The four component parts of the definition of consideration may well be described as the essentials of valid consideration. We shall now discuss these essentials one by one in detail.
Essentials of valid consideration in Indian Contract Act are as follows:
The four component parts of the definition of consideration may well be described as the essentials of valid consideration. We shall now discuss these essentials one by one in detail.
ADVERTISEMENTS:
1. Consideration must move 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 or request of the promisor. Thus acts done or services rendered voluntarily, or at the desire of third party, will not amount to valid consideration so as to support a contract.
The logic for this may be found in the worry and expense to which every one might be subjected, if he were obliged to pay for services, which he does not need or require.
Illustration:
ADVERTISEMENTS:
A sees B’s house on fire and helps in extinguishing it. He cannot demand payment for his services because B never asked him to come for help.
It must be noted that this essential does not require that the consideration must confer ‘some benefit’ on the promisor. It would be enough if the act or forbearance or promise constituting the consideration was done or given at the prormisor’s request, the benefit may accrue to a third party.
Illustration:
ADVERTISEMENTS:
B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment.
The contract between A and C is a ‘contract of guarantee’ and is perfectly valid though the benefit which A confers in return of C’s guarantee is conferred not on C but on B (in the shape of sale of goods on credit). A’s promise to deliver the goods is the consideration for C’s promise of guarantee. (Illustration appended to Section 127).
2. Consideration may move from the promisee or any other person:
The second essential of valid consideration, as contained in the definition of consideration in Section 2(d), is that consideration need not move from the promisee alone but may proceed from a third person.
Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promisee or from any other person. 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 as ‘Doctrine of Constructive Consideration’. The leading case of Chinayya vs Ramayya4 provides a good illustration on the point:
Illustration:
In the above case A, an old lady, by a deed of gift, made over certain property to her daughter R, with a direction that the daughter should pay an annuity to A’s brother C, as has been done by A.
Accordingly, on the same day R, the daughter, executed writing in favour of her maternal uncle C agreeing to pay the annuity. Afterwards she declined to fulfil her promise saying that no consideration had moved from her maternal uncle i.e., the promisee.
It was held that the words “the promisee or any other person” in Section 2(d) clearly show that a stranger to consideration may maintain a suit. Hence the maternal uncle, though a stranger to the consideration (as the consideration indirectly moved from his sister) was entitled to maintain the suit.
In the above case, it will be observed, that although C, the maternal uncle, was a stranger to the consideration, he was not a stranger to the contract as there was a separate contract between him and R, the daughter. The maternal uncle could not have sued on the basis of ‘gift deed’ executed by A in favour of R because he was not a party to it.
A stranger to a contract cannot sue. A person may be a stranger to the consideration 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.
It being a fundamental principle of the law of contracts that ‘a stranger to a contract cannot sue, only a person who is a party to a contract can sue on it.’
Thus, where A mortgages his property to B in consideration of B’s promise to A to pay/l’s debt to C, C cannot file a suit against B to enforce his promise, C being no party to the contract between A and B (Iswaram Pillai vs Sonnivaveru-).
Exceptions:
The above rule that ‘a stranger to a contract cannot sue’ is subject to the following exceptions:
(i) Where an express or implied trust is created:
In case of a trust, the beneficiary can sue in his own right to enforce his rights under the trust, though he was not a party to the contract between the settler and the trustees.
Illustrations:
(a) A transfers certain properties to B to be held by B in trust for the benefit of M. M can enforce the agreement i.e., trust (MK. Rapai vs John).
(b) An addressee of an insured article is entitled to sue the Post Office in case of loss, as on receipt of such article, the Post Office becomes in law a constructive trustee for the addressee (Amir Ullah vs Central Govt.).
(ii) Family settlement:
Where a provision is made in a partition or family arrangement for maintenance or marriage expenses of female members; such members, though not parties to the agreement, can sue on the footing of the arrangement.
Illustration:
A daughter along with her husband entered into a contract with her father whereby it was agreed that she will maintain her mother and the property of the father will be conveyed to them. The daughter subsequently refused to maintain the mother.
On a suit it was held that the mother was entitled to require her daughter to maintain her, though she was a stranger to the contract (Veeramma vs Appayya).
(iii) When the defendant constitutes himself, as the agent of the third party:
Thus if A receives some money from B to be paid over to C and he admits of this receipt to C, then C can recover this amount from A who shall be regarded as the agent of C (Surjan vs Nanat).
(iv) In case of agency:
Where a contract is entered into by an agent, the principal can sue on it.
(v) 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, e.g., the assignee of an insurance policy or the official assignee on the insolvency of a person can sue on the contract even though originally they were not parties to it.
3. Consideration may be past, present or future:
The words, “has done or abstained from doing; or does or abstains from doing; or promises to do or to abstain from doing,” used in the definition of consideration clearly indicate that the consideration may consist of either something done or not done in the past, or done or not done in the present or promised to be done or not done in the future. To put it briefly, consideration may consist of a past, present or a future act or abstinence.
Consideration may consist of an act or abstinence:
Consideration may consist of either a positive act or abstinence i.e., a negative act. Thus, an agreement between B and A, under which B; on failing to pay the debt amount on the due date to A; promises to raise the rate of interest from 9 per cent to 12 per cent in consideration of A promising not to file a suit against him for another one year, is a valid contract; A’s abstinence being the consideration for B’s promise.
Past consideration:
When something is done or suffered before the date of the agreement, at the desire of the promisor, it is called ‘past consideration.’ It must be noted that past consideration is good consideration only if it is given by the promisee, ‘at the desire of the promisor.’
Illustrations:
(a) A teaches the son of £ at B’s request in the month of January, and in February B promises to pay a sum of Rs 200 for his services. The services of A will be past consideration.
(b) A lawyer gave up his practice and served as manager of a landlord at the latter’s request in lieu of which the landlord subsequently promised a pension. It was held that there was good past consideration. (Shiv Saran vs Kesho Prasad).
Present consideration:
Consideration which moves simultaneously with the promise is called ‘present consideration’ or ‘executed consideration’. For example, A sells and delivers a book to B, upon B’s promise to pay for it at a future date.
The consideration moving from A is present or executed consideration since A has done his act of delivering the book simultaneously with the promise of B.
It should, however, be noted that it is said to be ‘present consideration’ when at the time of the agreement it is executed on one side and executory on the other. If both parties have done their part under the contract, e.g., where A sells a book to B and B pays its price immediately, it is a case of executed contract (where nothing remains to be done) and not of executed or present consideration.
Future consideration:
When the consideration on both sides is to move at a future date, it is called ‘future consideration’ or ‘executory consideration’. It consists of an exchange of promises and each promise is a consideration for the other.
For example, promises to sell and deliver 10 bags of wheat to T for Rs 6,500 after a week, upon Vs promise to pay the agreed price at the time of delivery. The promise of X is supported by promise of 7 and the consideration is executory on both sides.
It is to be observed that in an ‘executed consideration’, the liability is outstanding against only one side whereas in an ‘executory consideration’ it is outstanding on both sides.
4. Consideration must be ‘something of value’:
The fourth and last essential of valid consideration is that it must be ‘something’ to which the law attaches a value. The consideration need not be adequate to the promise for the validity of an agreement.
The Law only insists on the presence of consideration and not on the adequacy of it. It leaves the people free to make their own bargains. Thus, where A agrees to sell his motorcar worth Rs 50,000 for Rs 1,000 only and his consent is free, the agreement is a valid contract, notwithstanding the inadequacy of the consideration.
However, if the consideration be grossly or shockingly inadequate, and if one of the parties to the contract alleges that his consent was obtained by fraud, coercion or undue influence, the court will treat inadequacy of consideration as evidence in support of such allegation and will declare the contract void.