5.Consideration Need not be Adequate.
Consideration means something in return. This may not be equal to the value of the promise that is given. As long as there is some consideration the courts support it and are not concerned about its adequacy. The parties to the agreement should have been satisfied with the consideration when they made the contract. The consideration may not be adequate but it should be lawful.The English Law of Contract states that consideration should be of some value in the eyes of the law. The court does not take the responsibility of repairing any bad bargains made between parties. If the contract was agreed upon between people the court will not interfere in the agreement. However it will ascertain that the consideration was given freely with the consent of the other person without any duress.
Illustration
Madhu sold her old car for Rs 25000 to Meera. The value of the car was Rs 2,000,000. The consideration was valid and with the free consent of Madhu, who knew that the market value was much higher. It was therefore a valid agreement, even though the consideration was not adequate.
6. Consideration Must be Real and Not Illusory or Impossible
Real consideration means that the consideration should not be physically or legally impossible. Consideration is not real in the case of physical and legal impossibility or uncertainity.Physical Impossibility: If a promise is made to do impossible things that are not possible to do physically, it is not real.
Illustration
An agreement is made with a dead man to buy a house. There is physical impossibility in the promise.
Illustration
Manu asks Anil to steal money from the house of the industrialist. He promises that the stolen money would be shared between them, with a larger share going to Anil to take the risk. This is an impossible promise and a consideration that is legally impossible.
Uncertain Consideration: Consideration has to be certain; otherwise it is impossible to carry out an agreement.
Illustration
A dentist says he will charge a reasonable sum for his services. This is uncertain consideration and difficult to carry out because of the uncertainty about the exact amount.
Consideration Involving Pre-existing Duty: The court does not recognize an existing duty carried on to the new contract as good consideration. Consideration should be anew obligation. It should be something more than a person is already required to do. Moreover a promise to pay for doing a public duty to a government employee is not good consideration.
Illustration
The pilot of the aircraft had to land in Jaipur due to technical problems. The pilot asked the passengers for money to bring the plane back safely to Delhi, which was its actual landing destination. This was not a valid consideration, as the pilot had to return safely to Delhi as part of his duty. No higher consideration was required for the performance of his duty.
7.Consideration must be Lawful.
Consideration should be lawful, otherwise the agreement becomes void. According to section 23 of the Indian Contract Act consideration is not lawful in the following situations
2When it is made of an act forbidden by law
3 When it causes injury to a person or property of another person.
4 When it is declared as immoral or opposed to public policy.
When a part of the agreement is unlawful the whole agreement will become void except in those cases when the unlawful part can be separated from the lawful one. Then the unlawful part will become void and the other part can be carried out.
Stranger to Consideration and Stranger to Contract
Under the English Law, consideration has to move from the promisee and if any other person moves it, the promisee becomes a stranger to consideration and cannot enforce the promise.
A person becomes a stranger to a contract when he is not a party to the contract even though it is made for his benefit. He is a stranger to the contract and cannot claim any rights under it.
Stranger to consideration and stranger to contract are called Privity of consideration and Privity of contract. In India Privity of consideration is not applicable because Section 2(d) has the provision that provides that the promisee or any other person can move a contract. Accordingly in India a stranger to consideration can sue and enforce an agreement if he is a party to the contract.
Stranger to Consideration or ContractPrivity of contract is applicable in India also. According to this principle, only the parties to a contract can sue or be sued in a contract. Third parties/ strangers do not have any rights or obligations to a contract.
They are not even permitted to sue in a court even if the contract is for their benefit. The Principle of privity was supported by the decisions in the following case laws:
Case law 4
Dunlop Pneumatic Tyre company vs Selfridge and company 915 AC 847
In this case, the tire manufacturer Dunlop Pneumatic sold the tires to Selfridge and Company. They also sold the tyres to their sub-dealer, promising not to sell at a lower price than the price offered by Dunlop. If they did, they would have to pay Dunlop damages of £ 5 per transaction. The sub dealer sold two tires. Dunlop sued him for the infringement. Dunlop could sue for being a stranger to the contract.
However since 1969 under the Monopolies and Restrictive Trade Practices Act, the ruling in the Dunlop case does not hold good. According to the ruling in the court a retailer obtaining goods from a wholesaler with restrictions on conditions of sale of goods by the original supplier has to be bound by the conditions even though the conditions were between the wholesaler and the supplier and the retailer was not a party to it.
Illustration
Leela sold her Apple Mac computer to Mona, who asked her to take the money from Amulya. Mona instructed Amulya to give her the money she owed to Leela for the computer she had purchased. Amulya did not pay the price to Leela. Can Leela get relief from the courthouse? Leela can't sue Amulya for recovery because she's a stranger to the contract.
Illustration
Ashok borrowed Rs 40000 from Bonney as a loan guarantee and executed a mortgage on his property in his favour. Later, he sold the property to Chandan, a third person, for Rs 44000. Ashok retained Rs 4000 and allowed Chandan to retain Rs 40,000 to settle with Bonney. Later, Chandan refused to pay for Bonney. Bonney wanted to sue Chandan for the recovery of Ashok's money. Due to the privilege of the contract, Bonney can not claim the amount from Chandan as he is a stranger to the contract.
Exceptions to the Rule of Stranger to Contract
There are certain exceptions to the rule that a stranger cannot sue. In the following cases the court does not prevent a stranger from enforcing a contract that is made for his benefit though he is not a party to it.
- a) Trust or a Charge In the case of a trust or a charge created in favour of another person the beneficiary can enforce the rights conferred upon him by the trust even though he is not a party to the contract between the settler and the trustee.
Case law 5
Rana Uma Nath Baksh Singh Vs Jang Bahadur AIR 1938 PC245
A father appointed his son to be his successor for all his possessions, provided that he gave part of it to his illegitimate son. The son agreed, but later refused to take part in the possession. The illegitimate son can claim the part of the estate that was made for him.
Illustration
Sunita made a trust for the benefit of her son Sushant and appointed Raja, Mahesh and Arjun to be the trustees. Sushant was not being given the property by the trustees. Can he claim all the propertyin his favour?He can claim all that was given in his favour even though he was not a party to the benefits created for him by his mother.
Illustration
Raja promised Mahesh that he would give his daughter Naina a house after he had married his son Rohit. After Raja's marriage, he forgot his promise. Can Naina make the promise? This is a family arrangement, so Naina has the right to get a house, and she can make a promise to a court of law.
Case law 6
Khwaja Muhammead Khan vs Hussaini Begam 1910 37 IA 152
Two parents had made an agreement with their minor children. One had promised to pay his daughter-in-law, expenses for running a house, and had made some of his deposits in favor of the young lady. Later, she was allowed to recover the amount even though she was a stranger to the contract because it was considered a family affair.
Case law 7
Commissioner of Wealth Tax vs Vijayaba A.I.R. (1979) S.C.982
A mother agreed to pay to her younger son in the event of the failure by the elder son to pay to the younger son the amount which fell short of the younger son’s share in the assets left by their father. The agreement was made to purchase peace for the family. Held, it was a valid family arrangement and the younger son was entitled to his share even though he was a stranger to the contract
c) Acknowledgement of Payment or Estoppel: This is an agreement between two parties that one of them would give a benefit to a third person. If the promisor expresses or implies by words or actions and acknowledges that he has a liability towards a third person it is sufficient for the third person to recover the benefit as his right.
Illustration
Anu is Prem's subtenant, but she pays the rent directly to Anil. Anu's going to stop paying the rent. Anil has the right to recover the amount from Anu, as this is an exception to the law on the privilege of the contract.
Contract Through Agents: The principal can enforce contracts that are entered into by agents on behalf of him if the agent has acted within the scope of his duty and in the name of the principal. The rights of the principal are intact even though he is not party to the contract.
Illustration
Mr. Jaiswal sold the television set on behalf of L.G. Company. Company. He sold 35 television sets to Reena, and she didn't pay for the money. Oh, L.G. Company went to court because they could enforce their rights as Jaiswal acted as L.G. agent. Although the company was not directly involved in the contract.
Agreements Relating to Land: When a person purchases land and he knows that certain rights and obligations bind the seller, the buyer has to honour the commitments of any covenants by which the seller is bound. The rule of privity of contract does not apply in this case. The buyer may not be a party to the contract but he is bound by the principles relating to immovable property.
Case law 8
Smith and Snipe Hall Farm Ltd vs River Douglas Catchment Board (1949) 2 K.B,-500
The Board agreed with landowners near the streams to improve and maintain the banks of the streams in good condition. Landowners have paid proportionate maintenance costs. Subsequently, the landowner sold the land to someone who sold it to another person. Due to the negligence of the board, the river banks broke and the land was flooded. Subsequent owners brought an action against the board for negligence. Although they were not party to the contract, they were entitled to sue because they were bound by the original owner agreement with the board of directors.
“An Agreement without Consideration Is Void”- Exceptions to the Rule
The general rule is “no consideration no contract” or “an agreement without consideration is void” but there are exceptions to the rule. According to section 25 of the Indian Contract Act, in the following cases the rule does not apply.
- a) Natural Love and Affection: A written and registered contract without consideration, based on natural love and affection by two parties related to each other is a valid contract. [section 25(1)]
Note: Closeness of relationship need not necessary mean love and affection.
Case Law 9
RajlukhyVs Bhootnath (1900) 4 Cal WN 408,
The husband agreed to pay a fixed amount and maintenance to his wife for living in a separate residence due to frequent quarrels between them. The written document has been registered. Since she did not pay the amount, the wife went to court. She was unable to get any relief because the agreement was not made with natural love and affection.
Illustration
Naina promised Maina that she would give her Rs 5000 to buy books for her research work. The promise was made out of natural love and affection .It was in writing and registered. This is an enforceable contract even though there is no consideration.
- a) Voluntary Compensation: A promise to compensate a person wholly or partly for services done voluntarily, or for doing voluntary services that are legally compellable is a valid contract even without consideration.[Section 25 (2)]
Illustration
A thief snatched a chain of gold from Leela. Meera, an onlooker, rushed to help, picked up the chain and handed it back to Leela. Upon receiving the chain, Leela gave Meera Rs 2000/-. Even without consideration, this is a valid contract.
b) Time Barred Debt: A written and registered document by the debtor signing himself or his agent with a promise to pay a time barred debt, is a valid contract and does not require any fresh consideration. [Section 25(3)] The intention should be clearly expressed. It may be the full amount or part of the amount of the debt that is to be returned.
Note: An oral promise is not acceptable.
Illustration
Sita took a loan of Rs 5000 from Geeta. She could not pay it back in time and it became time barred under the Limitation Act. She made a signed and written promise to Gita that she would return Rs 3000 on account of the debt. This is a valid contract. No new consideration is required.
c) Agency: No Consideration is required to create an agency between the principal and agent according to section 185. If a person volunteers to work on behalf of another person as his agent without any remuneration, a relationship of agency will be created even if there is no consideration. The agent can work on behalf of the principal and bind the principal to any contracts that are taken by the agent on his behalf.
Note: Before the execution of the agreement the contract will be void since there is no consideration
d) Completed Gift: No consideration is required between the donor and the donee of any gifts already made. The person who receives the gift becomes its owner. A gift or a donation already given cannot be undone on the grounds that there was no consideration. There is no need for natural love and affection between the parties but there should not be any prior agreement to give a gift.
Note: A promise to give a gift on a future date is void if it does not have any consideration.
Illustration
Vibha has gifted a watch to Nirmalya on his birthday. This is a valid contract even though there is no consideration.
e) Remission of a Promise: A promise by the promisee to the promisor to give a concession (section 63) in the performance of his obligations is called remission. This remission of a promise can be without consideration. This is discussed in detail in the chapter on ‘Discharge of Contract’.