Explain Consideration with Case Law

Synopsis (Index)

1. Introduction
2. Definition of Consideration (Section 2(d))
3. Types / Kinds of Consideration
4. Essential Elements of A Valid Consideration
   • 3.1. Consideration only at the desire of the promisor
   • 3.2. Consideration by promisee or any other person (Doctrine of Privity of Consideration)
   • 3.3. Consideration may be past, present, or future
   • 3.4. Consideration must be real and of some value
   • 3.5. Must be lawful.
5. Exceptions to the Rule: “No Consideration, No Contract” (Nudum Pactum)
   • Agreement made on account of Natural Love and Affection
   • Compensation for past voluntary services
   • Promise to pay a time-barred debt
   • Completed Gift
6. Important Case Laws
   • Chinnaya vs. Ramaya
   • Durga Prasad vs. Baldeo
   • Ramchandra Chintaman vs. Kalu Raju
7. Conclusion

Introduction

Consideration is one of the essential elements of a valid contract under the Indian Contract Act, 1872. It is often called the “price for a promise”. Without consideration, a contract is generally void, except in certain special cases recognized by law.

Definition of Consideration (Section 2(d))

According to Section 2(d) of the Indian Contract Act, 1872:

“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, such act or abstinence or promise is called a consideration for the promise;”

Example:

1) A promises to give ₹10,000 to B if C (B’s friend) paints A’s house. C paints the house. C’s act is valid consideration for A’s promise, even though it was not done by B (the promisee).

2) A owes B ₹1,000. B agrees not to sue A if A pays ₹800 immediately. B’s abstinence from suing is valid consideration.

3) A sees B’s house on fire and, without being asked, helps to put out the fire. Later, B promises to pay A ₹1,000. The act was not done at B’s desire — therefore, it is not valid consideration.

Types / Kinds of Consideration

1. Past Consideration: Something done or suffered before making the promise.
   Example: A does some work for B at his request. Later B promises to pay A ₹500. This is valid past consideration.
2. Present (or Executed) Consideration: Consideration that is given at the same time as the promise.
   Example: A pays ₹10,000 to B, and B immediately delivers goods worth ₹10,000 to A.
3. Future (or Executory) Consideration: When the consideration is to be performed in the future.
   Example: A promises to deliver goods next week, and B promises to pay on delivery.

Essential Elements of A Valid Consideration

3.1. Consideration only at the desire of the promisor

The actor abstinence constituting the consideration must be done at the initiation or request of the promisor. A voluntary act is not valid consideration.

• Case Law: Durga Prasad v. Baldeo – A shop-owner’s expenses incurred for construction at the Collector’s order were held not to be consideration for a promise to pay commission, as the act was not done at the promisor’s desire.

3.2. Consideration by promisee or any other person (Doctrine of Privity of Consideration)

Indian law permits a third party (a stranger to the consideration) to furnish the consideration. This is known as the Doctrine of Privity of Consideration.

• Case Law: Chinnaya v. Ramaya – An old lady gifted property to her daughter (Ramaya), directing her to pay an annuity to her brother (Chinnaya). When Ramaya failed to pay, Chinnaya sued. The court held that the consideration (the property) was given by the old lady (a third party), which was valid consideration for Ramaya’s promise.

3.3. Consideration may be past, present, or future

Consideration is classified based on when the act constituting it took place:

• Past: The promise is given for an act already done before the promise. (e.g., A saves B’s life, and later B promises to pay A ₹1,000).
• Present (Executed): An act is done simultaneously with the promise. (e.g., Cash sales).
• Future (Executory): A promise is made to do something in the future. (e.g., A promises to deliver goods next month, and B promises to pay next month).

3.4. Consideration must be real and of some value

The law requires that the consideration must be something, but it need not be adequate to the promise. A mere inadequacy of consideration will not invalidate a contract, provided the consent was freely given. However, the consideration must be real, certain, and lawful, not illusory or physically impossible.

• Example: A promise to sell a new car worth ₹10,00,000 for a nominal price of ₹10,000 is a valid contract, provided A’s consent was free.

3.5. Must be lawful

The object or the consideration of an agreement must be lawful as per Section 23 of the Act. It should not be forbidden by law, fraudulent, immoral, or opposed to public policy.

Exceptions to the Rule: “No Consideration, No Contract” (Nudum Pactum)

Section 25 of the Act lays down specific exceptions where an agreement without consideration is still valid and enforceable:

1. Agreement made on account of Natural Love and Affection: It is expressed in writing and registered under the law for the time being in 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 (Section 25(1) of The Indian Contract Act).
2. Compensation for past voluntary services: A 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 (Section 25(2) of The Indian Contract Act).
3. Promise to pay a time-barred debt: A promise, made in writing and signed by the debtor or their authorized agent, to pay a debt that the creditor might have enforced but for the law for the limitation of suits (Limitation Act).
4. Completed Gift: The rule of No consideration, No Contract does not apply to completed gifts. Gifts already made are valid even without consideration.

Important Case Law

1) Chinnaya vs. Ramaya

Facts:
A mother gifted land to her daughter, who agreed to pay an annuity of Rs. 653 per year to the mother’s sister (Chinnaya). The daughter failed to pay, and the sister sued.

Issues:
Can a person who is not a party to the contract (a third party) sue on a contract made for his benefit if consideration moved from another party?

Analysis:
Under Indian law, consideration may move from any person. The mother’s gift was part of the same transaction, so valid consideration existed.

Judgment:
The court held that the sister could recover the annuity. Even though she was not a direct party, the contract formed one composite arrangement, and consideration existed under Indian law. Hence, the daughter was bound to pay the annuity.

Principle: In India, consideration can move from a third party, and a beneficiary under a contract may sue to enforce it.

2) Durga Prasad vs. Baldeo

Facts

• The Collector of a district ordered the construction of a market in a town.
• Durga Prasad (the plaintiff) constructed the market at his own expense.
• Baldeo (the defendant) and others occupied shops in the market.
• The defendants promised the plaintiff to pay him a commission on articles sold through their shops in exchange for his expenditure on the construction.
• The defendants later refused to pay, arguing that there was no valid consideration.

Issues

1. Whether the construction of the market constituted valid consideration for the defendants’ promise to pay the commission.
2. Whether the act of construction was done at the desire of the defendants (promisors).

Analysis

• The Court examined the requirement under Section 2(d) that the act constituting consideration must be done “at the desire of the promisor.”
• The market was constructed not at the instance or desire of the shopkeepers (Baldeo/promisors), but at the order of the Collector.
• Since the plaintiff’s act was voluntary with respect to the defendants, and not performed at their request, it did not fulfill the statutory requirement for valid consideration.

Judgment

• The Court held that there was no valid consideration for the promise made by the shopkeepers (Baldeo).
• A voluntary act done at the instance of a third party (the Collector) or without any request from the promisor cannot be considered good consideration. The plaintiff’s suit was dismissed.

3) Rajlukhy Dabee vs. Bhootnath Mookerjee

Facts:
The husband (Bhootnath Mookerjee) promised in a written and registered agreement to pay his wife a certain sum of money every month for her separate residence and maintenance. This agreement also detailed the existing disputes and disagreements between the couple, which had led to their separation. The wife (Rajlukhy Dabee) sued for maintenance.

Issues:
The primary legal issue was whether the agreement, though in writing and registered, was a valid contract without “natural love and affection” as a form of consideration under Section 25(1) of the Indian Contract Act, 1872

Analysis:
The wife had not agreed to any act or forbearance in exchange; separation was voluntary, not contractual.

Judgment:
The Calcutta High Court ruled in favor of the defendant (husband). The court held there was no consideration, so the agreement was unenforceable.

Principle:
A voluntary promise to maintenance without any consideration or legal obligation is not enforceable.