Business Law Complete Notes for BBS TU/ Consideration

Chapter-4 Consideration

1. What is consideration? Why is it important in the contract?

Answer 

Consideration is among the most essential elements of a valid contract. It is an important element, for measuring the safeguard of deliberation. It is legal evidence of the intention of the parties to establish a legal relationship between them. Legally binding exchanges for a promise between the parties is called a contract. 

There is a general rule that ‘no contract no consideration’. All sorts of agreements do not amount to a contract. To adopt an agreement into a contract, every agreement must be made with consideration. Subject to some exceptions, an agreement made without consideration is void. 

It is known as ex mudo pacto non oritur actio in Roman law. It means no pact comes into action without consideration. It signifies that the consideration is also one of the most important subjects of a valid contract, adopted as the heart of a valid contract.

Promises without ‘something in return’ are not enforceable. ‘Something in return’ is derived from the Latin term quid pro quo. The ‘something’ is called consideration. 

Blackstone defines the term consideration as, “Consideration is the recompense given by party contracting to the other.” Similarly, in the words of F. Pollack consideration is, “The price for which the promise of the other is bought.”

Consideration, features, legal rules and exceptions to the general rule '
no consideration on contract'

Consideration is thus, defined as the price, reward, a payment or value for which the promise of the other carried. It is something which should be valuable in the eyes of law. In this regard, a famous English case (Currie V. Misa) defines it thus, “A valuable consideration, in the sense of law may consist in some right, interest, profit or benefit accruing to one party for some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.” 

Simply saying, consideration is anything that is agreed upon between the parties as a return for the promise. Thus consideration is placed as the causes of the promise. In return of promise, one gets something and the other loses something, such something is called consideration. Consideration may be in the form of money, goods, and a promise to do something or providing service.

A party obtaining something for nothing is not a consideration and the agreement in such a case is not enforceable in the eye of law. For example, if A promise to pay B Rs. 500 for nothing, B neither doing nor promising to do anything in return to compensate A for his money can claim nothing as A, s promise has no force in law. A free promise has no legal enforceability.

According to Section 2(d) of the Indian Contract Act, 1872, “When, at the desire of the promise, the promisee or any other person has done or abstained from doing or does or abstain from doing, or promise to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

Thus, consideration is certain value getting and loosing by the parties pursuant to the contractual rights and obligations. It may vary to the different parries even in the same contract and maybe in the form of price, money, delivery of goods, services, rights, interest or responsibility etc.

For example, Mr. N agrees to sell his motorbike to M for Rs. 500,000. Here, M’s promise to pay Rs. 500,000 is the consideration for N’s promise to sell the motorbike, and N’s promise to sell the motorbike is the consideration for M’s promise to pay Rs. 500,000.

The Indian law has made the consideration as essential elements from a valid contract but in Nepalese law or in the Civil Code, it has not clearly mentioned that whether it is the compulsory element or not for forming a valid contract. 

Although it is not clearly mentioned in the law in practice the Supreme Court has recognized it as one of the essential elements of the valid contract.  So it is an essential element to generate contractual relations between the parties in the Nepalese context too.

Characteristics of Consideration

• It is a promise to do or not to do any work.

• It is something in return of any promise.

• It is mentioned in the contract.

• It is a price of promise.

• It can be given by the promisee or any person on behalf.

• It can be the past, present or the future.

• It may be less or more reasonable.

• It must be something real and valuable from the point of view of the law.

• It cannot be illegal, immoral, and against the public policy.

• It is not the fulfillment of the condition.

Needs and importance of Consideration

Consideration is an essential element and a universal requisite of a valid contract. It is the main and core thing in the contract. A contract without a deed of consideration is not able to create a legal connection and connectivity between any two parties. 

Thus it is the primary issue and concern that the contract does have a valid and legal consideration or not. It represents the deliberate calculation and involvement of the parties into the contractual matter with legality. 

The reason why the contract should be the major concern for a contract is; firstly the gratuitous promise is often made emotionally or not in business types of relationships and without any deliberation and second, it is not justifiable to enforce a promise of a person without getting anything. 

If one person is doing something and getting nothing in return has no validity in the eye of commercial laws. Thus consideration is necessary and essential as it reflects a variety of policies and serves a number of functions as below;

• Consideration established the value of exchange and the content of the promise.

• It provides an evidential proof that there was a transaction between the parties and promise was made to do or not to do something.

• It ensures that the promisor has deliberately decided to enter into a contract and prevent parties accidentally or emotionally binding themselves by their promises.

• Absence of consideration gives space of doubt that parties have inter into an agreement under pressure, fraud or mistake and hence is no free consent of either party.

Thus, it works as the content of promise or as a matter of deliberate intention and ensures the answer to the queries like whether the parties were intentionally entered into a contract to create a legitimate relationship, whether an alleged contract was really made between them, and if made, whether it reflects their deliberate and lawful intention in the bargain. Therefore consideration as the price of promise works as the law of the contract and it fulfills the legitimacy of the assent of the parties to the contract.   

2. What are the legal rules regarding consideration? Explain with suitable examples.

Answer

A consideration to be effective and valid, it must consist of some certain rules which are also termed as essential elements of valid consideration. Nepalese contract has also comprised several rules of consideration in its different legal provisions and the Supreme Court has made interpretation in this respect. Following are the general rules regarding consideration:

Consideration to be given at the desire of the promisor

In order to constitute legal consideration, the act or abstinence forming the consideration for the promise must be done at the desire of or request of the promisor. Thus act done or service rendered voluntarily or at the desire or request of the third party will not amount to valid consideration so as to support the contract.  

It is very simple that unless a person offers to do something, how can he be made liable to pay for that? This is clearly mentioned in Section 2(d) of the Indian Contract Act.

For example, A’s father is lost and B goes in search of him. It has the following consequences:

If B does his work at the desire of A, he can claim remuneration from A because he has done this work according to the desire of A. 

If B does this work voluntarily, he cannot claim remuneration because he has not done this work according to the desire of A. 

If B does this work at the request or C, he cannot claim remuneration from A because he has not done this work according to the request of A.  The logic for this may be found in the worry and expense to which everyone might be subjected if we were obliged to pay for service, which he does not need or require. 

Consideration may furnish from the promisee or any other person

As contained in the definition of a different law (i.e., Section 2(d) of ICA), the consideration need not move from the promisee alone but may proceed from a third person not directly related to contract. 

This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract. This is sometimes called the doctrine of constructive consideration. 

For example, A, by a deed of gift, made over the certain property to his daughter B, under the direction that B should pay C (Sister of A) a certain sum of money an annuity. On the same day, B entered into an agreement with C to pay C the agreed amount. Later B refused to pay the amount on the plea that no consideration had moved from C to B. It was held that C was entitled to maintain suit because consideration need not necessarily move from the promise. It may move from any other person as well. [Chinayya v. Ramayya(1882).]

Under English Law, however, consideration must move from the promise and not from any other person. It means that under English Law, a stranger to consideration cannot file a suit to enforce his right. 

Nepalese law has not made any clear provision to this effect but has pursued the Indian concept. Thus from the above discussion, it should be clear that a stranger to consideration can file a suit to enforce his right.

Consideration may be of past, present or future

The consideration may have any of these three forms. It does not matter what is the type of consideration but it should be legal and recognized by specific laws of the nation.

Past consideration

If the act was already conducted or service has rendered in the past or the promisor had enjoyed the consideration before the date of the promise, it is called a past consideration. In English law past consideration has no value but the law of Nepal and India have recognized it as a valid one.For Example, M found N's Bag. After a month N promised to pay Rs. 500 to M as reward for the service rendered. N is paying Rs. 500 for past consideration. Under English Law, a past consideration is no consideration.

Present Consideration

Where the consideration is moved at the time of the creation of a contract or simultaneously with the promise, it is called the present consideration. It is also called an executed consideration.For Example: A buys some goods by paying money in cash. Here, the consideration is present consideration.

Future Consideration

When the consideration is to be moved to the future date, it is called a future or executor consideration. In such case the parties agree to fulfill their respective liability at a certain future time.
For Example, A construction company agrees to build a bridge in the winter season and the Department of road agrees to pay after finishing the work in the future. It is known as future consideration.

Consideration must be necessarily lawful

It is the most significant factor of a valid contract. An illegal consideration not only turns the contract to void condition but also is adequate to drag the parties to the court for the breach of law. This is why a consideration must not be illegal, immoral, and against the public policy. Contracts with illegal considerations are not legal and enforceable.

Consideration need not be adequate

The consideration need not be any particular value. It may be some more or less. It need not be adequate. The parties to the contract can settle on the quantum of consideration. The adequacy of consideration is determined by the facts, circumstances, and necessities and nature of the case. It is always up to the contracting parties. 

Consideration must be valuable to some extent in the eye of the law

Though inadequacy of consideration does not affect the validity and legality of the contract nut it has some value in the eye of law. The quantity and volume as well as the nature of consideration all on the hand of parties nut while measuring it these should be at least minimum value in the eye of the law of the nation. Consideration is determined on the free consent of the parties but validity is measured by the court of the state. 

Consideration must be real and not illusory

Although inadequate consideration is sufficient to generate contractual relations, it must be real and not illusory. It means it should have some value in the eye of law. It should not be illusory. The real consideration is possible to perform legally and materially. There is no real consideration in case of legal or physical impossibility, uncertainty, and illusion. 

For example, A owes Rs. 500 to B. He promises to pay Rs. 200 to C, B’s servant, who, in return, promise to discharge for a debt due to B, A’s promise is unreal, because he being a servant, cannot discharge a debt due to B.(Harvey V. Gibbons, (1675)2 Lev. 16)) 

Similarly, A, promises to put life into B’s dead wife and B promises to pay Rs. 20,000. A’s promise is physically impossible for the performance and it is void. Again, Mr. Z promises to pay a reasonable amount of money to Mr. X for performing his work. Here the consideration is uncertain. In these all cases, the consideration is not legally valid and there is no kind of legal contractual relationship among the parties. 

Consideration must not be illegal, uncertain, ambiguous, fraudulent, immoral or opposed to public policy

The consideration given for an agreement must be lawful, possible to perform, certain, and should not against existing public policies and vague. 

According to Section 23 of Indian Contract Act, every agreement of which object or consideration is unlawful is void. For example, A, promises to pay Rs. 50,000 if he kills C. B kills and claims amount from A. A, refuse to pay. B cannot recover because the agreement is void on the ground of unlawful consideration. 

So law never considers something illegal, impossible, immoral or opposed to public policy rather it punishes a person who does something illegal, immortal or opposed to public policy. 

Impossibility could be physical or legal and in such the consideration would not be a good consideration. For example, A, promises to pay B Rs. 500 if he makes the color of milk red. It is physically impossible and therefore void.   

Consideration need not be immoral also. It must not be contrary to the morality and ethics of the society.  If it conflicts with the public policy and social practices then it loses its validity and regards as void. For example, M rents his house to a prostitute. M cannot recover the rent as consideration is immoral.

Parties are autonomous to determine the consideration

A contract is essentially and legally private legislation made by the assents of concerned parties on any particular issue and for their propose, therefore parties of the contract are always autonomous and free to fix the quantity and quality of consideration. 

This principle is incorporated under Section 507 of the Civil Code. This section mentioned that the parties to a contract shall, subject to this Act, be autonomous to choose the form and content of the contract, to determine its terms and condition and the nature of the remedy for its breach as well as to determine the measures for solving disputes arising out of it. 

Consideration may be direct or indirect and positive and negative

The consideration may be either direct or indirect or in other words, it could be expressed or implied. If a person sells his goods having their values, this is known as a direct consideration. If a person provides service against payment, this service is called an indirect consideration. 

Similarly, consideration may be an act to or not to do something. It means it could be positive or negative. For example, A promises B not to file a suit against him if B pays him Rs. 10,000. The abstinence of A is negative consideration for B’s payment.

3. Explain the Exceptions to General Rule- No Consideration No Contract or explain the circumstances where a contract becomes valid without consideration.

Answer 

The general rule behind the consideration is ex nudo pacto non oriture action. It means an agreement without consideration is no contract and void. In such sense, consideration is an important essential element for not making a contract void. Salmond and Winfield said that “a promise without consideration is a gift; one made for consideration is a bargain.”

Section 25 of Indian Contract Act, 1872, states, “an agreement made without consideration is void.” The Nepalese Civil Code is silent about ‘no consideration no contract’. However, the Supreme Court of Nepal provides that consideration is one of the essentials for making a valid contract. Hence consideration is essential for the validity of a contract.

However, there are certain exceptions to this rule. In the following cases, the agreement though made with no consideration will be valid and enforceable in the eye of law:

Natural love and affection

An agreement made on the account of natural love and affection is valid even in the absence of consideration. 

As stated in Section 25(1) of the Indian Contract Act, an agreement without consideration is valid only if the following requirements are completed with: It is made by a written document, It is registered under the law, It is made on account of natural love and affection, The parties to it in a near relation to each other.  

For example, A, the father, for natural love and affection, promises to give his son Rs. 5000. A  puts his promise into writing and registers it. This agreement is valid. It may be noted that nearness of relation, however, does not necessarily impart natural love and affection.  

Compensation for past voluntary acts/services

A promise to compensate for past voluntary services or gratuitous acts are legal and enforceable. 

As stated in Section 25(2) of the Indian Contract Act, a promise to compensate for past voluntary service is valid even without fresh consideration but which requires: The act must have done voluntarily, Legal obligation of the promisor to do the work, The promisor must be in existence at the time when the act was done, The promisor now must agree to compensate to the promisor(original promisor and now promisee) in written form.  

For example, A finds B’s laptop and gives it to him. B promises to give Rs. 10,000 to A. this is a contract even though the consideration did not move at the desire of B, the promisor. This is a valid contract with no consideration.

But in English law, past services cannot be a good consideration for present promise if it was not requested by the promisor. If the promisor of a fresh promise had not requested for such service and makes a promise to pay for, it cannot be enforceable by English law. 

Promise to pay time-barred debt

A promise by the debtor to pay a time-barred debt is binding. The promise may be to pay the whole or any part of the debt. 

According to Section 25(3) of the Indian Contract Act, a promise to pay the time-barred debt without consideration is enforceable provided: It is the promise to pay the whole or any part of the barred debt, It is made in writing, It is signed by the debtor or by his agent,It is related to a debt which could not be enforced by the creditor because of limitation.

Gift actually made

No consideration, no contract does not apply to gift actually made(which is not an agreement). 

As stated in Explanation I to Section 25 of the Indian Contract Act, nothing in this section affects the validity as between the donor and donee, of any gift actually made. It means a gift does not require any consideration. 

The absence of consideration does not affect the validity of any gift already made. 

For Example, A transferred some property to B by a duly written and registered deed as a gift. This is a valid contract.

Agency

By section 185 of Indian Contract Act, no consideration is necessary to create an agency. The acceptance of the offer of an agent is regarded as sufficient consideration for the appointment. Therefore, even though the principal does not pay the salary or remuneration or reward or commission to the agent appointed by him as an employee, it is valid. 

For example, A agrees to be an agent of B to perform a certain job without remuneration. 'B' is responsible for the acts of A and he is prohibited from saying the contract for the agency was invalid in the absence of consideration.

Contribution to Charity

If a person promises to contribute to a charity and on the faith of the promised subscription, the promise undertakes liability to the extent not succeeding that subscription, the contract shall be valid.

The contract specified by law

If an agreement is free from consideration as per the provision of a specific law, even such agreement is not in a compulsion to include consideration. The agreement of insurance, trust, guarantee, etc. are not compulsion to be with consideration.

Therefore, consideration is the value, in the eye of the law, of the contract, getting for which the parties make a contract. Both parties get something and lose something. Such getting and losing something is called consideration. 

Consideration is legitimate instrument for making a contract legal and binding the contracting parties and making them eligible to enjoy rights and fulfill the duties so created.