Understanding Consideration in Contracts

Consideration in simple legal terms is founded upon the 'quid pro quo' principle—Latin for 'something for something'. When applied to a contract, it basically means that something of value needs to be given by each party to receive whatever that party is due to get. It may be an act they will do—something they are not required to do—or even not do something they actually have a right to do.

Think of an offer as akin to a price tag on a contract. It does not have to be cash money, but it can be in the form of rights, goods, services, or any other type of consideration found valuable under the law. However, items such as feelings, respect, or love do not typically translate into legal consideration.

An example is the case of Chappell and Co. Ltd. v. Nestle Co. Ltd. (1960). Nestle offered music records at a reduced price if customers sent in wrappers from their chocolate bars. The court decided that even though wrappers may seem trivial, they did have value-enough to count as consideration. What matters is that there is some form of valuable exchange, not necessarily its exact monetary worth.

Essentially, consideration is something valued that the parties will exchange with one another for a contract to be legally valid.

Understanding Consideration in Legal Terms

Section 2(d) of the Act defines consideration thus:

"When, at the request of the person making the promise, the person to whom the promise is made, 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, such act, abstinence, or promise is called a consideration for the promise."

• Presence of Two Parties: Every contract involves a promisor (the person making the promise) and a promisee (the person to whom the promise is made).

• Promisor's Desire: The action, abstention, or promise must be undertaken or refrained from at the desire or request of the promisor.

• Action or Abstinence: The consideration can be in the form of an act performed, refraining from an act, or a promise to do or not do something.

Abstinence, in itself, suggests the act of holding himself or another person from doing something specific. Now that we know the crux of consideration, let us dive deep into the elements which give it validation and force.

Essentials of Valid Consideration

Consideration is a critical element in ensuring the validity and enforceability of contracts. It refers to something of value exchanged between parties to a contract. Without valid consideration, a contract cannot be upheld in court—it would be considered void. Essentially, valid consideration legitimizes a contract, offering legal protection for the rights and interests of all involved parties.

The essentials for valid consideration are as follows:

1. Act or Abstinence: For consideration to be valid, it must involve either an action or refraining from an action. An action refers to something the promisee (the recipient of the promise) does at the request of the promisor (the maker of the promise). Conversely, abstinence means not exercising a legal right that the promisee would otherwise have the right to, also at the promisor's request. This action or abstinence can occur in the past, present, or future, as specified within the definition of consideration itself.

2. Consideration by Promisee or Any Other Person: Section 2(d) of the Act specifies that consideration can be provided by the promisee or any other person. This means that someone other than the promisee can fulfill the consideration requirement, which is known as the doctrine of constructive consideration. This flexibility ensures that consideration does not need to come solely from the promisee.

In the case of Premalatha v. Mysore Minerals Ltd. (1992), the Karnataka High Court illustrated this principle by ruling that the petitioner had the right to seek relief from an insurance corporation on behalf of her deceased husband. Despite her husband not being a direct party to the contract between his employer and the insurance corporation, the benefits under the contract were intended for the employees, including him. Therefore, both employees and their heirs were entitled to claim those benefits under Indian law.

3. Consideration at the Desire of the Promisor: Valid consideration must be performed at the request or desire of the promisor. If the action or refraining from action is done at the request of someone else, it does not constitute valid consideration under the law.

Case

Durga Prasad v. Baldeo and Ors., 1881

The facts of this case are such that the District Authority of Etawah called upon the plaintiff to make a market in the local area. He accepted the District Authority's request and constructed a market with shops for which he purchased land. The defendants rented out these shops and carried on business as commission agents.

They agreed to pay a certain commission periodically to the Plaintiff. The Plaintiff wished to get this agreement registered with the municipal corporation, but the Defendants refused to permit the registration. The Plaintiff then filed the suit to enforce his right to the commission.

The Allahabad High Court held in favour of the Defendants. They relied on Section 2(d) of the Indian Contract Act, 1872, and stated that the consideration must flow from the promisee or any other person at the desire of the promisor to constitute a valid consideration. In this case, the Court held that the request for the construction of the market had been made by the District Authority of Etawah and not by the Defendants themselves. Thus, the Court held that no promisee-promisor relationship was established between the Plaintiff and the Defendants. As such, the Plaintiff's claim for commission failed.

Legal Requirement of Lawful Consideration

A consideration must necessarily be lawful. It should not be opposed to or forbidden by any law, and it should not be void. An unlawful consideration has no value and cannot be availed in a court of law. In the following sections, we will discuss what comprises a valid lawful consideration.

Understanding Lawful Consideration

A lawful consideration is one that is valid in court. Section 10 of the Indian Contract Act clearly states that "all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration, and with a lawful object, and are not hereby expressly declared to be void."

Thus, an agreement is considered a contract in case:

1. Free consent of parties

2. Legal competency of parties to the agreement

3. Lawful consideration and lawful purpose

4. Not expressed void under any law

All these factors allow the agreements to be valid, legally binding, and enforceable, and hence it lays down a regime through which contractual obligations can be held valid and legally legitimate.

Legal Effect of Lawful and Unlawful Consideration

Any agreement which involves an unlawful consideration is void under Sections 23 and 24 of the Indian Contract Act, 1872. Section 23 enumerates circumstances which would make a consideration unlawful. A consideration which does not come within any of the provisions of Section 23 is lawful.

For instance, in the case of Ram Swarup Bhagat v. Bansi Mandar (1915), the Defendant agreed to repay a loan with interest and to provide agricultural labor without compensation. The agreement was considered void under Section 23 because the unpaid labor was considered servitude, bordering into slavery, and that the penalties imposed were excessive and oppressive.

The contrary position was taken in the case of Gherulal Parakh v. Mahadeodas Maiya and Ors. (1959), wherein the validity of a partnership agreement to conduct wagering transactions was brought into question. Even though, barring wagering contracts under Section 30 of the Act, are void, the Supreme Court held that the partnership agreement could not be declared invalid under Section 23. The Court thereby drew a distinction between the general concept of public policy and the narrower prohibition on wagering contracts; not every act against public policy would render an agreement void.

These cases therefore illustrate the role of Section 23 in the Indian Contract Act regarding the legality and enforceability of considerations in agreements. It shows that at all costs, considerations have to be lawful to retain the integrity associated with contractual relationships under Indian law.

Understanding Unlawful Considerations

Section 23 of the Indian Contract Act provides for the features of the considerations or objects which the law regards to be illegal. It provides that:

i. Legality Is Forbidden: As to a consideration or object, an agreement is void if by its terms it requires either an act or forbearance, the consideration or object of which is an act that is forbidden by law. When forbidden by a law is the performance of acts, which statutes attach legal penalties or fines, performance of them renders that consideration void. All agreements having consideration on one side, which is either illegal or is forbidden by law, are void. But all void agreements are not necessarily illegal.

ii. Defeating the Provisions of Law or Fraudulent: Considerations that would defeat the provisions of the Act if allowed, or are such that they amount to fraud in any way. This includes acts or intentions that bypass legal protections or deceive the parties.

iii. Injury to Person or Property: All considerations that harm or, directly or indirectly, another person or their property are illegal. This section ensures protection against consents that cause damage or suspension of rights.

iv. Immoral or Against Public Policy: The considerations or the purposes found to be injurious to the current morality or public policy are regarded as illegal. This happens to be another criterion to ensure assurances of the fulfillment of contracts with values and ethics of a society.

In either of the above cases, if an agreement or its objective that remains under consideration falls within the kinds mentioned, it is considered unlawful. Hence, an agreement containing an unlawful consideration or objective becomes void-ab-initio under the law. The understanding and ramifications of these principles help establish the spheres within which the legal agreements may be inferred to be for just, good, and rightful.

Legal Consequences of an Unlawful Consideration:

Section 24 of the Indian Contract Act lays down that any agreement having an illegal consideration, the whole of it shall be construed as void. It says that in case of any part of the consideration of one or more objects or any one or any part of any one of several considerations for a single object being unlawful, then such an agreement is void.

In simpler terms, this means that if anything promised in return for an agreement contains anything that is illegal or against the law, that agreement cannot be enforced. This applies whether the illegality affects the entire consideration or just a portion of it.

If, for example, A agrees to give B 100 grams of gold in exchange for B giving A 500 grams of heroin, such an agreement stands void because the consideration B promises to perform becomes unlawful under the NDPS Act, 1985. This is an Act that clearly prohibits the possession, sale, and use of narcotics such as heroin; therefore, any agreement involving such substances is void and unenforceable.

As such, any agreement that has consideration on something forbidden by law cannot be enforceable at law. This serves to ensure that agreements at law happen within the norms of society and within the confines set by law, an action that enhances integrity in the contractual dealings.

Understanding Lawful Consideration and Lawful Object

In law, the terms "lawful consideration" and "lawful object" are used interchangeably, although they relate to different things. The object of an agreement refers to the purpose or intention of an agreement; meanwhile, consideration refers to 'something of value' bartered within the agreement and known to the law.

Consideration may be an act or a forbearance, either in the past, present, or future, provided that it is at the request of the promisor. The object refers to what the parties intend to achieve through the agreement. Consideration and the object, for them to be valid, ought to conform to the requirement of the law.

In practice, there may be situations whereby the consideration can be lawful, but the object itself may not be, or vice versa. Example: A agrees to invest money in B's business on the promise that B will make monthly repayments to A. However, the intention of B is to defraud creditors since he is insolvent. In this scenario, the consideration—that of making monthly payments—is lawful, but the object—that of defrauding creditors—is contrary to insolvency laws and thus unlawful.

In other words, for the agreement to be legally enforceable, the consideration and object should be lawful. The illegality in either of these components renders the whole agreement void, thereby stressing the legality aspect of contractual agreements.

Exceptions to the Requirement of Consideration

Under the Indian Contract Act, 1872, the general rule is that every contract must provide for consideration if it is to be enforceable; that is, 'no consideration, no contract.' Every agreement without consideration is called void. However, Section 25 specifically provides for exceptions to this very rule and renders certain agreements to be enforceable despite lack of consideration. These exceptions are as follows:

i. Natural Love and Affection: Agreements between persons in close natural relation made out of natural love and affection, when reduced to writing and registered under the law for the registration of documents, are valid and enforceable. The Act has not defined the expression 'close relatives', but judicial decisions have annexed to it both blood relatives as well as relatives by marriage, excluding distant relations. For example, in Vijaya Ramraj v. Dr. Sir Vijaya Ananda 1950, the Allahabad High Court laid down that the promises so made, when registered, and found to be based on natural love and affection, continue to be binding even though the promisor is dead before the performance of the promise.

ii. Past Voluntary Services: Where a promisor promises to pay wholly or partially for any service done to the promisor, no consideration exists on the ground of the promisor's promise; still, such agreements are valid. The services must have been performed without the promisor's prior knowledge and solely for their benefit.

iii. Time-Barred Debts: In writing and signed by the debtor or his acknowledged representative, promises to pay a debt, even when time-barred, are valid and enforceable. The written acknowledgment of the debt resets the period within which a lawsuit can be filed to recover the debt.

In summary, these exceptions carve out specific circumstances where the presence of consideration is not required for an agreement to be legally binding and enforceable under Indian contract law.