Central University of Punjab

Law of contract -Term Paper

Session 2024-2029

Title- Essentials of a valid consideration

Submitted by: submitted to:

Trisha Dr. sukhwinder kaur
(24barllb11)
Abstract
Consideration is a fundamental concept in contract law ,ensuring that parties exchange
something of value when entering into an agreement . This paper examines the essential
elements of a valid Consideration, exploring its definition . Understanding valid consideration
is crucial for drafting and enforcing contracts .

Introduction
Contract law is based on the concept of reciprocity, which means that parties exchange
promises or performances of value. Consideration is the mainstay of this concept as it ensures
that parties obtain something in return for their promises or actions . The consideration must
be valid in order for a contract to be enforceable . This paper will explore the main elements of
a valid consideration and provide a comprehensive understanding of this critical concept in
contract law.

Definition of Consideration under Section 2(d)

Section 2(d) , Indian Contract Act , 1872 defines consideration as under :-
"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 abstain from doing
something , such act or abstinence or promise is called a consideration for the promise ."

Nature of consideration
The nature of consideration can be of two types:

Unilateral consideration
The contracts under which the promisor offers to pay only after the occurrence of a specified
event. In other words, the promisor is willing to pay for the promise. Under unilateral
consideration, it moves only in a single direction. Under such a contract only the promisor is
legally bound to fulfill the promise under the prescribed time duration. For example- Mr Raj
lost his dog and makes an offer to Mr Rahul to find his list dog for which he would pay him
Rs.100. Mr Rahul is under no obligation to accept the offer and it is upto him to accept his
offer.

Bilateral consideration
The contract where both parties are under the obligation to fulfill their respective promises is
known as bilateral consideration. Here, the parties involved must be two, unlike that of a
unilateral consideration where only the promisor is bound to fulfill the promise. Under such
contracts, consideration moves in either direction. For example- a sale agreement where the
seller enters into a contract with the purchaser to transfer the title of the car to him upon
receiving consideration for the same within the prescribed duration of time.

Essential elements of valid consideration

Consideration is one of the essential elements of a contract, and at the same time ,
consideration itself has some essential elements are as follows.
1.The Consideration must move at the desire of the promisor
The definition of Consideration under the Indian Contract Act, 1872 , starts with "when at
the desire of the promisor .....", which clearly specifies that any act or abstinence or promise
by the promisee should act the desire of the promisor. It means that any act or abstinence done
voluntarily or without the desire of the promisor is not a valid consideration in the eyes of the
law. Let's example , if you help a person lift his luggage and then demand payment for the
service provided, that person is not bound to pay to you . The service or help provided by you
was a voluntarily act that was not asked for by the person . Thus , the desire of the promisor is
a must when it comes to consideration.

2.The consideration may move from the promisee to any other person or a third party
As long as there is no objection by the promissory , the consideration may move to any
other or proceed to any other person than the promisee . In simple words, it states that it is not
a mandate that only the promisee should grant the consideration; it can also be provided by any
other person. The following example will make you easier to understand it . Mr. A has taken a
certain amount of loan from Mr. B . After a few days Mr. A went to Mr. B and said that the
remaining amount of debt will be paid by his elder brother, Mr. C . Here, the consideration has
moved from Mr. A (the promisee) to his elder brother,Mr. C . This transfer of obligation to
pay from one person to another does not have any effect on the validity of the consideration,
involved in the promise which also means the doctrine of consideration is, thus, not applicable
in India.

Doctrine of Privity of Contract

The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to proceed from a
third-party. However, a stranger (third-party) to consideration is different from a stranger to a
contract. The law does not allow a stranger to file a suit on the contract. This right is available
only to a person who is a party to the contract and is called Doctrine of Privity of Contract.

Let’s understand this with the help of an example:

Peter has borrowed some money from John.

Peter owns a property and decides to sell it to Arjun.
Arjun promises to pay John on behalf of Peter.
However, if Arjun fails to pay, then John cannot sue since Arjun is a stranger to the contract.
It is important to note that the Doctrine of Privity has exceptions which allow a stranger to
enforce a claim as given below.

Exceptions to the Doctrine

There are certain exceptions to the Privity of Contract, meaning, a stranger or a person who is
not a party to a contract can sue on a contract in the following cases:

1.Trust
When an agreement between several parties results in the formation of the trust in favour of a
third party or a beneficiary, in that case, the latter is eligible to take legal action against the
contracting parties as an exception to this Doctrine of Privity of Contract. For example, A gives
possession of his company’s share to B, but with a condition that B will give 50% of his share
to C. However, A died and B refused to give the share to C which was promised before the
death of A. As B failed to fulfil his obligation, C sued B. In this case, C trusted B to receive
the shares of the company but B didn’t fulfill the obligation. Here, C can sue B, even if he was
not part of the contract.
2.Contract through an Agent
If an agent enters into a contract with a third party on behalf of a principal, then the latter is
compelled to fulfil the contractual agreement with the third party. The Indian Contract Act on
Privity of Contract defines an Agent as a person who has been formally recruited to perform
and represents the principle in dealings with strangers. The person who employs an agent or
anyone to be represented by one is called the principal. For example, if A is an agent of B, then
A will build a contract with Z and deal with him on behalf of B.

3.Family Settlement
If the contract is of a family arrangement, like a marriage settlement. A third party or
beneficiary can sue the parties to the contract to impose the agreement under exceptions to this
Doctrine. For example, Sonia belongs to a joint family, and her family made some financial
arrangements to pay the expenses for her marriage. However, the family parted ways due to
which the arrangement for the marriage expenses of Sonia was not fulfilled. Later, Sonia sued
for her benefits even though she was not part of the contract.

4.Beneficiaries under trust or charge or another arrangement

A person in whose favour a charge or other interest in some specific property has been created
may enforce it even though he was not considered to be a party to the contract. The decision
of the privy council in the case Nawab Kwaja Bombad Khan Vs Nawab Hussaini Begum is a
landmark judgement on this principle. For example, If a contract is made between Aman and
Jiya and it creates a be4neficial right for Rohini over some property, Rohini can enforce her
claim based on this right.

5.Acknowledgement or Estoppel
Where the terms of a contract have specified to make a payment to a 3rd person and both parties
agree and acknowledge the fact to make the payment to that 3rd person, a binding obligation
will be incurred towards him. Acknowledgement can be either expressed or implied. For
example, Ajay asks Mahesh to give ₹5,000 to Uma on his behalf. If in this case, Mahesh
acknowledges it then he is bound to pay the amount to Uma. If he doesn’t pay the amount then
Uma can sue him irrespective of the fact that she is the third party.

The consideration must not be unlawful

It's very obvious that any act, abstinence or promise made that is considered illegal in the eyes
of law is not a valid consideration. Also, if there is an involvement of of any injury to a person
or property of another person or is immoral in nature, it makes the consideration invalid under
the Indian Contract Act, 1872 . Such considerations make the contract void. For example, if
you promise a person to pay Rs 10,000 for selling at his workplace, such considerations will
not be valid.

The consideration must not be physically invalid

A consideration that is not physically possible to be performed or carried out is considered to
be invalid. A decision should always be something that is capable of being performed or carried
out. For example, X makes a promise to Z to pay Rs. 1,00,000 if Z runs 100 km in 1minute.
Here, it is impossible to perform the said task. Thus, such considerations that are physically
impossible to perform are deemed invalid.

The consideration must not be adequate

While entering into a contract, consideration is something that is to be mutually decided by
the parties to the contract. When the question of adequacy of consideration arises while
enforcing the contact, the court is not concerned with the adequacy of consideration in it. In
simple words, the court has nothing to do with the question of whether the consideration in
contract is adequate or not. But at the same time, the court may take into account the inadequacy
of consideration to verify whether there was free consent given by the parties or not. If the
contract is signed with the free consent of the parties, the consideration stands to be valid
regardless of its inadequacy. To get the clear understanding of this part, we can refer to
Explanation 2 of Section 25 of the Indian Contract Act, 1872, which clarifies that , " an
agreement to which the consent of the promisor is freely given is not void merely because the
consideration is inadequate; but the inadequacy of the consideration may be taken into account
by the Court in determining the question whether the consent of the promisor was freely given.

Types of consideration
Consideration can be mainly classified into three types:

1.Executory consideration
2.Executed consideration
3.Past consideration

Let's go through the detailed analysis of all these types one by one:

Executory consideration
Whenever there is a contract between two parties, there are some promises and obligations
that need to be fulfilled. When these promises or obligations are not yet fulfilled by the parties
involved in the contract, it is known as executory consideration. It generally refers to those
promises or obligations that will be executed in the future. Just like a general contract, here
also there is an exchange of promises and obligations between the promissor and the promisee
but the execution of the same tends to be on a future date.

For example, if you hire a freelancer to provide legal services for your company and you both
enter into a contract wherein you promise to pay Rs. 50,000 for the services in the next month,
then in this scenario the promises made in the contract are not fulfilled, the status of the
consideration in the contract stands to be executory.

Executed consideration
The principle element of executed consideration is contrary to that of executory consideration.
Under executed consideration, the promises and obligation made by the parties in the contract
are already fulfilled or completed. It is also known as present consideration, as the concerned
parties have successfully completed their part of the contract.
For example, if you purchase a car from the showroom and make the payment for it, the car
will also be delivered to you. At this point both parties have completed their promises or
obligations under the contract. This scenario comes under the ambit of execution consideration.

Past consideration
 It means that the consideration for any promise was given earlier and the promise is made
thereafter. It is, of course, necessary that at the time the act constituting consideration was done,
must have been done at the desire of the promisor. For example, I request you to find my lost
dog. After you have done the same, if I promise to pay you Rs. 100 for that, it is a case of past
consideration. For my promise to pay you Rs. 100 the consideration is your efforts in finding
my lost dog and the same has been done before I promised to pay the amount. In this case the
consideration has been given at my request, because it is only when I requested you that you
found the dog . This constitutes valid (past) consideration under Section 2(d), and therefore the
promise is enforceable. The words " has done or abstained from doing " , in Section 2(d) of the
Contract Act, 1872, according to Pollock and Mulla " declare the law to be that an act done by
A at B's request, without any contemporaneous promise from B, may be consideration for a
subsequent promise from B to A. "

Case law
Chinmaya v. Ramayya (1882) ILR 4 Mad 137 is a landmark Indian contract law case that dealt
with the issue of consideration and its relationship with the concept of “existing legal
obligations”.

Case Facts:
Chinmaya, the plaintiff, and Ramayya, the defendant, were brothers.
Ramayya had borrowed money from Chinmaya and promised to repay the loan.
Later, Ramayya promised to pay an additional sum of money to Chinmaya as a consideration
for Chinmaya’s promise to release Ramayya from his existing liability to repay the loan.

Issue:
Whether Ramayya’s promise to pay the additional sum of money was supported by valid
consideration.

Judgment:
- The court held that Ramayya’s promise was not supported by valid consideration.
- The court ruled that a promise to perform an existing legal obligation is not sufficient
consideration for a new promise.
- The court further held that Chinmaya’s promise to release Ramayya from his existing liability
was not a valid consideration, as it was not a new obligation, but rather a relinquishment of an
existing right.

Conclusion
In conclusion, the concept of valid consideration is a cornerstone of contract law, ensuring that
parties exchange something of value when entering into an agreement. Through this analysis,
it is clear that valid consideration must meet specific essential elements, including a bargained-
for exchange, something of value, request, benefit or detriment, present or future consideration,
something more, and not past consideration.

Understanding these essentials is crucial for drafting and enforcing contracts, as it ensures that
parties receive something of value in exchange for their promises or performances. The courts’
strict adherence to these essentials highlights the importance of careful consideration in
contract formation.

Furthermore, the analysis of case laws and examples demonstrates the practical application of
these essentials in various contractual scenarios. It is evident that valid consideration is not
merely a theoretical concept but a vital component of contract law that has significant
implications for businesses, individuals, and the legal system as a whole.

In light of this analysis, it is recommended that contracting parties, legal practitioners, and
lawmakers carefully consider the essentials of valid consideration when drafting, negotiating,
and enforcing contracts. By doing so, they can ensure that contracts are formed and performed
in a fair, efficient, and legally binding manner.

References:-
Books
1. *Anson’s Law of Contract* by Jack Beatson (Oxford University Press, 30th ed., 2016)
2. *Cheshire, Fifoot and Furmston’s Law of Contract* by M.P. Furmston (Oxford University
Press, 16th ed., 2017)
3. *Contract Law* by Ewan McKendrick (Palgrave Macmillan, 10th ed., 2018)

Articles
1. *”The Doctrine of Consideration”* by P.S. Atiyah (Law Quarterly Review, Vol. 83, 1967)
2. *”Consideration and the Contract”* by J.W. Carter (Journal of Contract Law, Vol. 25, 2009)
3. *”The Essentials of Valid Consideration”* by M. Chen-Wishart (Oxford Journal of Legal
Studies, Vol. 35, 2015