Introduction
Whenever a contract is made, there is a price associated with it. It is the value offered and accepted by people or companies. In simple terms, consideration is something in return. As per section 2(d), the definition of consideration is as follows:
“When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise."
In this article, we will simplify the above meaning of consideration in contract law and look at some of the essential elements of consideration.
Consideration Meaning in Law
Consideration is the foundation on which any contract is built. The law would enforce only those promises that are made as part of the consideration. A valid Consideration in business law must involve every party, which means that each person involved in the contract must promise to do something and also promise not to do something. Without consideration, a promise does not have any legal obligations.
Consideration is mostly referred to in monetary terms, but it could also mean a particular action or a promise to refrain from a specific action. It is a two-way street where each party must gain something valuable from the other involved parties.
Let us break down every part of the consideration definition in law:
Consideration has to move as per the desire of the promisor.
Consideration may move from the promise to another person.
Consideration might be in the past, present, or future.
Consideration does not need to be adequate.
Consideration must be real and not illusory.
Illegal or immoral acts are not considered.
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What are the Requirements of Section 2(d)?
The term consideration is defined in Section 2(d) of the Indian Constitution Act. according to section 2(d), three things are required for consideration to uphold validly, that is, the abstinence or act should be done at the desire of the promisor, the act should be done by the promise or any other person, the act should be either already executed or be in the process of being done or should be executory, that is, it should be promised to be done.
Let us explain the essential elements of consideration in detail.
Consideration has to Move as Per the Desire of the Promisor
The performance of the contract has to move as per the promisor and not any third party. The promisor doesn't need to always benefit from the consideration; it could be meant for a third party also. The significant thing is that there has to be a connection between the promisor's desire and the action of the promise. Another factor to note here is that what is done as part of the consideration is not voluntarily but at the promisor's behest. For example, if A’s house is on fire and B rushes to save it at his own will, this is not a consideration. But if A asks B to do it, then it will be deemed as a consideration.
Consideration May Move from the Person to Another Person
As per consideration in law, if the promisor has no objection, consideration may move to a third party. For example, A can grant a house on rent to B and direct B to pay it to X. If B refuses to pay it to X, then the case could move to court and force B to pay X as there is enough consideration from A to make the payment to X.
Consideration Might be in the Past, Present, or Future
Past Consideration - If the promise or act is performed before the contract was made, it is considered past consideration, and it holds good in Indian law. As an example, A’s bike ran out of petrol on the way and A requests B to fill petrol for which he agrees to pay later. So, the promise of money is made for a past consideration of filling petrol. In English law, any past consideration is no consideration.
Present Consideration – When one of the parties in the contract has performed his part of the promise, which constitutes the consideration to be performed by the other party, it is called present consideration. Let us say A lost his watch and offers to pay Rs 300 to the person who finds it. If B finds the watch and gives it to A, then A is bound to pay Rs 300 to B as part of the present consideration.
Future Consideration – When a party makes a promise in exchange for the promise from the other party and the performance of the consideration is to be done after making the contract; then it is a future consideration. For example, A promises to sell ten toy cars to B for which B is supposed to pay Rs.1000 at a future date. This is a future consideration.
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Consideration Does Not Need to be Adequate
An agreement must be supported by consideration, but the consideration doesn’t need to be equivalent to the promise. The parties are free to determine the appropriate consideration at the time of the bargain. Whether the promise is adequate or not is the lookout of the promisor and not the obligation of law or court to investigate the adequacy of the consideration. For example, if A has a property worth Rs. 50,000, which he agrees to sell to B only for Rs. 5000, then the inadequacy of the transaction does not make the contract void. But if B pleads coercion, fraud, or under influence, then the consideration will be looked into with sufficient evidence.
Consideration Must be Real and Not Illusory
The legal rules of consideration state that consideration has to be certain, definitive, and competent. It cannot be vague, uncertain, or impossible. The transaction is rendered void in such a case. As an example, if A promises to find a treasure by magic if B pays him Rs. 10,000, then this is an illusory consideration and not considered valid.
Who is Considered a Stranger to a Contract?
The contract of consideration can only be enforced upon the behest of the parties to the contract and therefore, no third party can enforce the contract upon anyone. The contract arises due to the prevalence of a contractual relationship between the two parties. According to this rule, no third party can enforce any contract, and also the contract cannot levy an obligation on any person other than those who are a part of the contract. Though, in certain cases, strangers either benefit or are involved in the contact other than the two parties. This happened in cases of the marriage settlement, land properties, and acknowledgement to the third party as per the need of the contract.
FAQs on Legal Rules Regarding Consideration in Contracts
1. Is Consideration Related Only to Money?
Consideration is not made only in monetary terms. Forbearance to sue is also considered a good consideration. It could also be a promise made as a consideration for another promise. One or more promises could also be combined to form a single consideration. Consideration could also be related to performance.
Another good consideration for the promise is the settlement of a dispute. If, as part of the promise, one party gives up legal rights, then that can also be adequate consideration for the promisor. For example, refraining from gambling, smoking, or drinking could supply consideration to the other party to pay money to the person who is refraining.
2. What is the Purpose of Contractual Consideration, and How is It Different from Gratuity?
The basis of contract law is based on the reciprocity of consideration. Each party entering into a contract is bound by a benefit and a burden. The consideration in the contract act is a benefit for one party (let us say the party receives money) and a burden to the other (who is paying the money). A contract is not legally binding without consideration being given by each party. A gratuity cannot be enforced by law. An example of gratuity is “A promises to pay B an amount of Rs 1000 without B having to for anything in response”. Since this is a gratuitous promise where one person promises to do something without any promise from the other person, the payment of Rs. 100 is not enforceable by law since it is not supported by any consideration. So here there is no consideration hence no contract.
3. What are Deeds, and How is it Different from Consideration?
Deeds are an exception to consideration as deeds are not required to be supported by any consideration. For consideration to be valid, a promise has to be made by both parties, while deeds can be valid without consideration. Deeds are written contracts that must state it is a deed and has to be signed, sealed, and delivered by both parties. They are legally binding without consideration, but they have some special requirements which help them from being abused. Deeds might require a witness or more than one signatory. A simple contract has a statutory limitation period of six years, which means that a claimant must claim for a breach of contract within six years from the date of the contract. The limitation period of a deed is 12 years.
4. What can be Some Real-life Examples to Explain the term Consideration Easily?
There are various simple examples of consideration available that can make the concept of consideration easy to understand. For example, two people say A and B, enter into a contract wherein A promises to deliver 15 curtains to B in one month and B promises to pay Rs 30,000 on delivery, then in this case the B’s promise is the consideration for A’s promise. Also, A’s promise is a consideration of B’s promise. According to another example, A has taken a loan from B but has not repaid it yet. B agrees not to file a case against A if A promises to pay the loan within a week. In this case, B’s agreement is due to the consideration of A’s promise to repay.
5. What are the Essential Features for Consideration to be Valid?
Based on the Indian Contract Act, 1872 Section 2(d), the considerations are said to be valid if they have the following features:
The considerations move at the promisor’s desire, that is, if suppose A is going back home and on his way, he sees that B”s house is on fire. A quickly arranges for a water hose and manages to douse the fire. In such a case A cannot demand any reward because his action was voluntary and not on the desire of B, who acts as a promise in this case. Therefore, considerations can only be offered by a promise or a third party at the request of a promisor and if the action is initiated by the third party, then it is not considered as a consideration.
The consideration may move from one promise to another person. This feature simply states that there can be a stranger to consideration but there can be no stranger to the contract.
The considerations can be in the past, present, or future. The considerations can be made before the promise is made by the promisor. For example, when applying for a job before any promise, you are told your pay package. This is an example of past considerations. If the promises and considerations are made simultaneously then in that case it is known as present consideration. For example, when you buy something from a shop and pay for it on the spot. If the considerations for a promise are made after the contract is formed, then it is known as a future consideration. For example, you hire someone for architectural plans and promise him to pay once his plans are approved by the boss.
The consideration must have a certain value in front of the law. Value also refers to the fact that the law will determine if the consent given by the party is with their own will or not. An example of a consideration that holds value in the eyes of the law is that a wife agrees to withdraw the suit she has filed against her husband if the husband is ready to pay her a monthly maintenance amount.
The consideration should be over and above the promisors’ existing obligations.
The consideration cannot be unlawful that is against the law or public policies.
