Understanding Consideration in Contract Law: Definition, Essentials, and Types

OVERVIEW

In this topic, we will discuss one essential of a contract which is a consideration that comes under section 2d of the Indian Contract Act, of 1872, which refers to the means of exchange in return for something under the contract. So, let us see all its meaning, kinds, and other essentials. It will also cover the privity of the contract. Let us begin with the topic.

CONSIDERATION

The definition of consideration under section 2d is when the promisee at the request of the promisor has done or abstained from doing something, does or abstains from doing something, or Promises to do or refrain from something, Then such act or abstinence is called consideration. 

When two parties under a contract agree then they exchange something in value which is brought by both the parties to the contract, this law refers to the consideration under the contract act. It can be taken in the form of goods, services, the promise of performance of an act, etc. 

Now let us see its different kind in brief.

KINDS

• Executed 

This kind refers to the act of promise in the form of exchange which has been already done by the party to the contract. For example, a person has already been rewarded for finding his dog to another, so here the consideration is already done by the party.

• Executory

This kind refers to the promise of exchanging something which will be done in the future, in this both parties to contract had made promise to fulfill it al later date. For eg, a person promised to reward money who will find his dog.

• Past 

This kind refers to the promise of exchange done in the past, although it is not considered a valid consideration because it is not given in exchange for the promise. There are some exceptions also in some legal systems.

ESSENTIALS

Some essential considerations are needed to fulfill several criteria. Let us see what are they.

• The consideration should be done for legal objects. Consideration of an illegal act or object will not be declared valid in a contract, it will be void ab initio.
• The consideration of the two parties should be certain, which means it needs adequate consideration if it is agreed upon by the parties.
• In the contract, there should be a need to exchange something between the parties, which should be mutually agreed upon by both parties.
• The consideration that constitutes some act or promise should be performable. Impossible acts or promises will not serve valid consideration.
• Each party to the contract can decide on consideration by bargaining, which means the party must intend legal detriment a benefits as a part of an agreement.

CONCLUSION

At the end of this topic, we have learned how consideration is important in the contract to enforce the valid contract under the Indian Contract Act 1872. The privity of contract also makes sure that any person who is not part of the contract can not take the rights and obligations of others but there is an exception which is that if the contract is made for others’ benefit then they can take part in the contract as a beneficiary, and also file sue if their rights under contract is violated.

REFERENCES

Theoretical overview

Section 2(d) defines consideration as price given for the promise. It is any act or abstinence done/undertaken at the desire of the offeror. It is required by the offeror and is done by the offeree. It could be in the past, present or future.

In the case of unilateral promises one party commits something to the other. If the other alters the actions in accordance with the actions of the first party, then it is said to be a promise where the first party is bound to fulfil the terms of the promise. Revocation of Unilateral Promise can be done only if the other party has not done any act towards fulfilling the promise.

Privity of Contract and of Consideration

Position in England

• Privity of contract – Those who are not a party, not given the right to sue, cannot enforce the contract
• Privity of consideration – Consideration must flow from the party to contract, otherwise invalid
• Two fundamental principles:
  • Consideration must move from the promisee and the promisee only. If it moves from a third party, then the promisee becomes a stranger to the contract and cannot sue.
  • A contract cannot be enforced by a stranger to it, even if it is for his benefit as he is stranger

Position in India

• Privity of contract – No law either in favour or against
• Privity of consideration – Consideration can flow from third party – section 2(d) – promise valid as long as there is some consideration, immaterial where it flows from
• Can be enforced by someone who is not a party to the contract, but still enjoys a benefit under it and has a sufficient interest to entitle him to enforce it.

Types of Consideration

1. Past Consideration and exception to the rule (English and Indian Perspective)

• England: Past consideration is no consideration as the consideration should be at the time of entering the contract.
• India – Section 2(d) along with section 25 – Past voluntary service is covered under s. 25(2), according to which, a promise to compensate another for voluntarily having done something would be enforceable. (A past act which was done at request of promisor was held to be good consideration.)

2. Executed Consideration – Future

If a person does something, only then the other person does something. Promises are futuristic in this case and the contract is only valid on the performance of the first deed. In a contract where A agrees to sell something, and B agrees to buy the thing, until the goods are delivered, it would be seen as an executory consideration.

3. Executory Consideration – Future

The promises come into being only after the actual agreement is made. An example of executed consideration is when there is a promise to pay a person for finding a lost article. Here the acceptance can only be made by the act of finding the article. Here the liability would be outstanding for one of the parties.

Such Act or Abstinence is called consideration”

1. Consideration must be of some value in eyes of law
2. Adequacy of Consideration: It needn’t be of adequate value. §25(2), even if consideration is not adequate, the contract is still enforceable.
3. Inadequacy of Consideration – An evidence to imposition of terms (Pepper-Corn Theory): Inadequacy does not vitiate contract but if the terms are unequal, it will be given consideration in a case claiming no free consent. In Illustration g of the Section 25, it was held that in cases where the consideration is inadequate, the person who has furnished a greater amount will be capable of having that taken into account while deciding the case.
4. Forbearance to sue as consideration: Forbearance to sue is adequate consideration. In case of limitation, on the subsequent dishonour of the contract, he will be sued for the breach of the second contract.
5. Compromise of Suit as consideration: Compromise of a suit is possible where it is legal and permitted for the party to take back its charge in exchange for some performance by the other party.

Performance of Existing Duties

• Obligation can be through obligation by law or by contractual obligation.

1. Performance of Legal Obligations : Consideration is supposed to be more than something that the offeree was already bound to do. Thus, a contract where the consideration is something which the promise had already been under a legal obligation to perform would not be valid consideration.

2. Performance of Contractual Obligations: There are also contracts where the party is requested to perform contractual obligations. This could be out of a pre-existing contract with the promisor. Compliance with the legal obligation which arises out of the contract which had already been made with the promisor was held to not be valid consideration.

Exception is when the person asks the other to perform a contractual obligation for the additional benefit of himself

Pre-existing contractual obligation inter se promisor and promise (Promise to pay more/less)

a contract for the performance of contractual obligations is not valid when there is a promise for lesser than the original. It was held that for no reason could the receipt of a lesser amount in the place of a greater amount would give greater satisfaction to the person. However, when the payment is made in kind, it is not necessary for the value of the item to be commensurate with the value of the original debt.

Exception to this are-

1. Part Payment by third party, payment in kind etc.
2. Compromise – When the parties themselves have entered into an agreement for paying of a lesser amount, it will be a valid consideration.
3. Payment before time-Where the payment has been made before the due time or by a different mode of payment, it is held to be valid consideration.
4. Promissory Estoppel- When one party has made the other party believe that it is waiving off some of its rights, then this party cannot exercise those rights for that period of time.If a person has waived some of his rights or under this doctrine he has made the other party believe a position, he can step back from his position. If you have said this suspension of rights will be for a particular period of time, then estoppel elapses by elapse of time. If you haven’t given a stipulated time, but now the person says he wants to change his position and get back to original position, even in this, the estoppel will expire provided reasonable notice for reasonable time is given.

Pre-existing contracts with third parties: In case of specific performance where a person is already under the obligation to do so under a contract with a third party, the performance of that contract has been held to be sufficient promise.

Exception to Consideration [Section 25]

1. Gift – Natural Love and Affection – A written and registered agreement based on natural love and affection is enforceable without consideration.
2. Past Voluntary Service – Where there has been a promise subsequent to a past voluntary action which had been done for the promisor, it is a valid contract. Promisor must have been in existence at the time when the act was done. He must have been competent to contract at the time when the service was rendered. section will not apply to a contract by which a person ratifies on majority, a promise by a minor to compensate someone for past services rendered voluntarily is valid.
3. Time Barred Debt – A promise to repay a time barred debt is enforceable in the absence of consideration.
4. Inadequacy of Consideration (Theory of Pepper-Corn)
   Peppercorn Theory

 Consideration should be “sufficient” in the eyes of law but need not be adequate.

Relevant section

• Section 2(d) – price given for the promise . It is any act or abstinence done/undertaken at the desire of the offeror. It is required by the offeror and is done by the offeree. It could be in the past, present or future

• Section 25 : exception to consideration 
• section 2(d) – promise valid as long as there is some consideration, immaterial where it flows from
• S 25(2), according to which, a promise to compensate another for voluntarily having done something would be enforceable.

Important case laws

Durga Prasad v. Baldeo [ILR (1881) 3 All. 221]

Held: The court did not allow recovery of commissions as in this case Durga Prasad built the shops at the order of collector and not at the desire of defendants. If he would’ve built the shop at their desire, it would’ve been different. So, this promise is not an enforceable promise. Consideration is to be at the desire of the promisor.

Doraswami Iyer v. Arunachala Iyer [AIR 1936 Mad. 135

Held: He was not liable as he did not make them alter their actions.The revocation of a unilateral promise possible but solely where the plaintiff has not taken the particular action which was the condition of the payment.

Kedarnath Bhattacharjee v. Gorie Mohamed [ILR (1886) 14 Cal. 64]

Held: This was considered to be a breach since the work had already begun. Court said if you’ve promised to pay someone and that person does something on the faith and with the backing that you’ll pay for it, then you are bound to pay it.In the case of a unilateral promise, the promisee is not bound to act, but if he carries out the act desired by the promisor, he can hold the promisor to his promise.

Tweddle v. Atkinson [1861]
Held: The couple though they are beneficiary of the contract, but they in reality are strangers to this transaction and only a person who is a party to a transaction can enforce it.

Dunlop Pnuematic Tyres v. Selfridge & Co. Ltd. [1915 AC 847]
Held:Contract between Dew and Selfridge. Dunlop as a stranger could not enforce contract.

Dutton v. Poole[1677]
Held: Girl can sue because she was a beneficiary of the contract. This was before the privity rule in England so won’t be applicable there but is the position in India. The brother was bound to pay. 

Chinnaya v. Ramayya [ILR (1876-82) 4 Mad. 137]
Held:Held that third party gave valid consideration and both the agreements could be treated as one and as the sister had been receiving the amount for a long time previously from the estate, the promise to pay the sister was a part of the agreement when the land was sold to the daughter. Court said that the Rs. 653 is in return of a consideration furnished by a 3rd party. So, it is a valid agreement and she can enforce it.

Daropati v. Jaspat Rai [(1905)(Punj. Rec) 171]
Held: Wife could enforce promise made by D to her father. Where an agreement is made in marriage, partition or other family arrangements, and a provision is made for benefit of a person, he may take advantage of that agreement although he is no party.

Rana Uma Nath Bakhsh Singh v. Jung Bahadur [AIR 1938 PC 245]
Held: The younger brother could enforce the contract.

Kshirodebihari Datta v. Mangobinda Panda [AIR 1934 Cal. 682]
Held: Landlord could sue on failure to pay. Sub-tenant was stopped from denying his liability to pay rent on ground that there was no contract between him and landlord.

Rule: Where by the terms of a contract, a party is required to make a payment to a third person and he acknowledges it to that person, a binding obligation is incurred towards him.

Mc Ardle Re: [(1951) 1 All E.R. 905(CA)]
Held: The quid pro quo is to be decided before the contract. The work had already been completed and the consideration is a past consideration so this promise can’t be enforced. (Quid Pro Quo should be a simultaneously thing)

White v. Bluett [(1853) 23 LJ Ex 36]
Held: Not complaining has no value before the law, hence no consideration. The exchange should be of some value, here it was only illusory.

De La Bere v. Pearson Ltd. [(1908) 1 KB 280 (CA)]
Held:There was consideration. Such publications have a tendency to increase sale of newspapers. Inadequacy does not vitiate contract but if the terms are unequal, it will be given consideration in a case claiming no free consent.

Collins v. Godefroy [(1831) 109 ER 1040]
Held: not valid, the police officer had a pre-existing duty to investigate the case.

Williams v. Roffey Bros. and Nicholls (Contractor) Ltd [(1991) 1 QB 1]
Held: There was a practical benefit you have (not being subjected to penalties) so you offered a higher price. So, in light of this, though he had existing obligation, he is bound to pay the price.

Penny v. Cole (Pinnel‟s Case) [1602] 5 Co. Rep. 117a

Held: Contract for the performance of contractual obligations is not valid. The court said that for no reason would a reasonable man be willing to accept a lesser amount against a higher amount he is entitled to. But a consideration in kind for a lesser value is acceptable, because it may be that valuable to the other person.

Central London Property Trust Ltd. V. High Trees House Ltd. [(1947) 1 KB 130]

Held:The court said that the builder was entitled to receive 25000 pounds from the date of cessation of war. Before the war ended, he would get 50% of that amount. From the end of the war till the date of the decree, he would get 25000 pounds. No arrears were allowed. 

Combe v. Combe
Held: Court rejected wife’s plea as husband never tried to change wife’s position, never told her to not file a case against him. So, promissory estoppel doesn’t operate against husband.

Shadwell v. Shadwell

Held:The court said that the consideration in this case was that the person would perform his obligations inter se the man and his fiancée, since the uncle wanted it to be enforced. Thus, the uncle was bound to pay him 150 pounds per year.

Scotsons v. Pegg [158 ER 121]
Held: The delivery of the goods to him was a good enough promise, despite the plaintiff previously being under an obligation to deliver the goods through a different contract

Rajlukhy Dabee v. Bhoothnath Mookherjee (1899-00)
Held: When 2 people have gotten separated on grounds of a quarrel between them and therefore this agreement has come into being, we cannot consider them to be in good terms or out of love and affection and therefore agreement won’t be enforceable. This case was an exception to the assumption of instinctive love between the two parties closely related.

Sindhi Shri Ganapat singhji v. Abraham
Held: A promise to repay a person for voluntary service during minority and continuing to majority is valid consideration for a subsequent promise by the person in favour of he who rendered the services.

Points to remember

• Consideration is any act or abstinence done/undertaken at the desire of the offeror. It is required by the offeror and is done by the offeree. It could be in the past, present or future
• If a person does something, only then the other person does something. Promises are futuristic in this case and the contract is only valid on the performance of the first deed.
• : Past consideration is no consideration as the consideration should be at the time of entering the contract
• unilateral promises one party commits something to the other. If the other alters the actions in accordance with the actions of the first party, then it is said to be a promise where the first party is bound to fulfil the terms of the promise.
• Where a party acknowledges a payment due to a third party, a binding obligation will be created against him.
• When a property is transferred, so are the charges and encumbrances. Agreement dealing with a particular piece of land is also transferred.
• Consideration must be of some value in eyes of law.
• When the parties themselves have entered into an agreement for paying of a lesser amount it is called compromise 
• Where the payment has been made before the due time or by a different mode of payment, it is held to be valid consideration.
• Gifts, past voluntary services, time barred debt, inadequate consideration are the exception of consideration