CMA Foundation – Consideration, Legality of Object and Consideration Lesson 2.3

Prepare for your CMA Foundation Paper 1 Business Laws and Business Communication. using our CMA Foundation Study Materials. Here is Lesson 2.3 Consideration, Legality of Object and Consideration.

Lesson 2.3 Consideration, Legality of Object and Consideration

Contracts are an essential part of business and personal dealings. However, not all agreements are legally binding. For an agreement to become a valid contract under the Indian Contract Act, 1872, it must meet certain conditions, one of the most important being consideration. Consideration refers to “something in return”—a benefit or a detriment exchanged between the parties. It ensures that promises are not made casually but involve reciprocal obligations. Along with this, the legality of the object is equally important, as no contract can stand in law if its object or consideration is unlawful.

Definition of Consideration

Consideration is defined under Section 2(d) of the Indian Contract Act as an act, abstinence, or promise done at the desire of the promisor by the promisee or even a third party. It may bring some benefit to one party or cause some loss to the other, but it must always arise from the promisor’s request. Section 25 of the Act makes it clear that an agreement without consideration is void, since promises without value are often made rashly and without careful thought.

Legal Rules Regarding Consideration

1. Consideration must move at the desire of the promisor

Consideration is valid only when it is done at the request of the promisor. If the act is performed voluntarily or at the desire of a third party, it cannot be treated as valid consideration.

For instance, in Durga Prasad vs Baldeo, the plaintiff constructed a market at the request of the District Collector, and later the shopkeepers promised to pay him commission. The court held that there was no consideration because the act was not done at the request of the defendants.

2. Consideration may move from the promisee or any other person

Indian law allows consideration to be furnished either by the promisee or even by a third party. This is different from English law, which requires consideration to move only from the promisee.

This was established in Chinnayya vs Ramayya, where a mother transferred property to her daughter on the condition that she pay annuity to her uncle. Although the uncle himself did not provide consideration, the court held that the agreement was valid since Section 2(d) expressly allows consideration to move from “the promisee or any other person.”

3. Consideration must be something of value

For consideration to be valid, it must have some value in the eyes of the law, though it need not be adequate. For example, if a house worth eight lakhs is sold for two lakhs, the agreement is binding despite the inadequacy of consideration. However, courts may take inadequacy into account when claims of coercion, undue influence, or fraud arise.

4. Consideration may be an act, abstinence, or promise

Consideration may take different forms. It may involve an act, such as performing at a function, or an abstinence, such as a promise not to smoke. It may also be a promise to do or not to do something in the future, such as an agreement not to take a dispute to court. In each of these cases, the act, abstinence, or promise serves as valid consideration.

5. Consideration may be past, present, or future

Under Indian law, consideration may be past, present, or future. Past consideration refers to an act already performed at the request of the promisor before the promise is made. For example, if a person renders services at the request of another and later receives a promise of payment, such past services constitute valid consideration.

Present consideration arises when both parties perform their obligations simultaneously, such as in a cash sale where money and goods change hands at the same time. Future consideration, also called executory consideration, refers to a promise that is to be performed at a later date, for example, a promise to deliver goods in the future in return for payment on delivery.

6. Consideration must not be unlawful

Even when consideration is present, it will not make an agreement valid unless it is lawful. The law declares consideration unlawful if:

• it is forbidden by law,
• defeats the provisions of any statute,
• is fraudulent in nature,
• involves injury to person or property, or
• is considered immoral or against public policy.

For example, a contract to commit a crime, or to engage in acts opposed to morality such as corrupt practices, cannot be enforced by a court of law.

Types of Consideration

1. Past Consideration

Past consideration refers to something that has already been done before the making of the agreement. Under Indian law, such past acts can be valid consideration if they were performed at the request of the promisor.

For example, if A renders services to B at B’s request and later B promises to pay A for those services, the services already rendered constitute valid past consideration. In English law, past consideration is treated as no consideration.

2. Present Consideration

Present consideration, also known as executed consideration, arises when the promise and the act are performed simultaneously.

Example is a cash sale, where one party delivers goods and the other pays money at the same time. Both parties perform their obligations instantly.

3. Future or Executory Consideration

Future consideration, also called executory consideration, refers to an act or promise that is to be performed at a later date. In this case, the promisor makes a promise in return for the promisee’s obligation to do something in the future.

For example, if A agrees to deliver goods to B at a future date and B agrees to pay for them on delivery, the obligations are deferred, and the consideration is executory.

No Consideration — No Contract [Sec. 25]

The general rule of the Indian Contract Act is ex-nudo pacto non oritur actio, which means an agreement made without consideration is void. For example, if A promises to pay B ₹1000 without any obligation from B, the agreement is void for want of consideration.

However, Section 25 of the Indian Contract Act provides specific exceptions where an agreement without consideration is still valid and enforceable. These exceptions are explained below.

Exceptions to Rule No Consideration No Contract

1. Promise made on account of natural love and affection [Sec. 25(1)]

An agreement made without consideration is valid if it is expressed in writing, registered under the law, made on account of natural love and affection, and entered into between parties standing in near relation to each other. Normally, such transfers are in the nature of gifts.

Case Laws:

• Venkatswamy vs Rangaswamy: An elder brother promised in writing to pay the debts of his younger brother on account of natural love and affection. The agreement was held valid.
• Poonoo Bibi vs Fyaz Buksh: A husband, by a registered agreement, promised to pay his earnings to his wife. The court held the agreement valid despite absence of consideration.
• Rajlakshmi vs Bhootnath: A Hindu husband, despite registering a promise to pay his wife maintenance, could not enforce it because natural love and affection was missing due to quarrels.

2. Promise to compensate for voluntary services [Sec. 25(2)]

A promise to compensate a person who has voluntarily done something for the promisor is valid, even without consideration. The essentials are:

• The act must have been done voluntarily.
• The act must have been done for the promisor.
• The promisor must have been in existence at the time of the act.
• The promisor must intend to compensate the promisee.
• The act must be legal.

Examples:

• A finds B’s purse and returns it. B promises to give A ₹500. This is a valid contract.
• X supports Y’s infant son. Y promises to pay X’s expenses. This is also valid.

3. Promise to pay a time-barred debt [Sec. 25(3)]

A written and signed promise to pay a debt barred by the Law of Limitation is valid even without fresh consideration.

Example: A owes B ₹1000, but the debt is barred by limitation. A signs a written promise to pay ₹500 on account of the debt. The promise is enforceable.

4. Creation of Agency [Sec. 185]

According to Section 185, no consideration is necessary to create an agency. Thus, appointment of an agent is valid even if there is no consideration.

5. Completed Gifts [Explanation 1 to Sec. 25]

Gifts once completed cannot be revoked on the ground of absence of consideration. If a person has transferred property as a gift according to the Transfer of Property Act, it remains valid even without consideration.

Example: A gifts a watch to B on his birthday. Later, A cannot demand it back citing lack of consideration.

6. Contract of Guarantee [Sec. 127]

A contract of guarantee requires no consideration. The surety’s liability is enforceable even though he does not receive any benefit.

7. Remission [Sec. 63]

When a promisee accepts lesser performance of a contract than originally agreed, it is valid without consideration.

8. Charity

A promise to contribute to charity is enforceable if, on the basis of that promise, the promisee undertakes a liability.
Case Laws:

• Kedarnath vs Gorie Mohammad: The defendant promised to subscribe ₹100 towards construction of a Town Hall. On the strength of this promise, the secretary undertook liabilities to contractors. The promise was enforceable.
• Abdul Aziz vs Mazum Ali: If the promisee does not incur liability, the promise to contribute to charity is not binding.

Stranger to Contract cannot sue

A stranger to contract (i.e., one who is not a party to the agreement) has no right to sue upon it.
Example: A sells property to C, who promises to pay A’s debt to B. If C defaults, B cannot sue C as he is a stranger to the contract.
Case Law: Dunlop Pneumatic Tyre Co. vs Selfridge Co. — Dunlop could not sue a sub-dealer directly because it was not a party to the contract between them.

Stranger to Contract / Doctrine of Privity of Contract

The doctrine of privity of contract states that only parties to a contract are entitled to enforce the rights and obligations created under it. A stranger to a contract cannot sue upon it.

Case Law: In MC Chacko v. State Bank of Travancore (1970 SCR (1) 658) the Supreme Court of India held that “a person not a party to a contract cannot, subject to certain well-recognized exceptions, enforce the terms of the contract.”

Under Indian law, consideration for an agreement may proceed from a third party, but only a person who is a party to the contract can sue to enforce it. Thus, as a general rule, strangers to a contract cannot maintain an action.

Exceptions to the Rule

These are as follows:

1. Beneficiary of a Trust

A trust is created for the benefit of a beneficiary. Even if the beneficiary is not a party to the contract, he can enforce the terms of the trust.

Case Law: MK Rapai vs John — A agreed to transfer property to T in trust for the benefit of B. It was held that B could enforce the agreement, though he was not a contracting party.

2. Provision in Marriage Settlement

Where a provision is made for a person under a marriage settlement or a family arrangement, the beneficiary can enforce it even though he is a stranger to the contract.

Case Law: Shuppu Ammal vs Subramaniyam — Two brothers agreed to invest money for their mother’s maintenance after partition. It was held that the mother could compel them to fulfill the promise.

3. Provision for Maintenance or Marriage Expenses of Female Members

Under a partition or family arrangement, if a provision is made for the maintenance or marriage expenses of a female member, she can enforce the promise though she is a stranger to the contract.
Case Laws:

• Gandy vs Gandy — A husband executed a separation deed agreeing to pay for his wife’s maintenance through trustees. The court held that the wife could enforce the trust created in her favour.
• Rakhmanbai vs Govind — Female members of a joint Hindu family could sue for marriage expenses provided under a partition agreement between male members.

4. Assignee of a Contract

The benefits of a contract can be assigned. Once assigned, the assignee may enforce the contract even though he was not an original party.

Example: A assigns his life insurance policy to his wife. The wife can claim the policy benefits though she is not a party to the contract with the insurer.

5. Acknowledgement of Liability

When a promisor acknowledges liability directly to a third party, privity is created, and the third party can enforce the contract.

Example: X receives money from Y to pay Z and acknowledges it to Z. Z can sue X to recover the money, though Z was not a party to the original arrangement.

6. Agency Contract

Contracts made by an agent on behalf of the principal can be enforced by the principal even if the principal was not personally a party to the contract.

Case Law: Madhu Trading Co. vs UOI & Ors. — It was held that a beneficiary of a trust or interest created in immovable property can enforce the agreement, even though not an original party.

Conclusion

Consideration is the foundation of a valid contract under the Indian Contract Act, 1872, ensuring that promises are backed by reciprocal obligations. While the general rule is “No consideration, no contract”, the law recognizes important exceptions to uphold fairness and equity. Equally, the object and consideration of a contract must be lawful, or else the agreement is void.

Finally, the doctrine of privity of contract restricts enforcement to parties to the contract, subject to well-recognized exceptions such as trusts, family arrangements, and assignments. Together, these principles safeguard contractual fairness, prevent exploitation, and maintain certainty in business and legal transactions.

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