Consideration of the contract

LAW OF CONTRACT
SUBMITTED TO
RAJIV GANDHI NATIONAL
UNIVERSITY OF LAW
PATIALA, PUNJAB

FOR THE SECOND SEMESTER OF

B.A. LLB. (HONS.)
SUBMITTED TO. SUBMITTED BY
Mrs. Manpreet kaur Abhijeet singh nafri
Roll No.: 18026

2019
 Acknowledgement

I would like to express my special thanks of gratitude to my teachers Manpreet kaur as well as
the entire Rajiv Gandhi National University of Law faculty who gave me the golden opportunity
to do this wonderful project on the drama ‘Doubt: A Parable’, which also helped me in doing a
lot of research and I came to know about so many new things, I am really thankful to them.
Secondly, I would also like to thank my parents and friends who helped me a lot in finalizing this
project within the limited time frame. I would also take this opportunity to thank the RGNUL
library staff, who helped me to delimit my resources of research.
 Table of content
Introduction 4
Essentials of the valid 6
contract
Privity of contract 8
Exception of the contract 13
Case law 16
Bibliography 17
Introduction

What is contract?
According to the section 2(h), of the act, 1872, contract is an agreement which is
enforceable by law. It is an agreement or set of promise giving rise to obligation which
can be enforced or are recognized by law.
Essentials of the valid contract under section 10 of the Indian contract act-
1. An agreement between the two parties. An agreement is the results of a proposal
or an offer by ne party followed by its acceptance by the other.
2. Agreement should be between the parties who are competent to the contract.
3. There should be a lawful consideration and lawful object in the respect of that
agreement.
4. There should be free consent of the parties, when they enter into the agreement.
5. The agreement must not be one, which has been expressly declared to be avoid
Consideration - Consideration under contract law is defined as a bargained for exchange
of value between parties of a contract. Without consideration, a contract cannot be
enforced or is otherwise voidable (with only a very few exceptions). The exchange of
value is interpreted broadly to not only include money, but property, a promise, doing
something, or even not doing something. In broadest sense, if one agrees to do
something, he or she was not otherwise legally obligated to do, it may be said that he or
she has given consideration. Conversely, agreeing to do something that is otherwise
legally required, is not adequate consideration to a contract.
Consideration requires (i) a bargain regarding terms of an exchange, (ii) a mutual
exchange between the parties (i.e. both parties must get something out of the contract),
and (iii) the exchange must be something of value.

If one party was not in a position to properly bargain, either because of fraudulent
information provided by the other party, duress (i.e. one party held a gun to the head of
the other party), or other circumstance that made it impossible for a party to bargain, then
there is no consideration.

Likewise, if one party receives no value whatsoever (i.e. one-sided consideration), this
will not be sufficient (in most instances) to establish overall consideration to render the
contract valid.
Finally, the value cannot be illusory — it must have actual value. For instance, agreeing
to do something that is otherwise legally required, such an agreement is illusory and
therefore will not be sufficient consideration to enforce a contract.

Applicability in Business

Usually, consideration is important because one business needs to unilaterally change the
terms of a relationship with some other party, such as an employee, contractor or
customer. For example, you may have determined it’s important that a particular
employee (or contractor) agrees to not compete or solicit customers, years after that
employee was hired. Or, you want to change pricing or services for customers. Or, you
want to make sure you own the copyrights of the work produced by your contractor, after
the project has already started.

The fact-pattern is actually complex, and can spell long-term problems for businesses. It
goes like this: Your company unilaterally makes a change, either in writing or in practice,
and you continue “business as usual” with the other party. Over time, the other party fails
to pay or there are some other problems in the relationship and you try to enforce — i.e.
you try to get paid or you try to enforce whatever unilateral change you tried to put in
place previously.
Essentials of the valid contract
 Essentials of a valid consideration:
The essentials of valid consideration are as under:
2.1  At the desire of the promisor.
2.2  Promisee or any other person.
2.3  Consideration may be past, present or future.
2.4  Consideration must be real.
 
2.1  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.
 
2.2  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’.
 
2.3  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:
2.3.1 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.

2.3.2 Present consideration: Consideration which moves simultaneously with the promise
is called ‘present consideration’ or ‘executed consideration’

2.3.3 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.

2.4 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.
Privity of the contract
The Indian Contract Act clearly states that there cannot be a stranger to a contract.

Doctrine of Privity of Contract

The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to proceed
from a third-party. However, a stranger (third-party) to a consideration is different from a
stranger to a contract. The law does not allow a stranger to file a suit on the contract. This
right is available only to a person who is party to the contract and is called Doctrine of
Privity of Contract.

Let’s understand this with the help of an example:

 Peter has borrowed some money from John.

 Peter owns a property and decides to sell it to Arjun.
 Arjun promises to pay John on behalf of Peter.

However, if Arjun fails to pay, then John cannot sue since Arjun is a stranger to the
contract. It is important to note that the Doctrine of Privity has exceptions which allow a
stranger to enforce a claim as given below.
English doctrine of privity of contract

The common law doctrine of privity of contract dictates that only persons who are parties
to a contract are entitled to take action to enforce it [1] . It means that only those who are
parties to the contract or privy to the contract can sue or be sued on it [2] . A contract
generally, cannot confer rights or impose obligations arising under it on any person
except the parties to it. A person who is not a party to a contract may not enforce a
contract even though he stands to gain a benefit from the contract (a third-party
beneficiary).

For example, John agrees to sell his watch to Jack for RM 1000. John delivers the watch
to Jack but jack fails to pay the agreed sum to John. The party’s privy to this contract are
John and Jack. Only john has the legal right to sue Jack. Similarly, where Jack has paid
John for his watch and John fails to deliver the watch to Jack, only Jack can sue John for
breach of contract because both John and Jack are privy to the contract.

A classic authority for this principle is Tweddle v Atkinson [3] . The plaintiff’s father and
father-in-law agreed with each other to pay the plaintiff $100 and $200 respectively in
consideration of his intended marriage in a written agreement. The plaintiff sued the
executor of his father-in-law for the unpaid sum. The court held that plaintiff was unable
to sue the executor, because he had not provided any consideration to the contract.
Consideration must move from the party entitled to sue upon the contract.
Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a contract can sue on a contract in the
following cases:

 Trust
 Family Settlement
 Assignment of a Contract
 Acknowledgment or Estoppel
 A covenant running with the land
 Contract through an agent

Let’s look at each of them in details:

Trust

If a contract is made between the trustee of a trust and another party, then the beneficiary
of the trust can sue by enforcing his right under the trust, even if he is a stranger to the
contract.

Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of
his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and
transfer half of the estate in Ravi’s name, once he becomes 21 years old.

After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he
denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was
formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence,
Ravi had the right to sue upon the contract between Arjun and his father, even though he
was not a party to it.

Family Settlement

If a contract is made under a family arrangement to benefit a stranger (person not a party
to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as
damages. Eventually, he married someone else, thereby breaching the contract. Nancy
filed a case against Peter which was held by the Court since the contract was a family
arrangement with Nancy as the beneficiary.

Ritika was living in a Hindu Undivided Family (HUF). The family had made a provision
for her marriage. Eventually, the family went through a partition and Ritika filed a suit to
claim her marriage expenses. The Court held the case because Ritika was the beneficiary
of the provision despite being a stranger to the contract.

Assignment of a Contract

If a contract is made for the benefit of a person, then he can sue upon the contract even
though he is not a party to the agreement. It is important to note here that nominees of a
life insurance policy do not have this right.

Acknowledgment or Estoppel

If a contract requires that a party pays a certain amount to a third-party and he/she
acknowledges it, then it becomes a binding obligation for the party to pay the third-party.
The acknowledgment can also be implied.

Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be
paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the
amount.

Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of the
sale price, Pankaj was to be paid Rs 25,000 as his professional charges. Seema promised
to pay Pankaj the amount before taking possession of the property. She made three
payments of Rs 5,000 each and then stopped paying him. Pankaj filed a suit against
Seema which was held by the Court because Seema had acknowledged her liability by
conduct.

A Covenant running with the Land

When a person purchases a piece of land with the notice that the owner of the land will be
bound by all duties and liabilities affecting the land, then he can sue upon a contract
between the previous land-owner and a settler even if he was not a party to the contract.

Peter owned a piece of land which he sold to John under a covenant that a certain part of
the land will be maintained as a public park. John abided by the covenant and eventually
sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the
specific plot. When Peter came to know of it, he filed a suit against Arjun. Although
Arjun denied liability since he was not a party to the contract, the Court held him
responsible for violating the covenant.

Contract through an Agent

If a person enters into a contract through an agent, where the agent acts within the scope
of his authority and in the name of the person (principal).
Exception of the Consideration

Can you make a legal agreement without consideration? No. As per Section 10 and
Section 25 of the Indian Contract Act, 1872, consideration is essential in a valid contract.
In simple words, no consideration no contract. Hence, you can enforce a contract only if
there is a consideration.

While considerations are integral to a contract, the Indian Contract Act, 1872 has listed
some exceptions whereby an agreement made without consideration will not be void.

Exceptions to the ‘No Consideration No Contract’ Rule

Section 25 also lists the exceptions under which the rule of no consideration no contract
does not hold, as follows:

Natural Love and Affection

If an agreement is in writing and registered between two parties in close relation (like
blood relatives or spouse), based on natural love and affection, then such an agreement is
enforceable even without consideration.

Peter and John are brothers. In his will, their father nominates Peter as the sole owner of
his entire property after his death. John files a case against Peter to claim his right to the
property but loses the case. Peter and John come to a mutual decision where Peter agrees
to give half of the property to his brother and register a document regarding the same.

Eventually, Peter didn’t fulfill his promise and John filed a suit for recovery of his share
in the property. The Court held that since the agreement was made based on natural love
and affection, the no consideration no contract rule didn’t apply and John had the right to
recover his share.
Past Voluntary Services

If a person has done a voluntary service in the past and the beneficiary promises to pay at
a later date, then the contract is binding provided:

 The service was rendered voluntarily in the past

 It was rendered to the promisor
 The promisor was in existence when the voluntary service was done (especially
important when the promisor is an organization)
 The promisor showed his willingness to compensate the voluntary service

Peter finds Johns wallet on the road and returns it to him. John is happy to find his lost
wallet and promises to pay Peter Rs 2,000. In this case, too, the no consideration no
contract rule does not apply. This contract is a valid contract.

Promise to pay a Time-Barred Debt

If a person makes a promise in writing signed by him or his authorized agent about
paying a time-barred debt, then it is valid despite there being no consideration. The
promise can be made to pay the debt wholly or in part.

Peter owes Rs 100,000 to John. He had borrowed the money 5 years ago. However, he
never paid a single rupee back. He signs a written promise to pay Rs 50,000 to John as a
final settlement of the loan. In this case, the no consideration no contract rule does not
apply either. This is a valid contract.

Creation of an Agency

According to section 185 of the Indian Contract Act, 1872, no consideration is necessary
to create an agency.

Gifts

The rule of no consideration no contract does not apply to gifts. Explanation (1) to
Section 25 of the Indian Contract Act, 1872 states that the rule of an agreement without
consideration being void does not apply to gifts made by a donor and accepted by a
donee.
Bailment

Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods
from one person to another for some purpose. This delivery is made upon a contract that
post accomplishment of the purpose, the goods will either be returned or disposed of,
according to the directions of the person delivering them. No consideration is required to
effect a contract of bailment.

Charity

If a person undertakes a liability on the promise of another to contribute to charity, then

the contract is valid. In this case, the no consideration no contract rule does not apply.

Peter is the trustee of his town’s charity organization. He wants to build a small pond in
the town to enhance greenery and offer the residents a good place to walk around in the
evenings. He raises a charity fund where he appeals to people to come ahead and
contribute to the cause. Many people come forward as subscribers the fund and agree to
pay Peter their share of the amount once he enters into a contract for constructing the
pond.

After raising half the amount, Peter hires contractors for building the pond. However, 10
people back out at the last moment. Peter files a suit against them for recovery. The Court
ordered the 10 people to pay the amount to Peter since he had undertaken a liability based
on their promise to pay. Even though there was no consideration, the contract was valid
and enforceable by law.
Case laws
1. Rajlukhy vs. dabee
In the case of Rajlukhy Dabee v. Bhootnath Mookerjee[i], the defendant promised to pay
his wife a certain amount every month as maintenance. The promise was made in writing
and the quarrels the husband and wife had were also mentioned. A case was filed to
recover the amount promised to be paid as maintenance. However, the judge decided in
favour of the defendant as although the two were in a near relation, the court held that
there was no natural love and affection between them.

2. Chinnaya vs. ramaya –

A, an old lady, granted / gfted an estate to her daughter the defendant, with the
direction / condition that the daughter should pay an annuity (annual payment) of
Rs 653 to A’s brother, the plaintiff. On the same day the defendant, daughter
(promisor), made a promise vis a vis an agreement with her uncle that she would
pay the annuity as directed by her mother, the old lady. Later the defendant
refused to pay on the ground that her uncle (promisee, plaintiff) has not given any
consideration. She contended that her uncle was stranger to this consideration and
hence he cannot claim the money as a matter of right.

Held: The Madras HC held that in this agreement between the defendant and plaintiff the
consideration has been furnished on behalf of the plaintiff (uncle ) by his own sister
(defendant’s mother). Although the plaintiff was stranger to the consideration but since
he was a party to the contract he could enforce the promise of the promisor, since under
Indian law, consideration may be given by the promisee or anyone on his behalf – vide
Section 2 (d) of ICA.
Thus, consideration furnished by the old lady constitutes sufficient consideration for the
plaintiff to sue the defendant on her promise. Held, the brother / uncle was entitled to a
decree for payment of the annual sum of money.

3. Durga prasad vs. Baldeo –

In Durga Prasad v. Baldeo, the plaintiff, on the order of the collector of a town,
built at his own expense, certain shops in a bazaar. The shops came to be
occupied by the defendants who, in consideration of the plaintiff having expended
money in the construction, promised to pay him commission on articles sold
through their agency in the bazaar. The plaintiff’s action to recover the
commission was rejected
 Bibliography
1. LAWOCTOPUS.COM
2. LEXISNEXIS.COM
3. WESTLAW.COM
4. SCC.COM
5. TOOPPR.COM
6. LAWTEACHER.NET