Consideration- Section 2(d) of the Indian Contract Act,1872- Part I

In the previous articles, we have discussed the Essentials of a Promise- proposal and acceptance and their revocation. By which, we can acknowledge what an agreement is. To understand which agreement can be enforceable under the law we need to know-

1.     Competence of parties

2.     Lawful consideration

3.     Free consent

4.     Lawful object

In this article, we will understand what consideration is.

Consideration -Section 2(d) of the Indian Contract Act

Consideration has been defined variously by courts in England and India over the years. Some recognized definitions are;

Blackstone- “Consideration is the recompense given by the party contracting to the other.”

Sir Frederick Pollock- “An act or forbearance of the one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus, given for value is enforceable.”

Lush J in Currie v. Misa- “A valuable consideration in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other.”

Thus, in simple terms, consideration is the price of the promise or a quid pro quo as an incentive for a promise.

*quid pro quo- A favour or advantage in return for something. Simply, a favour for a favour.

Section 2(d) of the Contract Act defines consideration as,

“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.”

Hence, any act done or taken upon to be done at the desire of the promisor is called consideration.

Dividing the definition provided in section 2(d) in FOUR parts we can lay down the essentials of consideration:

1.     At the desire of the promisor

2.     The promisee or any other person

3.     An act or abstinence or promise of act or abstinence

4.     Has done, does or promises to do 

 

      I.          AT THE DESIRE OF THE PROMISOR

According to the definition of consideration in section 2(d), the act should be done at the desire of the promisor and not any third party. Thus, any act done at the desire of a third party is not considered to be a good consideration. This principle was reiterated in the case of Durga Prasad v. Baldeo. In this case, the plaintiff had built certain shops in a bazaar at his own expense at the order of the collector. The defendants occupied these shops who in exchange for the plaintiff’s spending money on the construction promised to pay the plaintiff a certain percent of their income from the articles sold through their agency as commission. The defendants were unsuccessful in paying the commission and the plaintiff thus sued them for damages. It was held that the plaintiff will not be able to succeed as the consideration for the promise i.e. the expense on constructing the market was not done at the desire of the promisor a.k.a. the defendants. It was done by the plaintiff on the order of the collector who is a third party not involved in this promise. There is no consideration, henceforth, the contract is void.

In another case, Radha Govinda Rai v. Khas Dharmaband Colliery Co. Ltd., A dispute arose between the landlords and their assignees of underground coal and mining rights about the right to receive rent from the sub-lessee of the mining rights. The sub-lessee agreed to pay the rent on the condition that the assignee executed an indemnity bond which was done by them. It was held that the payment is made by the sub-lessee at the desire of the assignees (the indemnity bond), there was a lawful consideration and thus the contract is valid.

Another case which is well-known in this regard is the case of Kedar Nath v. Gorie Mohamed decided by the Calcutta High Court. In this case, the commissioners of the Howrah municipality constituted themselves as members of trust for the purposes to erect a town hall and gathering funds through subscriptions for the same. The defendant was a subscriber and had signed his name in the book for Rs 100. Basing on the promised subscriptions the plaintiff entered into a deal with a constructor to build the town hall. The defendant failed to pay the amount. An action was initiated against him and it was claimed by him that there was no consideration. It was held by the High Court that the defendant is liable to pay as there was good consideration because he knew the purpose of the subscriptions was to build a town hall for which a contractor would be appointed. The promise was "In consideration of your agreeing to enter into a contract to erect, I undertake to supply money for it." The plaintiff had at the desire of the defendant entered into a deal with the contractor to constitute consideration under section 2(d).

Unilateral promises- In unilateral promises, where the promisee although not bound to act, performs some action on the desire of the promisor, he can hold the promisor liable to perform his end of the deal. In such cases, the act of the promisee is acceptance as well as consideration of the unilateral promise made by the promisor.

 

    II.          THE PROMISEE OR ANY OTHER PERSON

According to the definition, it is now an established rule that the consideration for a contract can flow from the promisee himself or any other third party. Departure from the English Law can be observed at this point under which consideration to a promisor may flow from the promisee i.e. the person who wishes to enforce the contract.

For example, In the case of Chinnaya v. Ramayya, A, an old lady, made certain property under the name of her daughter, R, through a gift deed on the condition that she would pay a certain sum of amount to A’s sister, C. On the same evening R executed in writing that she would pay C the annuity. She refused to fulfill her promise, later on, and the aunt initiated legal action against her to recover the annuity. It was claimed by R that there was no consideration in the agreement between R and C. It was held by the Madras High Court that R was liable to pay since it is clear from the definition of consideration under section 2(d) that the consideration to a promise can flow even from a third party and in this particular case the consideration of the promise made by the defendant to the plaintiff was the gift deed in favor of the defendant made by her mother a.k.a the plaintiff’s sister.

Under Indian Law, it is thus now an established principle that a stranger to consideration can sue, but a stranger to a contract cannot. This means that a party to a contract from whom the consideration has not flowed can sue for enforcement of the contract(privity of consideration) but if that particular person is a stranger to the contract then he cannot sue for enforcement of the contract(privity of contract) unlike English Common Law according to which a stranger to consideration is also not entitled to sue for enforcement of a contract.  This principle is more widely known as the principle of privity of contract which will be discussed in another article separately in detail. 

 III.          ACT, ABSTINENCE OR PROMISE

An act done or to be done or an act which is abstained from doing or is to be abstained or a promise to perform or abstain a particular act is regarded as consideration. Abstinence may consist of parting with something of value, or not performing a specific act or letting go of some legal right which is in the general course of nature possessed by the parties. To understand the concept of act and abstinence we can refer to cases described above:

For example- In Chinayya v. Ramayya, the contract between the daughter and her aunt was based on the act of the mother to make the gift deed in favor of the daughter. The consideration, in this case was an act performed by someone.

In Dutton v. Poole, the contract was based on the abstinence of the father of cutting the tree. Thus, the consideration, in this case was the abstinence of an act.

Thus, consideration can be positive as well as negative.

Forbearance-

One very important kind of abstinence is forbearance i.e. letting go of a legal right. Forbearance can be of any type, such as forbearance to exposing the secrets of the other party, forbearance by way of compromising on a doubtful claim, forbearance to sue, etc.

In most cases, forbearance to sue is for a specific period or for a reasonable time or in a specific court. An example of this would be Debi Radha Rani v. Ram Dass, where the Patna High Court held that the forbearance of a wife to sue her husband for maintenance in exchange for the husband paying her monthly allowances by way of maintenance was good consideration. In another case of the Allahabad High Court, Kastoori Devi v Chiranji Lai, where a pending suit against her husband was withdrawn by a wife and it was held to be good consideration against his promise to provide maintenance to her. It is to be noted here that forbearance of a non-existing claim is no forbearance at all. The claim that is to be forborne should be of a bonafide nature.

The promise to do or abstain from doing something is also considered as good consideration. A contract may be formed by mutual or reciprocal promises (Section 2(f)) each being the consideration for another.

For example, Company A promises to not enter into business transactions with Company C and Company B promises to transact with no other company other than Company A. The promises made by Company A and Company B are reciprocal promises which eventually result into an exclusive contract between Company A and B with both promises acting as consideration for each other.

 

 IV.          HAS DONE, DOES OR PROMISES TO DO- PAST, PRESENT AND FUTURE CONSIDERATION

 

·       Past- The words “done or abstained from doing” in the definition of consideration indicate that an act done by one party on behalf of other’s request without any existing promise from the other party may be considered as the consideration for any subsequent promise between the parties. It is an established principle in English Law that past consideration is no consideration. However, in this case, the Indian principle departs from the English law. The wording of the definition clearly implies that past consideration is acceptable in India. Some circumstances where past consideration is considered as good consideration are;

 

1.     Past Voluntary Service-

A past voluntary service means there is a voluntary service rendered to the promisor without any request or contemporaneous promise in regards to which a subsequent promise is made to pay for it. For example, if A saves B from drowning in a river and then B to reward A promises to him 1000 Rupees, this would constitute a valid contract under Indian Law contrary to English Law wherein this kind of contract would be void. Such kind of promise is enforceable in India under section 25(2) of the Contract Act,

“a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do”.

2.     Past service at request-

If any service is rendered at the request of the promisor on the understanding that payment would be made through a subsequent promise then such consideration is a good consideration. This principle was laid down in the case of Re Casey’s Patents, the defendant Casey managed the patents owned by the plaintiffs. The plaintiffs later signed a document which read that they were willing to give the manager 1/3^rd share of their patents in consideration of his services. The defendant registered this document in the patent’s office to claim his share. However, the plaintiffs moved to expunge the documents from the patent’s office claiming that the document is not a deed and there is no consideration as the defendant’s service to them will be considered as past consideration which is not good consideration. It was held by the court of appeal that Casey must have assumed that the work he did would be paid in some way as it was not done just in goodwill but was such work for which a manager would be expected to pay for.

In the exact words of Lord Bowen who decided this case,

“The fact of a past service raises an implication that at the time it was rendered it was to be paid for, and if it was a service which was to be paid for, when you get in the subsequent document a promise to pay, that promise may be treated as an admission which evidences or as a positive bargain which fixes the amount of that reasonable remuneration on the faith of which the service was originally rendered.”

3.     Past Antecedent debt-

The existence of a contemporaneous debt is a good consideration for a later promise to pay that debt.

 

·       Present- An act or abstinence which is done simultaneously with the execution of the contract is referred to as present consideration.

 

·       Future- A promise to do something in the future after the contract is executed is a legal consideration, provided it involves a legal obligation. In Mittar Sain v Data Ram, it was held that a promise by a widow to adopt a person is a good consideration for the adoptee’s agreement in favor of the widow to pay a certain sum of money for maintenance and, at times, for the management of the property.

 

These were certain essentials of consideration as expressly implied by the definition. The next article will discuss some essentials of consideration that are not specifically mentioned by the legislature in the definition of consideration in the Contract Act but are developed through precedents.

References-

1.      Indian Contract Act, 1872.

2.      Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16th edition.

3.     Avtar Singh, Contract and Specific Relief, 12th edition.

4.     Anson’s Law of Contract, 29th edition.

5.     Halsbury’s Laws of India Contract, 2e 2015.

6.     Durga Prasad v. Baldeo; ILR (1881) 3 All 221.

7.     Radha Govinda Rai v. Khas Dharmaband Colliery Co. Ltd.; AIR 1963 Pat 160.

8.     Kedar Nath v. Gorie Mohamed; ILR (1886) 14 Cal 64.

9.     Chinnaya v. Ramayya; ILR (1876-82) 4 Mad l37:6 Ind Jur 402.

10.  Dutton v. Poole; (1677) 2 Levinz 210: 83 ER 523.

11.  Debi Radha Rani v Ram Dass, AIR 1941 Pat 282.

12.  Kastoori Devi v Chiranji Lai, AIR 1960 All 446.

13.  Re Casey’s Patents, Stewart v. Casey; 1892 1 Ch 104.

14.  Mittar Sain v Data Ram, AIR 1926 All 194 at 198: (1925) 24 All LJ 185 at 205 : 90 IC 1000.