Consideration: Rules; Privity of Contract

and Its exceptions, Rule of ‘No

Consideration. No Contract’ & its
exceptions
.
Sec 2 (d)
• When, at the desire of the promisor, the promisee or any other
person has done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such
act or abstinence or promise is called a consideration for the promise
 What is consideration?
• The concept of consideration requires that both parties to a contract
shall have given and have received something as the “price” of their
respective promises.
• For example: X promise to install a home-air conditioning unit for Y,
and Y promises to pay X Rs. 1,100 for the job. Here the price X has
received (in return for his obligation to install the unit) is the right to a
payment of Rs. 1,100 from Y when the job is done; similarly, the price
Y has received ( for her promise to pay the Rs. 1,100) is her right to
have the unit installed
 Essential element of consideration
(1) Consideration must move at the desire of the promisor
An act or abstinence without any request from the promisor is a voluntary act and does not
come within the definition of consideration. Similarly an act or abstinence done at the
request of any person other than the promisor does not constitute consideration. In other
words an act shall not be a good consideration unless it is done at the desire of the promisor.
Examples:
1. A sees B drowning and saves his life. A cannot demand payment for his services as it is a
voluntary act on his part and B never asked him to do so.
2. The collector of a district asked D to spend some money on the improvement of a
market and he did so. The shopkeepers of the market promised to pay commission to D
on their sale. Later on they refused to pay the commission. D cannot demand payment
from the shopkeepers who are using the market for having improved the market as he
had done so at the desire of the collector and not at the request of shopkeepers
Contd.
(2) Consideration may move from the promisee or any other person
It means that so long as there is consideration for promise, it is immaterial who has
furnished it. It may move from the promisee, or from any other person if the
promisor has no objection
Example:
An old lady, by a deed of gift made over certain property to her daughter D under
the direction that she should pay her aunt, P (sister of the old lady), a certain sum
of money annually.
The same day D entered into an agreement with P to pay her the agreed amount.
Later, D refused to pay the amount on the plea that no consideration had moved
from P to D. Held, P was entitled to maintain the suit as consideration (the house)
had moved from old lady, sister of P, to the daughter D
Consideration can be past, present or future
• Past
For example, A does some work for B in the month of April without expecting any return
from B. Later on, in June, B promises to pay him some money for the work done in April.
This constitutes a valid contract as the work done by A is of the nature of past consideration.
• Present
The best example of present consideration is cash sale where performance by both the
parties (seller and buyer) is simultaneous
• Future
M and B enter into a contract in April under the terms of which M agrees to build a
swimming pool for B in June, B promising to pay Rs. 2,50000 in return. M later refuses to
perform, and B sues him to recover damages for breach of contract. M is liable; that is, his
promise is enforceable.
Rules regarding consideration
(1) Adequacy of consideration
Consideration, means “something in return”. This “something in return” need not
necessarily be equal in value to “something given”
Explanation 2 to section 25 of the Act says that an agreement to which the consent
of the promisor is freely given is not void merely because the consideration is
inadequate; but the inadequacy of consideration may be taken into account by the
court in determining the question whether the consent of the promisor was freely
given.
Example – A agrees to sell a house worth Rs.1,00,000 for Rs.10,000. A’s consent to
agreement was freely given. The agreement is a contract notwithstanding the
inadequacy of the consideration. However, if A says that his consent was not freely
given, the inadequacy of the consideration is a fact which the Court should take
into account in considering whether or not A’s consent was freely given..
.
• (2) It must have some value in the eyes of law
In the case of White v. Bluett 1853, the promise by a father to release
his son from an outstanding loan, if the latter refrained from boring the
father with complaints, was refused to be enforced, since the essential
elements of a bargain was lacking. The court observed that,” It would
be ridiculous to suppose that such promises could be binding. In reality
there was no consideration whatever.”
..
(3) It must be real not illusory – The consideration should be real, i.e. it
must not consist of impossible act or promise. It must not be illusory or
sham.
Physical impossibility – A promises to pay B Rs. 1,00,000 in
consideration of B bringing a star from the sky to the earth. This is
unreal because B’s promise is absurd and physically impossible.
 (4) It must be something which a promisor is
not already bound to do
Where one is doing, or promising to do something which one is already under an
obligation to do will not form a good consideration.
One can already be bound:
(i) under a duty imposed by law
Where A promise to pay B, who had received summons to appear at a trial in a civil suit, a
certain sum being a compensation for the loss of time during his attendance. It was held,
the promise was without consideration as B was already under a duty imposed by law to
appear and give evidence – Collins v. Godfrey [1831] 1B & AD 956.
(ii) under a duty emanating from an existing contract:If a person is bound to perform
certain act under an existing contract, the same performance cannot form a good
consideration for any other contract.
There was a promise to pay the advocate an additional sum if the suit was successful. Held,
the promise was void for want of consideration. The advocate was under a pre-existing
5. Consideration has to be lawful (s. 23)
What considerations and objects are lawful, and what not.
The consideration or object of an agreement is lawful, unless
it is forbidden by law ; or
is of such a nature that, if permitted, it would defeat the provisions of any law; or
is fraudulent ; or
involves or implies, injury to the person or property of another; or
the Court regards it as immoral, or opposed to public policy
• A promises to obtain for B an employment in the public service and B promises
to pay 1 crore rupees to A. The agreement is void, as the consideration for it is
unlawful.
Sec. 24
• There may be cases where one part of consideration is unlawful but
the other is not.
In such cases the whole agreement is void if the unlawful part cannot
be separated from the lawful part.
Example – A promises to work for B who runs both illegal and legal
business for a sum of Rs. 4,000 per month and B agrees to pay this
amount to A. The legal business can be separated from illegal business,
the part of salary pertaining to legal business is lawful consideration. In
the above case, if legal and illegal businesses cannot be separated,
whole salary of A will constitute unlawful consideration.
Exceptions to the doctrine of consideration
• Sec 25
There may be certain circumstances where it will not be reasonable to
apply the doctrine of consideration to meet the basic motives of the
law. Section 25 of the Indian Contract Act, 1872 takes care of such
circumstances.
“An agreement without consideration is void unless it is in writing and
registered or is a promise to compensate for something done, or is a
promise to pay a debt barred by limitation law.”
 1) Love and affection [Sec. 25(1)]
• An agreement is enforceable even if there is no consideration, if it is
(i) expressed in writing,
• (ii) registered under the law for the time being in force for the
registration of documents,
• (iii) is made on account of natural love and affection, and
• (iv) between parties standing in a near relation to each other.
In simple words, a written and registered agreement based on natural
love and affection between near relatives is enforceable even if it is
without consideration
(2) Compensation for past voluntary services
[Sec. 25 (2)]
• A promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promisor, is enforceable, even
though without consideration. In simple words, a promise to pay for a
past voluntary service is binding.
• Examples: 1. A finds B’s purse and gives it to him. B promises to give A
Rs. 50. This is a contract.
(3) Promise to pay a time-barred debt [Sec.
25(3)]
• A time barred debt is a debt which is not recoverable because of lapse
of specified time (presently 3 years) under the Limitation Act.
• In the normal course, once a debt becomes time barred, the lender is
left with no remedy to get his money back. Therefore a debtor is not
legally bound to pay the debt if it becomes time-barred. In such a case,
if the debtor subsequently promises to pay the time barred debt,
apparently there is no consideration moving from the other party but
the contract is still enforceable.
• Example – D owes C Rs. 1,000 but the debt is barred by the Limitation
Act. D signs a written promise to pay C Rs. 1,000 on account of the debt.
This is a contract.
 Privity of Contract
• Stranger to Contract
A stranger to the contract, not being a party to the contract, can neither sue
nor be sued upon under it.
The consequences of the doctrine of privity of contract are :
(i) a person who is not a party to a contract cannot sue upon it even though
he has provided the consideration
(ii) a contract cannot confer rights or impose obligations arising under it on
any person other than the parties to it.
Thus if there is a contract between X and Y, Z cannot enforce it.

Refer: https://www.taxmann.com/post/blog/consideration-under-the-indian-contract-act-1872
 Stranger to consideration
• If A promises to B that he will pay Rs. 1000 to B, if B can get a picture painted
from C for A.
• Here consideration is moving from C to A (painting of picture by C for A) and
from A to B (Rs. 1000) and there is no consideration from B to either party, i.e.
B is stranger to the consideration, but
• the relationship of promisor and promisee subsists between A and B only.
• The relationship between A and C is that of the privity of consideration. But
the privity of consideration does not confer any right to the party providing
consideration to enforce the contract at the court of law, unless he is a party to
the contract. This is known as the doctrine of privity of consideration.
• In the given example if A does not perform his part of the contract, C cannot
sue upon A in the court for its enforcement, only B is entitled to do so.
 Exception to Privity of Contract
(1) Beneficiary under trust or a charge
When a trust is created, the beneficiary can enforce the rights given to him
under the trust, even though he was not a party to the contract between the
settler and the trustees.
Examples: 1. A transfers some property in favour of B to be held by him in trust
for the benefit of X. X can enforce the agreement even though he is a stranger to
the contract.
(2) Agency – Contracts entered into by an agent can be enforced by the principal.
Example – A appoints B as his agent for selling the goods. B sold the goods to a
buyer C. C sued A for defective goods. In this, though there is no direct contract
between A and C, yet A is liable because B has sold the goods to C as A’s agent.
Reference
• Rajesh Kapoor (ed.)., Avtar Singh’s Law of Contract and Specific
Relief (Eastern Book Company, 13th edn., 2022).
• Anirudh Wadhwa, Mulla The Indian Contract Act (Lexis Nexis, 16 th
edn, 2021)
• https://www.taxmann.com/post/blog/consideration-under-the-indian
-contract-act-1872
The examples are collected and compiled from different books, Bare
Act and internet sources for purely classroom teaching purpose.