. If it is done based on a request – if X asks Y for a lift, and after X reaches the destination, promises to compensate for the petrol – the claim will fail because, again, the promise was made after the consideration.
3) For a debt barred by limitation law, where a creditor is barred from suing, a promise made in writing and signed by the person who has to pay a debt or a part of it, will be valid. The promise overrides the debt instrument and creates a new contract. The debt itself can be seen as functioning as a consideration for the promise.