Introduction
Whenever a contract is made, there is a price associated with it. It is the value offered and accepted by people or companies. In simple terms, consideration is something in return. As per section 2(d), the definition of consideration is as follows:
“When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise."
In this article, we will simplify the above meaning of consideration in contract law and look at some of the essential elements of consideration.
Consideration Meaning in Law
Consideration is the foundation on which any contract is built. The law would enforce only those promises that are made as part of the consideration. A valid Consideration in business law must involve every party, which means that each person involved in the contract must promise to do something and also promise not to do something. Without consideration, a promise does not have any legal obligations.
Consideration is mostly referred to in monetary terms, but it could also mean a particular action or a promise to refrain from a specific action. It is a two-way street where each party must gain something valuable from the other involved parties.
Let us break down every part of the consideration definition in law:
Consideration has to move as per the desire of the promisor.
Consideration may move from the promise to another person.
Consideration might be in the past, present, or future.
Consideration does not need to be adequate.
Consideration must be real and not illusory.
Illegal or immoral acts are not considered.
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What are the Requirements of Section 2(d)?
The term consideration is defined in Section 2(d) of the Indian Constitution Act. according to section 2(d), three things are required for consideration to uphold validly, that is, the abstinence or act should be done at the desire of the promisor, the act should be done by the promise or any other person, the act should be either already executed or be in the process of being done or should be executory, that is, it should be promised to be done.
Let us explain the essential elements of consideration in detail.
Consideration has to Move as Per the Desire of the Promisor
The performance of the contract has to move as per the promisor and not any third party. The promisor doesn't need to always benefit from the consideration; it could be meant for a third party also. The significant thing is that there has to be a connection between the promisor's desire and the action of the promise. Another factor to note here is that what is done as part of the consideration is not voluntarily but at the promisor's behest. For example, if A’s house is on fire and B rushes to save it at his own will, this is not a consideration. But if A asks B to do it, then it will be deemed as a consideration.
Consideration May Move from the Person to Another Person
As per consideration in law, if the promisor has no objection, consideration may move to a third party. For example, A can grant a house on rent to B and direct B to pay it to X. If B refuses to pay it to X, then the case could move to court and force B to pay X as there is enough consideration from A to make the payment to X.
Consideration Might be in the Past, Present, or Future
Past Consideration - If the promise or act is performed before the contract was made, it is considered past consideration, and it holds good in Indian law. As an example, A’s bike ran out of petrol on the way and A requests B to fill petrol for which he agrees to pay later. So, the promise of money is made for a past consideration of filling petrol. In English law, any past consideration is no consideration.
Present Consideration – When one of the parties in the contract has performed his part of the promise, which constitutes the consideration to be performed by the other party, it is called present consideration. Let us say A lost his watch and offers to pay Rs 300 to the person who finds it. If B finds the watch and gives it to A, then A is bound to pay Rs 300 to B as part of the present consideration.
Future Consideration – When a party makes a promise in exchange for the promise from the other party and the performance of the consideration is to be done after making the contract; then it is a future consideration. For example, A promises to sell ten toy cars to B for which B is supposed to pay Rs.1000 at a future date. This is a future consideration.
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Consideration Does Not Need to be Adequate
An agreement must be supported by consideration, but the consideration doesn’t need to be equivalent to the promise. The parties are free to determine the appropriate consideration at the time of the bargain. Whether the promise is adequate or not is the lookout of the promisor and not the obligation of law or court to investigate the adequacy of the consideration. For example, if A has a property worth Rs. 50,000, which he agrees to sell to B only for Rs. 5000, then the inadequacy of the transaction does not make the contract void. But if B pleads coercion, fraud, or under influence, then the consideration will be looked into with sufficient evidence.
Consideration Must be Real and Not Illusory
The legal rules of consideration state that consideration has to be certain, definitive, and competent. It cannot be vague, uncertain, or impossible. The transaction is rendered void in such a case. As an example, if A promises to find a treasure by magic if B pays him Rs. 10,000, then this is an illusory consideration and not considered valid.
Who is Considered a Stranger to a Contract?
The contract of consideration can only be enforced upon the behest of the parties to the contract and therefore, no third party can enforce the contract upon anyone. The contract arises due to the prevalence of a contractual relationship between the two parties. According to this rule, no third party can enforce any contract, and also the contract cannot levy an obligation on any person other than those who are a part of the contract. Though, in certain cases, strangers either benefit or are involved in the contact other than the two parties. This happened in cases of the marriage settlement, land properties, and acknowledgement to the third party as per the need of the contract.
FAQs on Legal Rules Regarding Consideration in Contracts
1. What are the essential legal rules for a valid consideration in a contract?
According to the Indian Contract Act, 1872, for a consideration to be valid, it must follow certain legal rules. The key rules are:
- It must move at the desire of the promisor: The act or abstinence must be done at the request of the person making the promise.
- It may move from the promisee or any other person: Under Indian law, a 'stranger to consideration' can provide it, as long as it is at the promisor's desire.
- It can be past, present, or future: Consideration can be an act already performed (past), performed simultaneously with the promise (present), or promised to be performed later (future).
- It must be real and not illusory: The consideration must be certain and possible to perform. A promise to do something impossible, like finding treasure by magic, is not valid.
- It must not be something the promisor is already bound to do: Performing a pre-existing legal or contractual duty is not a valid consideration for a new promise.
- It must be lawful: The consideration cannot be for an act that is illegal, immoral, or against public policy.
2. Can consideration be something other than money? Provide examples.
Yes, consideration is not limited to money. It is defined as 'something in return' and can take many forms. Any act, abstinence, or promise that has value in the eyes of the law can be a valid consideration. Examples include:
- A promise for a promise: A promises to sell his car to B for Rs. 2,00,000. Here, A's promise to sell is the consideration for B's promise to pay, and vice-versa.
- Forbearance to sue: If A owes B money and B agrees not to file a lawsuit in exchange for A promising to pay the amount within a month, B's forbearance is a valid consideration.
- Performance of an act: A loses his dog and offers a reward of Rs. 5,000 to anyone who finds it. When B finds and returns the dog, B's act of finding it is the consideration for A's promise to pay.
3. Why is 'adequacy of consideration' not a requirement for a valid contract?
The law does not require consideration to be adequate or financially equivalent to the promise. The core logic is that the courts do not interfere in the commercial wisdom of the parties to a contract. As long as the parties have given their consent freely and the consideration is real, it is their right to decide the value of their bargain. However, if the consideration is grossly inadequate, the court may investigate whether the promisor's consent was truly free and not obtained through coercion, fraud, or undue influence.
4. How do past, present, and future considerations differ under the Indian Contract Act?
The timing of the consideration relative to the promise determines its type:
- Past Consideration: This is a promise made for an act that was performed before the promise was made. For example, if A's car breaks down and B helps him, and A later promises to pay B Rs. 1,000 for the help, the promise is for a past act. This is valid under Indian law.
- Present Consideration (Executed): This is when the promise and the act of consideration happen simultaneously. For example, when you buy a book from a store, you pay the money (your consideration) and receive the book (the shopkeeper's consideration) at the same time.
- Future Consideration (Executory): This is when parties make reciprocal promises to perform their obligations at a future date. For instance, A promises to deliver 50 bags of cement to B next month, and B promises to pay upon delivery. Both promises are to be performed in the future.
5. What happens if an agreement is made without consideration? Are there any exceptions?
The general rule is "no consideration, no contract." An agreement made without any consideration is void and legally unenforceable. However, Section 25 of the Indian Contract Act, 1872, outlines specific exceptions where a contract is valid even without consideration:
- An agreement made out of natural love and affection between parties in a near relationship, provided it is in writing and registered.
- A promise to compensate for a past voluntary service, where someone has already done something voluntarily for the promisor.
- A promise in writing to pay a time-barred debt (a debt that can no longer be legally recovered due to the statute of limitations).
- Completed gifts (as between the donor and donee).
6. What is the difference between a 'stranger to a contract' and a 'stranger to consideration'?
This is a crucial distinction in contract law. A 'stranger to consideration' is a person who has not provided the consideration themselves but is a party to the contract. Under Indian law, consideration can be provided by the promisee or any other person, so a stranger to consideration can still enforce the contract. In contrast, a 'stranger to a contract' is a person who is not a party to the contract at all. The doctrine of privity of contract states that only the parties to a contract can sue each other. Therefore, a stranger to the contract generally cannot enforce it, even if the contract was made for their benefit.
7. If a person is already legally required to do something, can performing that act be a valid consideration?
No, performing a pre-existing duty cannot be a valid consideration for a new promise. The rule is that consideration must be something more than what the promisor is already bound to do. For example, if a police officer is promised a reward by a citizen for catching a thief, the officer cannot claim it because catching criminals is their existing legal duty. The promise is not supported by fresh consideration from the officer's side and is therefore not enforceable.
8. What makes a consideration 'illusory', and what is its effect on a contract?
An 'illusory' consideration is one that is uncertain, vague, or physically or legally impossible to perform. It appears to be a consideration but has no real value in the eyes of the law. For example, if A promises to pay B Rs. 10,000 in return for B promising to 'bring a star from the sky', B's promise is illusory because it is impossible to perform. A contract with an illusory consideration is void because there is no real 'something in return' to support the promise.
