Agreements Without Consideration: Legal Framework

Consideration is one of the essential concepts in any contract law. As such, any individual studying contract law should possess a thorough understanding of the same. The Indian Contract Act of 1872 states that for any contract to be legally binding, consideration should be provided. An agreement without consideration is not considered valid.

Section 2(d) of this act defines consideration as a thing of value that one contracting party provides to another in exchange for the successful execution of the terms and agreement mentioned in the contract. On this note, consideration can be a promise to do something, to refrain from doing something or a guarantee of the payment of money. 

For instance; A promised to paint B’s house for Rs.5,000. Here, B is providing A Rs.5000 as a consideration in exchange for the latter’s promise to paint her house. This is not an example of agreements without consideration, as each party is offering something of value to others.

Features of Consideration

A legally valid consideration should have the following features - 

• Consideration Should be Real

Consideration provided by the two parties in a contract must be real or believable since an agreement without consideration is void. It should not involve illegal activities. A consideration is unreal if the law forbids it; if it is a fraudulent or immoral activity or if it is something that can cause damage to a person or property.

• Consideration Should be at the Desire of the Promisor

In a contract, consideration must be provided only at the desire or request of the promisor. Any service provided voluntarily will not be a consideration, and the person offering it cannot ask for any service in return. For instance, If A took care of B when she was sick voluntarily, she (A) cannot claim any consideration for the same. And there can be no contract without consideration.

• It Can Involve a Third-Party

Under the Indian Contract Act of 1872, a promisee can provide consideration to the promisor or a third party if the former holds no objection. However, in that case, the third party can sue the contracting parties. 

• Consideration Can be in the Past, Present or Future

Once a contract has been drawn up, there can be three types of considerations – past, present, and future. The present and future considerations are known as executed and executor, respectively. An executed consideration, as the name suggests, is a consideration that has already been carried out by the person who made the promise. On the other hand, an executory consideration is a service that has been promised by one of the contracting parties but has not been delivered yet.

Additionally, a past consideration can be an act or service or abstinence that took place before the contract agreement was drawn. However, in this case, one should note that the consideration is only legally valid if it was provided by the promisee at the request of the promisor.

Exceptional Circumstances 

An agreement without consideration is a null and void agreement. However, there are certain exceptions where agreement without consideration is valid according to section 25 of the Indian Contract Act. These include: - 

• Voluntary Services

If a promise was given to an individual who provided a service voluntarily, then, in that case, all agreement without consideration is legally enforceable. Aside from voluntary service, if a person performs an act which the promisor was legally compelled to do, then a promise made in exchange for that service is considered valid. 

For instance, let’s consider an example of a contract without consideration as the void exception. Suppose that two individuals A and B are neighbours. One day there was a fire at B’s house which A spotted on time and stopped from spreading. Due to this, B promised to pay A a sum of Rs.10,000 at a later date. This is one of the agreements without consideration that will be considered valid by a court.

• Love and Affection

Another exception to the statement an agreement made without consideration is void is love and affection. According to section 25(1) Indian Contract Law, an agreement made between two individuals who are directly related to each other through blood or are near relations of one another, where the deal is in writing and has been registered formally, will be enforceable under law.

For example - C agreed to pay his brother D a certain sum of money every day for a year. A formal agreement was drawn and registered in a court. This results in agreements without consideration, where C is liable to pay that sum of money to D.

• Time-Barred Debt

Time-barred Debt is a type of Debt that was created when one individual borrowed money from another party and did not repay on time. As a certain amount of time has passed, it is no longer legally collectable. 

Nevertheless, if the borrower made a promise in writing to return the amount, in whole or part, and he or his authorized agent signed the agreement; then it will be considered legally enforceable, even though it is an agreement without consideration.

• Gifts and Charity

Gift or charity is also an exception of the rule that agreement without consideration is Void. Any gift or charity exchanged between a donor and one will be considered a valid agreement under the law even if there was no consideration involved. Furthermore, a promise to make a future gift is also binding.

The ‘ No consideration no Contract’ has a Few Alternative Options that are Mentioned Below:

The contract without consideration is not considered valid under Section 25 of the Act where there have been few exceptions to the case. Following this, the contract made is not considered valid until and unless:

• The contract is registered and given in writing.

• For compensating the deed of a consumer service made towards the promisor in the past.

• Legally it is a written contract of commitment made to pay all debt or a part of it that has been prohibited by the time limit.

Important Note:

• This section is not considered in the case where it is a transfer of a gift from one client to another.

• Within this section, lack of compensation is not dependent on the null terms. However, the lack of compensation on the other hand would only be evaluated to see if the agreement is made willingly.

Explanation Case Study Example:

The lack of compensation might be considered into account by the court in finding out whether the consent given by the promiser was given out of willingness and no false or unfair means. Also just because the consideration is lacking doesn’t mean the consent given by the promiser for signing the agreement is freely given and is not void.

• B gets Rs. 1,000, for no consideration from the promiser party  A. This type of case is considered a void agreement.

• B the son of A receives a house as a token of love and affection from his father A. The promiser party A puts his consideration into writing and even registers the same. Thus this type of giving and take is a contract.

• B lost his purse and the other party A found the purse and returned it to party B. This party B promises to give Rs. 200 to party A. This type of deal is a contract.

Cases:

1. Considerations Appear to be Misappropriated:

Sometimes, we feel many deals are unfair. Yet many times the court passes judgment based on the quality consideration that has been made between the two parties even if the consideration has been made disproportionately without negotiating the process whether it was conducted under good or bad faith. During the verdict, if the court feels the consideration has been made on an unfair basis, the contract falls apart then and there. This happens because the consideration is made disproportionately which indicates that one party acted unfairly and made the deal appear fair to the other party by hiding some information from them. Thus this lack of consideration, makes the contracts made fall apart in the eyes of the court. But there might be a case where the value of money is more for one party but it may be worthless to the other. Hence many times courts don’t judge such cases based on the relative worth or specific promises until and unless they feel it has been made under unfair modes. The last scenario for such deals is a negotiation between the two clients and fairly getting enough of their rights to them. 

2. Worth of the Word “ Consideration” in the Contract:

The contract being made is generally entered into “ For valuable and good consideration” which is rationally a word describing the importance of acknowledgement or something that might affect the case. For this purpose, a statement of the beginning of the contract provides the main consideration points. This statement at the beginning of the contract giving information of the compensation and promises for good values is referred to as recital. It is believed by many writers that by just mentioning the word consideration the contract justifies the reason and terms of the client. But in major states, these recitals have zero value and are considered non-entity as they aren’t able to justify the consideration made between the two people. To justify in another way, we can't state that the consideration is valid until it has been proved and approved by both parties on a fair mean basis.

Law grads and the experienced folks generally came on terms that the contract need not include anything other than the statement on which both the clients agree. Also, the statement made here needs to be done on a fair basis without hiding any information from any of the other parties. Exceptions for such cases are agreements that are generally signed by one party only. These agreements or contracts could be assignments, promissory contracts or option agreements. In such contracts in the recital part, a statement justifying that the consideration is sufficient should be included as it’s evident that a bargained-for exchange has taken place already with the client.