Business law 1b

Consideration
• It is one of the most essential elements of a
contract
• Subject to certain exceptions a contract without
consideration is nudum pactum and void
• It is a technical term used in the sense of quid
pro quo( something in return)
• When a party promises to do something he must
get something in return
• Consideration is the price for which the promise
of the other is bought and the promise thus
given for value is enforceable
 Contd.
• A promise made for nothing has no force
in law.
• The breach of a gratuitous promise cannot
be redressed by legal remedies, it is only
when a promise is made in return of
something from the promisee that such
promise can be enforced by law against
the promisor
 Definition and components
• Section 2d of the Indian contract Act defines consideration as follows:

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
promise to do or to abstain from doing, something, such act or
abstinence or promise is called a consideration for the promise.

• An analysis reveals following components:

 an act or abstinence which forms the consideration for promise must

be done at the desire of promisor.
 It must be done by the promisee or any other person.
 It may have been already executed or is in the process of being done
or may still be executory
 It must something to which the law attaches value
 Contd.
• Example : A agrees to sell his house to B for a
price of Rs. 10,000. Here B’s promise to pay the
money is the consideration for A’s promise to
sell the house and A’s promise to sell the house
is the consideration for B’s promise to pay
money
• Example Abdul Aziz Vs Masum Ali :Secretary of
mosque committee filed a suit to enforce a
promise which the promisor had made to
subscribe Rs. 500 to re-bulding the mosque.
 Essential Elements of Valid
Consideration
1. Consideration must move at the desire of the Promisor
Cosnideration must at the desire of the promisor in order to be
legal, thus acts done or service renederd voluntarily or at the
desire of third party will not amount amount to valid consideration
so as to support contract

Example : A sees B’s house on fire and extinguished it. He cannot

demand payment for his services.

D had built at his own expense, a market at the request of the

collector of the district. The shopkeepers in the market promised
to pay D commission on the articles by them in the market. When
D sued the shopkeepers for the commission it was held that the
promise to pay lacked consideration. (Durga Prasad Vs. Baldeo)

It is not essential that the Consideration must confer some

benefit on the promisor. Example : Guarantee
 Contd.
2. Consideration may move from the promisee or
any other person : Consideration need not
move from the promisee alone but may
proceed from a third person. Thus as long as
there is consideration for a promise it is
immaterial who has furnished it. This means
that even a stranger to a contract may sue on
a contract provided he is a party to the
contract.

Example : Chinayya Vs Ramayya

 Doctrine of privity of
Contract
• A stranger to a contract cannot sue: A person
may be stranger to the contract but he should
not be a stranger to the contract because “privity
of contract” is essential for enforcing any of the
rights arising out of the contract.
A stranger to a contract cannot sue only a party
to a contract can sue.

Example : A mortgages his property to B, with a

promise that he would pay his debt to C. C
cannot file a suit against B to enforce his
promise.
 contd.
• Exceptions

1. Where an express or implied trust is created: In case of trust the

beneficiary can sue in his own right to enforce his rights under the
trust. Example A transfers his properties to B to be held by B in
trust for benefit of M. M can enforce the agreement.

Example : An addresse of an article is entitled to sue the post

office.
2. Family Settlement : when settlements are made in a partition or
family arrangement for maintenance or marriage expense of
female members such memebers though not party can sue:

Example : Father leaves a will in favour of daughter with a

condition of maintaining of maintaining her mother, mother can
sue for full filment of promise.
 Contd.
3. When the defendant constitutes himself as agent of third
party. Thus if A receives some money from B to be paid
over to C and he admits of this to C then C can recover
this amount from A who shall be regarded as agent Ex.
(Surjan Vs Nanat)
4. In case of agency : Where a contract is entered into by
the agent the principal can sue on it.
5. In case of assignment of rights under a contract :in
favour of a third party either voluntarily or by operation of
law, the assignee can enforce the benefits of the
contract. Ex. The official assignee in case of insolvency.
 Contd.
3. Consideration may be present past, present or future: The word has done,
abstained from doing shows that consideration can be present, past or future.

It may be an act of abstinenece : Ex An agreement bw B and where B failing to

pay the debt amount on due date to A; promises to raise the interest from 9 to
12 % in consideration of A not promising not to file a suit against him.

It may be past : Ex. Tutor getting salary at the end of month.

A consideration which moves with the promise is called present consideration.

A sells and delivers book to B upon B ‘s promise to pay at a future date. i.e at
the time of agreement consideration is executed from one end and executory
from other.

When consideration on both sides is to move at a future date also called

executory consideration. Ex. X promises to sell and deliver 10 bags of wheat to
Y and Y promises to pay at the time of delivery.

Executed consideration is a liability and executory it is outstanding on both

sides.
 Contd.
4. Consideration must be of something of value :
Something which law attaches value, it need not be
adequate, it leaves people to make their own bargains

Consideration must be real , the following are not

consiedred valid consideration :
Physically impossible,
legally impossible,
uncertain conisderation
illusory consideration – not something you are already
bound by (Colin vs Godefroy)
Exceptions to rule of Consideration
1. Agreements made out of natural love and affection: An agreement without
consideration is enforceable if it is 1)expressed in writing 2)registered under
law 3) made on account of natural love 4) between parties standing near in
relationship These are four essential requirements that must be compiled with
to enforce an agreement without consideration.

Example A out of natural love promises to give B Rs. 1000 and registers it.

A registered document where elder brother on account of natural love promises

to pay debts of younger brother.

Note A husband referring to qualrrels and disagreement agreed to pay his wife
for separate residence and maintenance, the agreement lacked consioderation
as it was not made out of natural love (Rajlakhidevi vs Bhootnath)
 Contd.
2. Agreement to compensate for past voluntary service: A promise made without
consideration is also valid, if it is a promise to compensate wholly or in part for
past voluntary service

Ex A rescued B from drowning. B promises to pay Rs. 1000 to A.

3. Agreement to pay time barred debt : Where an agreement is ,made in writing

and registered and signed by a debtor or by his authorised agent to pay a time
barred barred by law of limitation, the agreement is valid eventhough it is not
supported by consideration

Example : A time barred debt.

4. Completed gift : A gift (which is not an agreement ) does not require

consideration, there need not be natural love.

5. Contract of Agency : Contract of agency does not require consideration

6. Remission by the promisee of performance of the
promise: For compromising a due debt agreeing to
accept less than what is due no consideration is
necessary.

7. Consideration to charity: A promise to charity though

gratutious would be enforceable if on faith of the
promised subscription the promisee takes definite steps
in furtherance of the object and undertakes a liability to
the extent of liability incurred , not exceeding thje
promised amount of subscription

Ex. Kedarnath Vs Gorie Mahammad