LESSON - 2.

CONSIDERATION AND CAPACITY OF PARTIES CONSIDERATION

Meaning
Consideration is an essential element in a contract. It is the sign and symbol of
every bargain subject to certain exceptions. An agreement made without consideration is
void. Consideration is the necessary evidence required by law of the intention of the
parties to effect their legal relations. All contracts require consideration to support them.
Consideration means the valuable considerations (i.e) the price paid for the other party’s
promise. Contract results where one party promises to do in exchange for something in
return. Consideration is otherwise known as “something in return.” In a nutshell,
consideration is the price paid by the promise for the obligation of the promisor.
Example
(i) ‘P’ agrees to sell his land for Rs.2,00,000 to ‘Q’. for ‘P’s promise, the
consideration is Rs.2,00,000. For ‘Q’s promise, the consideration is the house.
(ii) ‘X’ promises not to file a suit against ‘Y’ if ‘Y’ pays him Rs.10,000 on a
particular date. ‘X’s act of not filing a case against ‘Y’ is the consideration for ‘Y’
and Rs.10,000 is the consideration for ‘X’. if there is no consideration there is no
contract.

In an Allahabad case, a person subscribed Rs.500 to rebuild a mosque. It was held that the
promise was without consideration and the subscriber was not liable. (Abdul Aziz V.
Masum Ali)

Definitions
Sec. 2(d) of contract act defines consideration as follows:
“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 abstains from
doing, such act or abstinence or promise is called a consideration for the promise.”
In the English case Currie V. Misa (1875) consideration was defined as, “some
right, interest, profit or benefit accruing to one party for some forbearance, detriment, loss
or responsibility given, suffered or undertaken by the other.”
Example: ‘X’ engages ‘Y’ as a steno in his office for Rs.2000 per month. The monthly
wage is the consideration received by ‘Y’. the services of ‘Y’ is the consideration for ‘X’.

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 The consideration may consist of either:
(i) An act (which one is legally bound to perform)
(ii) An abstinence or forbearance from doing
(iii) A return promise.

TYPES OF CONSIDERATION
Consideration may be classified as
1. Past consideration
2. Present consideration, and
3. Future consideration.
Past consideration: When the consideration of one party was given before the date of the
promise, it is said to be past.
For Example, ‘X’ does some work for ‘Y’ in the month of January and ‘Y’
promised him to pay some money during February. The consideration of ‘X’ is past
consideration. Under English law past consideration will make the contract invalid. But
under Indian law a past consideration is good consideration because the definition of
consideration in Sec.2(d) includes the words “has done or abstained from doing.”
Present consideration: Consideration which moves simultaneously with the promise is
called present consideration or executed consideration.
Future Consideration: When the consideration is to move at a future date it is called
future consideration or executory consideration.

ESSENTIALS OF VALID CONSIDERATION

1. Consideration Must Move at the Desire of the Promisor: The act done or loss
suffered by the promise must have been done or suffered at the desire of the promisor. An
act done without any request is a voluntary act and does not come within the definition of
consideration.

The collector of a district asked ‘D’ to spend money on the improvement of a market and
he did so. ‘D’ cannot demand payment from the shopkeepers using the market for having
improved the market. (Durga Prasad Vs Baldeo)

2. It must be a real consideration: The consideration must have some value in the eyes
of law. It must not be illusory. The impossible acts or non-existing goods cannot
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 support a contract. A contribution to charity is without consideration. A promise to pay
an existing debt within due date if the creditor gives a discount is without consideration
and the discount cannot be enforced.

3. Public Duty: “Where the promise is already under an existing public duty, an express
promise to perform or performance of that duty will not amount to consideration.
Example: A contract to pay a sum to a witness who has already received some
money to appear at a trial is invalid.

4. Promise to a stranger: A promise made to a stranger to perform an existing contract,

is enforceable because the promisor undertakes a new obligation upon himself which
can be enforced by the stranger.

‘X’ wrote to his nephew ‘B’, promising to pay him an annuity of 150 pounds in
consideration of his marrying ‘C’. ‘B’ was already engaged to marry ‘C’. Held that the
fulfilment of B’s contract with ‘C’ was consideration to support X’s promise to pay the
annuity. (Shadwell Vs Shadwell)

5. Consideration need not be adequate: Explanation 2 under Sec. 25 provides that “An
agreement to which the consent of the party is freely given is not void merely because
the consideration is inadequate.” Law requires the presence of consideration, but does
not inquire into the adequacy.
Example: ‘P’ agrees to sell a house worth Rs.5,00,000 for Rs.1,00,000. P’s consent to the
agreement was freely given. The agreement is valid in spite of inadequate consideration.

6. The consideration must not be illegal, immoral or opposed to public policy:

If the consideration of the object of the agreement is illegal, immoral or opposed to public
policy, the agreement to contract is invalid.
Example: ‘X’ agreed to pay Rs.50,000 to ‘Y’ if he kills ‘C’.

7. The consideration may be past, present and future

In the past promise, consideration has already been taken place. In the present
consideration, it simultaneously moves with promise. In the future consideration, it passes
subsequently.
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8. The consideration may move from the promise or from any other person:
A person has given some properties to his wife ‘C’ directing her at the same time to pay an
annual allowance to his brother ‘R’. ‘C’ also entered into an agreement with ‘R’ promising
him to pay the allowance. This agreement can be enforced by ‘R’ even though no part of
consideration received by ‘C’ moved from ‘R’

“NO CONSIDERATION NO CONTRAACT” – EXCEPTIONS TO THIS RULE

Consideration is essential for the validity of a contract. “A promise without
consideration is a gift; one made for a consideration is a bargain” (Salmond and
Windfield)
A promise without consideration is a gratuitous undertaking and cannot create a legal
obligation. Under Roman law an agreement without consideration was called a ‘nudum
pactum’ and was unenforceable. Under English law simple contracts must be supported by
consideration but special contracts require no consideration. Under Indian law, the
presence of consideration is a rule essential to the validity of contracts.
Exceptions:
1. Natural love and affection: An agreement without consideration is valid under
Section 25(1) only if the following requirements are complied with:
(i) The agreement is made by a written document
(ii) The demand is registered according to the law relating to registration in force at
that time.
(iii) The agreement is made on account of natural love and affection.
(iv) The parties to the agreement stand in a near relation to each other.

Examples: An agreement entered into by a husband with his wife during quarrels and
disagreement, whereby the husband promised to give some property to his wife. The
agreement is void because, under the circumstances, there is no natural love and affection
between the parties. (Rajlukhy Debee V.Bhootnath ;1900)

2. Voluntary Compensation: Sec.25(2) applies when there is a voluntary act by one

party and there is a subsequent promise (by the party benefited) to pay
compensation to the former. The term ‘voluntary’ signifies that the act was done,
“otherwise than at the desire of the promisor.” This kind of promise without any

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 consideration is valid. Example: ‘D’ finds B’s baggage and gives it to him. ‘B’
promises to give ‘D’ Rs.100. this is a valid contract.

3. Time-barrred debt: ’A’s promise to pay, wholly or in part, a debt which is barred
by the law of limitation can be enforced if the promise is in writing and is signed
by the debtor or his authorised agent. [Sec. 25(3)] Example: ‘D’ owes ‘B’
Rs.10,000 but the debt is barred by the limitation act. ‘D’ signs a written promise to
pay ‘B’ Rs.5000 on account of the debt. This is contract.
4. Agency: No consideration is required to create an agency. (Sec. 185).
5. Completed Gift: According to Sec. 25 ‘No consideration no contract’ rule does
not apply to completed gifts.

If a person transfers certain property to another by a written and registered deed according
to the provisions of Transfer of property Act, he cannot subsequently claim back that
property on the ground of lack of consideration.

Can a person who is stranger to consideration sue upon it? Normally, the rule is that
the consideration must move from the promise and the party to a contract can sue. In other
words, a stranger to a consideration cannot sue. Under English law, a stranger to a
consideration cannot sue.

Examples: Suppose ‘A’, a doctor, agrees to treat ‘B’, but as ‘A’ will not accept payment,
‘B’ promises ‘C’ (A’s son) that he will pay him Rs.5,000, ‘C’ cannot maintain a suit on the
promise because he is a stranger to the consideration and the fact of C being the son of A
will not alter the position.
Under Indian law consideration may move from the “promisee or any other
person”. So it is clear that the consideration can move from any person.
There are certain differences between the rights of a stranger to a contract and stranger to
consideration. A stranger to contract i.e. one who is not a party to it, cannot file a suit to
enforce it. A contract between ‘P’ and ‘Q’ cannot be enforced by ‘R’.
But a stranger to consideration can sue to enforce it provided he is a party to the
contract. A contract between ‘P’, ‘Q’ and ‘R’ whereby ‘P’ pays money to ‘Q’ for
delivering goods to ‘R’ can be enforced by ‘R’ although he did not pay any part of the
consideration.
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 CAPACITY OF PARTIES

Capacity defined: According to

. 10, an agreement becomes a contract if it is entered into between the parties who are
competent to contract. ‘capacity’ referred to here, means competence of the parties to enter
into a valid contract. Capacity includes physical and mental capacity.

According to Sec.11: Every person is competent to contract who is of the age of majority,
according to the law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.

From this definition we come to the conclusion that the following are not
competent to contract:
1. A person who has not attained the age of majority.
2. A person who is of unsound mind, e.g. lunatic or an insane person.
3. Any other person who has been disqualified from contracting under any law, e.g. a
person who has been adjudicated an insolvent.
Minor: Under Section 3 of the Indian Majority Act, 1875, a minor is one who has not
completed eighteenth year of age. It may be stated here that a minor whose property has
been entrusted to a guardian by a court, attains the age of majority when he completes
twenty one years of life. In England, minority continues up to the completion of 21st year.

THE LEGAL RULES REGARDING MINOR’S AGREEMENT

1. Minor’s agreement is Void-ab-initio: (void from the very beginning):
Today an agreement with or by minor is void and inoperative. Formerly, the position was
not clear. The Indian Contract Act, does not expressly state whether a contract made by a
minor is void or voidable. Sec.11 of the Act simply states that a minor is not competent to
contract. Following the English law, it was held formerly that a minor’s contract was
voidable but not void. The issue came up again in the case of Mohori Bibee Vs Dharmadas
Ghose (1903)

In this case, a minor executed an agreement for Rs.20,000 and received Rs.8,000
from a mortgagee by way of earnest money. H sued for setting aside the mortgage. The
lender wanted refund of the sum which he had actually paid. Held an agreement by a
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minor was absolutely void and therefore, the question of refunding the money did not
arise. Had the agreement been only voidable, the benefit received would have been
refunded under Sections 64 and 65 of the Act.

2. A Minor can be a Promisee or a Beneficiary: During his minority, a minor cannot

bind himself by a contract, but there is nothing in the contract act which prevents him from
making the other party to the contract to be bound to the minor. Thus, a minor is incapable
of making mortgage, or a promissory note. But he is capable of becoming a mortgagee, a
payee or endorsee. He can derive benefit under the contract.

3. A minor’s Agreement cannot be Ratified by the Minor on his attaining Majority: A

minor cannot ratify the agreement on attaining the age of majority as the original
agreement is totally void from the beginning, and, therefore, validity cannot be given to it
later on.
Example: Indira Ramasamy V Anthiappa Chettiar. ‘A’ a minor makes a promissory note
in favour of ‘B’. on attaining majority, he makes out a fresh promissory note in place of
the old one. Neither the original nor the fresh promissory note is valid.
4. If a Minor has Received any Benefit Under a Void Contract he Cannot be Asked
to Refund the same: We have already mentioned the facts in Mohiri Bibee’s case. In
that case, the lender could not recover the money paid to the minor. Also the property
mortgaged by the minor in favour of the lender could not be sold by the latter for the
realisation of his loan.
5. A Minor is Always Allowed to plead Minority: He is not prevented from this right
even where he had procured a loan or entered into some other contract by falsely
representing that he was of full age. Thus, an minor who has deceived the other party
to the agreement by representing himself as of full age is not prevented from later
asserting that he was minor at the time he entered into agreement.

Examples: Leslie V Shiell (1914) In this case ‘S’, a minor, borrowed ₤ 400 from L, a
money lender, by fraudulently misrepresenting that he was of full age. On default by ‘S’,
‘L’ sued for return of ₤ 400 and damages for the crime. Held, ‘L’ could not recover ₤ 400,
and his claim for damages also failed. Even on equitable grounds, the minor could not be
asked to refund ₤ 400, as the money was not traceable as the minor had already spent it.

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 In the case of a fraudulent misrepresentation of his age by the minor, inducing the
other party to enter into a contract, if money could be traced. The court may award
compensation to that other party under Sections 30 and 33 of the Specific Relief Act,1963.
6. A Minor Cannot be a Partner in a Partnership Firm: He cannot become a partner
but for the benefit of the partnership with the consent of all the partners he can be
admitted as a partner. Other partners cannot file a case against the minor partner if the
latter commits any offence.
7. A Minor’s Estate is Liable to a Person Who Supplies Necessaries of Life to a
Minor: However there is no personal liability on a minor for the necessaries of life
supplied.

The term ‘necessaries’ is not defined in the Indian Contract Act, 1872. but the English Sale
of Goods Act defines necessaries as “goods suitable to the condition in life of the minor
and to his actual requirements at the time of sale and delivery”.

From the above definition it is very clear that in order to entitle the supplier to be
reimbursed from the minor’s estate, the following conditions must be fulfilled:

 The goods are necessaries for that particular minor having regard to his status. For
example, Purchase of a car may be a necessity for a particular minor and may not hold
good for the other person.
 The minor needs the goods both at the time of sale and delivery.

Example: Nash V Inman (1908): A minor, was studying B.C.S., in a college. He ordered
11 fancy coats for about ₤ 45 with N, the tailor. The tailor sued him for the price. His
father proved that his son had already number of coats and had clothes suitable to his
condition in life when the clothes made by the tailor were delivered. Held, the coats
supplied by the tailor were not necessaries and therefore, tailor cannot get the price.

The minor’s estate is liable not only for the necessary goods but also for the necessary
services rendered to him. The lending of money to a minor for the purpose of defending a
suit on behalf of a minor in which his property is in jeopardy or for defending him in
prosecution, or for saving his property from sale in execution of decree is deemed to be a

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service rendered to the minor. Other examples of necessary services rendered to a minor
are: provision of education, medical and legal advice, provision of a house on rent to minor
for the purpose of living and continuing his studies.
8. Minor’s parents or guardians are not liable to a minor’s creditors for the breach of
contract by the minor, whether the contract is for necessaries or not. But the parents are
liable where the minor is acting as an agent of the parents or the guardian.
9. A minor can act as an agent and bind his principal by his acts without incurring any
personal liability.
10. No specific performance: An agreement by a minor being void, the court can never
direct specific performance of such an agreement by him.
11. No Insolvency: A minor cannot be declared insolvent even though there are dues
payable from the properties of the minor.
12. Company’ shares to a minor: A minor cannot apply for and be a member of a
company. If a minor has, by mistake, been recorded as a member, the company can
rescind the transaction and remove the name from the register. But where a minor was
made a member and, after attaining majority, he received and accepted dividends, he
will be stopped from denying that he is a member. (Fazalbhoy V The Credit Bank of
India)

PERSONS OF UNSOUND MIND

Definition of “Sound Mind” for a valid agreement it is necessary that each party to it
should have a sound mind. What is sound mind for the purpose of contracting is laid down
in Sec. 12 of the Indian contract act.

Section 12: A person is said to be of sound mind for the purpose of making a contract if at
the time when he makes it, he is capable of understanding it and of forming a rational
judgement as to its effect upon his interests.

A person usually of sound mind, but occasionally of unsound mind, may not make
a contract when he is of unsound mind. However, when he is of sound mind he is capable
of becoming a party to a contract.

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Illustrations
(a) A patient in lunatic state of mind, who is at intervals of sound mind, may make
a contract during these intervals.
(b) A sane man who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgement as to its effect
on his interests, cannot contract whilst such delirium or drunkenness lasts.
Unsoundness of mind may arise from insanity or lunacy, idiocy, drunkenness
and similar factors.

Idiocy: The term idiot is applied to a person whose mental powers are completely absent.
Idiocy is a congenital defect caused by lack of development of the brain.

Insanity or Lunacy: This is a disease of the brain. A lunatic is one whose mental powers
are so deranged that he cannot form a rational judgement on any subject. Lunacy can
sometimes be cured. Idiocy is incurable.

Drunkenness: Drunkenness produces temporary incapacity. The mental faculties are

clouded for sometime, so that no rational judgement can be formed.

Effects of Agreements Made by Persons of Unsound mind

Agreements by persons of unsound mind are void. But an Agreement entered into
by a lunatic or a person of unsound mind for the supply of necessaries for himself or for
persons whom he is bound to support (e.g. his wife, children) is valid as a quasi-contract
under Section 68 of the Act. Only the estate of such a person is liable. There is no personal
liability.
The guardian of a lunatic can bind the estate of the lunatic by contracts entered into
on his behalf. The mode of appointments of such a guardian and his powers are laid down
in the Lunacy Act.

Example: Inder Singh V Parmeshwardhari Singh (1957)

A person agreed to sell a property worth Rs.25,000 for Rs.7000. his mother proved
that he was a congenital idiot and she pleaded for cancellation of the contract. The court
held the agreement to be null and void.

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DISQUALIFIED PERSONS
Aliens: An alien means a citizen of a foreign state. Contracts with aliens are valid. An
alien living in India is free to enter into contracts which citizens of India. But the
government may impose certain restrictions. Certain types of transactions with aliens may
be prohibited. A contract with an alien becomes unenforceable if war breaks out with the
country of which the alien concerned is a citizen.

Foreign Sovereigns: Foreign sovereigns or governments cannot be sued unless they

voluntarily submit to the jurisdiction of the local court (Mighell V Sultan of Johore)

Professional Persons: in England, barristers and members of the Royal College of

Physicians are prohibited by the etiquette of their profession form suing for their fees. But
they can sue and be sued for all the claims other than their professional fees. In India, there
is no such restrictions on barristers and physicians.

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