This Consideration – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Consideration – CA Foundation Business Law Study Material
Define consideration. What are the legal rules/essentials regarding consideration? (C.A. Foundation MTP May 2019)
Section 2(d) of the Contract Act define consideration as follows:
(a) “When, at the desire of the promisor,
(b) the promisee or any other person,
(c) has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
(d) such an act or abstinence or promise is called a consideration for the pro¬mise. ”
1. Consideration must move at the desire of the promisor
The act of abstinence must be done at the desire of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it is no consideration.
However, consideration need not be to the benefit of the promisor.
2. Consideration may move from the promisee or any other person
Consideration may be supplied by the promisee or any other person.
3. Consideration may be an act or abstinence
A person may promise to do something or not to do something for a promise. To do or not to do something in return is a consideration.
4. Consideration may be past, present or future
When the consideration of one party was given before the date of the promise, it is said to be passed. Past consideration means the consideration for a promise given by a party before the promise is made. Such a consideration given by a party must be at the desire of the promisor. The consideration which moves simultaneously with the promise is called present or executed consideration. When the consideration is to move at a future date, it is called future or executory consideration.
5. Consideration need not be adequate
Consideration need not be adequate nor equivalent to promise.
6. Consideration must be real and not illusory
Consideration must be real or of some value in the eyes of law. It should not be physically impossible or illegal or illusory.
7. Consideration must be lawful
Consideration given for an agreement must be a lawful one. Consideration must not be illegal, immoral or opposed to public policy.
8. Consideration must not be a pre-existing obligation or duty.
Consideration must not be something, which a person is already bound by law to do. Discharging of pre-existing obligations is no consideration.
State exceptions to the rule “An agreement without consideration is void.”
What are the exceptions to the rule “No consideration no contract”?
“No consideration No contract”. Discuss
The general rule is “an agreement made without consideration is void” However, sec. 25 also mentions some exceptions to the general rule. These exceptions are given below:
1. Agreement made on account of natural love and affection
An agreement made without consideration is enforceable if it is
- made on account of natural love and affection,
- between parties standing in a near relation to each other,
- expressed in writing, and
- registered under the law.
2. Agreement to compensate for past voluntary service [sec. 25(2)]
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do. The following two situations are covered by this section:
(A) Voluntary Services: When there is a voluntary act by one party and there is a subsequent promise to pay compensation to the former. E.g. A finds B’s purse. B promises to give him ? 500 this promise is enforceable.
(B) Legally Compellable Duty: Another situation covered by the exception is where the promisee has done something for the promisor, “which the promisor was legally compellable to do”. A subsequent promise to pay for such an act is enforceable.
3. Agreement to pay a time-barred debt [sec. 25(3)]
Where there is an agreement,
- made in writing and
- signed by the debtor, or by his authorised agent,
- to pay wholly or in part a debt barred by the law of limitation, the agree¬ment is valid even though it is not supported by any consideration.
4. Completed Gift
A gift is the transfer of property without consideration. In order to be valid, a gift does not require consideration. Promise for a donation is not a gift. As such a promise for a donation is invalid for want of consideration.
5. Contract of Agency
Sec. 185 of the Contract Act lays down that no consideration is necessary to create an agency.
Sec. 148 of the Contract Act lays down that no consideration is necessary in case of a gratuitous bailment.
Sec. 63 of the Contract Act lays down that where a person agrees to receive less than what is due to him, such an agreement is said to be an agreement of remission. No consideration is required for a contract of remission.
Sec. 127 of the Contract Act lays down that under the contract of guarantee, no consideration is received by the surety, even then the contract of guarantee is valid.
If the promise undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid as held in Kedarnath v. Gorie Mohammad.
Explain the doctrine of privity of contract. What are the exceptions to this rule?
A stranger to a contract cannot sue. However, in certain cases, a stranger to a contract may even enforce a claim. Explain. (C.A. Foundation RTPMay 2018)
The doctrine of Privity of Contract: According to the doctrine of privity of contract only a party to a contract is entitled to enforce a right created by the contract. No one is entitled to or bound by the terms of a contract to which he is not an original party. A third party (stranger to contract) has no locus stand a contract, he is debarred from interfering with the contractual rights or obligations of the parties. Only a person who is a party to a contract can sue on it. The doctrine of privity of contract prevents the imposition of contractual obligations upon a person without his consent.
Exceptions – There are certain exceptions to the rule that a stranger to the contract cannot sue upon it. They are as follows:
1. Beneficiaries in the case of a trust
An agreement to create a trust can be enforced by the beneficiary even though he was not a party to the contract between the settlor and the trustee.
2. Family settlement
When family disputes are settled by mutual agreement and the terms of the settlement are written down in a document it is called a Family Set¬tlement. Such agreements can be enforced by members of the family who were not originally parties to the settlement.
3. Assignee of contract
In the case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract.
4. Provision for marriage or maintenance.
At the time of partition of the property of a joint family, the male members may agree that a certain portion of property shall be kept aside for the benefit of, for example, some elderly person or the education and marriage of a female child. Such beneficiaries may not be a party to the arrangement. But, they have been held entitled to enforce the agreement for their benefit.
5. Contracts entered into through an agent
The principal can enforce the contracts entered into by his agent pro¬vided the agent acts within the scope of his authority and in the name of the principal.
The person who becomes an agent of a third party by acknowledgement or otherwise can be sued by such a third party. If the promisor acknowl¬edges his liability to the third person, then such a third person can file a suit to recover the benefit.
7. Covenants attached with the land
In the case of a covenant running with the land, the person who purchases land with the notice that the owner of the land is bound by certain duties affecting the land, the covenant affecting the land may be enforced by the successor of the seller.
“A stranger to contract cannot sue but a stranger to consideration can sue”. Comment.
According to the doctrine of privity of contract, a contract is a private matter only between the contracting parties and therefore only the parties to contract can sue each other to enforce their respective rights under the contract. Thus generally only contracting parties can sue & enforce the contract & a stranger to the contract cannot sue.
Under the Law of Contracts, consideration can be furnished by the promisee or any other person, provided it is at the desire of the promisor. Thus a person who has not furnished consideration himself, under a contract, can also sue on the contract & enforce his rights provided he is a party to contract. Therefore a stranger to consideration can sue provided he is a contracting party.
For example, A contract between P & Q cannot be enforced by R, who is a stranger to the contract. On the other hand where a contract between P & Q, R agrees to pays money to Q for delivering goods to P, which can be enforced by P, although he did not pay any part of the consideration. Thus stranger to .consideration can sue to enforce it provided he is a party to the contract.
X transferred his house to his daughter M by way to gift. The gift deed, executed by X, contained a direction that M shall pay a sum of ₹ 5,000 per month to N (the sister of the executant). Consequently, M executed an instrument in favour of N agreeing to pay the said sum. Afterwards, M refused to pay the sum to N saying that she is not liable to N because no consideration had moved from her. Decide with reasons under the provisions of the Indian Contract Act, 1872 whether M is liable to pay the said sum to N.
Hint: Yes, There can be a stranger to consideration, consideration may be supplied by the promisee or any other person [Chinnaya v. Rammaya].
S bought tyres from Dunlop Rubber Co. Ltd. and sold them to D, a sub-dealer, who agreed not to sell them below Dunlop’s list price & to pay the Dunlop Co. $5 as damages on every tyre D undersold. D sold two tyres at less than the list price and thereupon Dunlop Co. Ltd. sued him for the breach.
Hint: Stranger to a contract cannot sue. Dunlop Co. is not entitled to sue and therefore cannot claim any damages from D, the sub-dealer, since it is not a party to the contract between S & D.
Mr. X was in need of money & offered to sell his casio to Z for ₹ 6000. Z refused to buy the same at the stated price. X gradually reduced the quoted price until 2000 was reached, which Z accepted. Before the casio was delivered, X received ail offer from Mr. A for the purchase of his casio for ₹ 4500 and X refused to carry out his contract with Z on the grounds that the consideration was inadequate. Is Mr. X liable to pay damages to Mr. Z for the failure to perform the contract?
Hint: Consideration may or may not be adequate. Thus inadequacy of the consideration has no effect on the validity of the contract. Mr. X is liable under the contract to Mr. Z.
R & S two brothers entered into a contract for the division of the family property between them and agreed to contribute ₹ 20000 each, per month towards the maintenance of their mother. Can the mother enforce the contribution under the contract?
Hint: Generally stranger to contract cannot sue. However, in certain exceptional cases such as in the case of a contract for marriage settlement, the partition of the property of family arrangements, the beneficiaries under the contract are entitled to use and enforce the contract. Thus the mother is entitled to sue on the contract and enforce her rights against R & S.
A received certain goods from B promising to pay ₹ 1,00,000. Later on, A, expressed his inability to make payment. C, who is known to A, makes payment of ₹ 60,000 to B on behalf of A. However A was not aware of the payment. Now B is intending to sue A for the amount of ₹ 1,00,000. Discuss whether the contention of B is right?
Hint: Consideration can even proceed from a stranger to a contract. When the promisee for consideration receives & accepts the same, from a third party i.e. a person other than the promisor, then it shall discharge the promisor from his obligation to furnish the consideration irrespective of the fact whether the promisor has authorized or ratified the act of the third party or not. Thus A is discharged from his obligation to pay t 60,000 and is now liable to B only for ₹ 40,000. A shall however be bound to compensate C for his past voluntary payment which was the legal obligation of A.
Mr. Ramesh promised to pay ₹ 50,000 to his wife Mrs. Lali so that she can spend the sum on her 30th birthday. Mrs. Lali insisted her husband to make a written agreement if he really loved her. Mr. Ramesh made a written agreement and the agreement was registered under the law. Mr. Ramesh failed to pay the specified amount to his wife Mrs. Lali, Mrs. Lali wants to file a suit against Mr. Ramesh and recover the promised amount. Referring to the applicable provisions of the Indian Contract Act, 1872, advise whether Mrs, Lali will succeed. (C.A. Foundation Nov. 18)
Generally, an agreement made without consideration is void. A contract is enforceable only when consideration is present. However, the Indian Contract Act, 1872 provides for certain exceptions to this rule. One of the exceptional cases where a contract/agreement though made without consideration is valid and enforceable is when an agreement is made out of natural love affection. The Act expressly provides that an agreement without consideration shall be legally enforceable provided the following conditions duly comply
- The agreement must be made on grounds of natural love and affection.
- Parties must be standing in near relation to each other
- It must in writing &
- It must be registered under the Law.
Thus a written and registered agreement based on natural love and affection between the parties standing in near relation (e.g. husband & wife) to each other, shall be enforceable even without consideration. In the given case, a written agreement is executed and registered by Mr. Ramesh, the husband, in favour of Mrs. Lali, the wife. Since all the abovementioned conditions comply, the agreement is legally enforceable even without consideration. Thus Mrs. Lali can successfully enforce the said agreement against Mr. Ramesh.
Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September 2018 for 25 Lakhs. The property papers mentioned a condition, amongst other details, that whosoever purchases the land is free to use 9 acres as per his choice but the remaining 1 acre has to be allowed to be used by Mr. Chotelal, son of the seller for carrying out farming or other activity of his choice. On 12th Oct. 2018, Mr. Sohanlal died leaving behind his son and wife. On 15th Oct. 2018 purchaser started construction of an auditorium on the whole 10 acres of land and denied any land to the son. Now Mr. Chotelal wants to file a case against the purchaser and get a suitable redressal. Discuss the above in light of the provision of the Indian Contract Act, 1872 and decide upon Mr. Chotelal’s plan of action?
According to the Doctrine of Privity of Contract under the provisions of the Indian Contract Act, 1872, a contract is a private matter between the contracting parties and can be enforced only by them against each other. However, in certain exceptional cases, the law permits the enforcement of a contract even by a stranger.
Where a contract creates a trust or charge on a specific property in favour of a beneficiary, then the same can be enforced by him under the contract even though he is not a party to the contract. However the beneficiary must be clearly mentioned in the agreement and the charge must be created on a specific property in his favour.
In the given case Sohanlal sold his agricultural land to Mohanlal under a contract, which specified that 1 acre of the land was to be left out of the total area of 10 acres for the purpose of commercial activity by Chotelal, son of the seller. Mohanlal subsequently denies the right to any land to the son, after the death of Sohanlal. Thus applying the above-stated provisions, it can be concluded that Chotelal being a beneficiary under the contract can sue Mohanlal for his right to use of the land of 1 acre.