MODULE 2

CONSIDERATION AND CAPACITY TO CONTRACT

CONSIDERATION
A valid and enforceable contract must be supported by consideration. The term consideration is used in the
sense of quid pro quo (i.e. something for something or something in return). Consideration must be either a
benefit to the promisor or a detriment to the promisee or both. Section 25 of the Indian Contract Act
specifically states, " An agreement without consideration is void ".

Definition:
1. When a party to an agreement promises to do something, he must get something in return - this something
is defined as consideration.

2. Pollock: "Consideration is the price for which the promise of other is bought, and the promise thus given
for value is enforceable".

3. Section 2 (d) 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 abstains from doing
something, such act or abstinence or promise is called a consideration for the promise".

Eg. 1: A agrees to sell his car to B for Rs. 50,000. In this example, Rs.50,000 is the consideration for A's
promise. Similarly, the car is the consideration for B's promise.

Eg. 2: Mr. A promised to go to Delhi if B paid him Rs. 2,000. Here the consideration for A's promise is the
payment of Rs. 2,000. It is the benefit to A and a detriment to B. (Detriment - the act of giving up something
of legal value, or suffering a loss or harm)

Eg. 3: Abdul Aziz v/s Masum Ali: Masum Ali promised to pay Rs. 500 for the reconstruction or rebuilding
of a mosque. Later he failed to pay. Thus, the secretary of the mosque (Abdul Aziz) filed a suit for the recovery
of the amount. It was held that the promise was not enforceable as there was no consideration. Here there was
no benefit to the promisor or detriment to the promisee.

ESSENTIAL ELEMENTS OF CONSIDERATION:

1). Consideration must move at the desire of the promisor:
Consideration must move at the desire of the promisor. Hence an act done at the desire of a third party is not
a consideration.
Eg. 1: Durgaprasad v/s Baldeo (already explained)

Eg. 2: Mr. A saves B's goods from fire without being asked to do so. A cannot demand payment for his service.

2). Consideration may move from the promisee or any other person:
Under Indian law, consideration may move from promisee or any other person. But under English law,
consideration must move from the promisee only. A stranger to the consideration cannot sue. Privity of
contract is essential for a right of action.

Eg: Chinnayya v/s Ramayya: A Madrasi woman (A) gave her property to her daughter (C) through a gift
deed. As part of this arrangement, A directed C to pay Rs. 650 every year to A's brother (R). On the same day,
C signed an agreement promising to follow A's direction and pay the annuity to R. After some time, C stopped
paying the Rs. 650, and R filed a lawsuit against her.
The court ruled in R's favor, stating that the gift deed and the agreement to pay the annuity were part of the
same transaction. Since there was consideration involved in this arrangement, the contract was valid, and C
was legally bound to pay R.

3. Consideration may be past, present or future:

a. Past consideration: Consideration by a party for a present promise was given before the date of the promise.
Under the English law, past consideration is not valid.
b. Present or executed consideration: Consideration given simultaneously with the promise.
c. Future or executory consideration: Here consideration from one party to the other is to pass subsequently.

Eg. 1: X renders some service to Y at the latter's desire. After a month, Y promises to pay some compensation
for his service. It is a past consideration and X can recover it.

Eg. 2: A sells goods to B and delivers them to B who promises to pay the amount at a future date. It is a case
of present or executed consideration. Here A has done his act of delivering goods against the promise of B to
pay the amount in future.

Eg. 3: X promises to deliver to Y certain electric appliances as soon as he receives them from the wholesaler
at Mumbai and Y promises to pay Rs. 5,000 against the delivery of the articles. It is an instance of future
consideration, which is to be performed by both the parties when supplies are received from Mumbai.

4. Consideration need not be adequate:

Consideration means 'something in return'. Consideration need not be adequate means 'something in return'
need not be equal to 'something given'. The adequacy of the consideration is for the party to consider at the
time of making an agreement. It has been held by the court: "The adequacy of consideration is for the parties
to consider at the time of making the agreement, not for the court when it is sought to be enforced."

Eg.: Mr. A purchased from B an old table for Rs. 250. It would be difficult task for the court to ascertain
whether the price paid was adequate or not. Therefore, they have agreed that Rs. 250 is the consideration.

5. Consideration must be real and not illusory:

Consideration must be real, competent and of some value in the eyes of law.

Eg.: A promises to put life into B's dead wife, for which B should pay Rs. 5000. A's promise is impossible of
performance. It is not a real consideration. Thus, it is a void agreement.

6. Consideration must be something, which the promisor is not already bound to do:
Eg.: A lawyer was promised extra money or a commission if a lawsuit was successful. However, the court
ruled that this promise was void. The reason was that the lawyer was already legally obligated to provide the
best possible service as part of their duty.

7. Consideration must not be illegal, immoral or opposed to public policy:

Consideration must not be unlawful. It must be legal. Section 23 of the Indian Contract Act says, "Every
agreement of which the consideration is unlawful, is void". It means that an agreement must be supported by
lawful consideration.
Eg.: A promised to pay Rs. 5,000 to B if he (B) beats C. The agreement is void as the consideration is unlawful.

'NO CONSIDERATION, NO CONTRACT’ (OR)

'A CONTRACT WITHOUT CONSIDERATION IS VOID':
Exception to the above rule (Section 25):
The following agreements are enforceable even though they are made without consideration.

1. Love and affection [Sec. 25(1)]:

A written and registered agreement based on natural love and affection is enforceable even without
consideration.

Eg: Aamir out of natural love and affection agrees to gift her newlywed daughter a flat worth ₹1 crore. Aamir
made this promise in writing and the same was registered. Even though the promise is without any
consideration the same shall be valid as it is made out of natural love and affection.

In the context of this exception, it may be noted that an agreement entered into, between a husband and his
wife during quarrels and disagreement, whereby the husband promises to give some property to the wife is
void, even if the agreement is in writing and is registered. Because under such circumstances, i.e. during
quarrels, there cannot be natural love and affection between husband and wife, though they stand in near
relations to each other. This point was upheld in Rajalakshmi Devi v/s Bhoothnath.

2. Compensation for past voluntary service [Sec 25(2)]:

A promise to pay for a past voluntary service is binding.

Eg 1: Akshay left for Canada for a year, and Kapil a neighbor of Akshay voluntarily agrees to take care of the
garden of Akshay. Akshay subsequently promises to pay a sum of money as compensation to Kapil for taking
care of the garden. The promise was made in writing and registered by law. Although no consideration exists
at the time of rendering services, the contract is valid as there is a promise to pay for past service.

Eg. 2: A finds B's lost purse and gives it to him. B promises to give Rs. 100. This is a valid contract.

Eg. 3: Mr. A supports B's infant son. B promises to pay A's expenses in doing so. This is a valid contract.

Raja of Venkatagiri v/s Krishnayya: In a train accident, X saved the life of Y out of his own impulse. Later
on, Y promises to pay Rs. 5,000 to him as reward for his past efforts. It is a valid promise and constitutes a
contract, though there is no consideration (because services of X were rendered voluntarily).

3. Promises to pay time-barred debt [Sec 25(3)]:

A promise by a debtor to pay a time-barred debt is enforceable provided it is made in writing.

Eg: Kangana purchased a flat from Hrithik at a price of ₹1 crore, however, 10 years have passed and she didn't
make any payment towards the flat to Hrithik. The debt became time-barred and cannot be brought to legal
action. However, after 10 years Kangana writes a promise to pay ₹20 lakh for the flat in the final settlement
of the debt. Even though the contract is made without consideration it shall be enforceable and valid but only
to the extent of ₹20 lakh.

Eg.: Mr. B owes C Rs. 1000. The debt is barred by the Limitation Act. D signs a written promise to pay Rs.
500 to 'C' in full settlement of the debt. This is a valid contract.
4. Completed gift:
The rule "No consideration, no contract" does not apply to a completed gift.
Eg: Phil gifts his wife Clair, a car worth ₹10 lakh on her birthday. Although the transfer of property is made
without consideration, however, this will be enforceable as it is gifted voluntarily by the donor to donee as a
gift.

5. Agency [Sec 185]:

No consideration is necessary to create an agency.
Eg: Salman; the principal, appoints Arbaaz; the agent, to sell his property. Even though there is no
consideration when the agency agreement is made, the contract is still binding because the agent is authorized
to act on behalf of the principal, and the principal is bound by the actions of the agent taken on behalf of the
principal.

6. Contribution to charity:
A promise to donate to charity is legally enforceable if the charity, relying on the promise, takes specific
actions and incurs expenses to achieve its goal. The promisee (the charity) can enforce the promise to cover
the expenses incurred, but only up to the amount promised by the donor.
Eg: Aishwarya promises to donate an amount of ₹1 lakh to an organization named 'Being Good Human'. While
relying on the promise of Aishwarya, the organization incurs expenses on manufacturing new shirts for people
in need. Although the promise was made without consideration it will be considered as a valid contract.

7. Remission of Contract:
Eg: Rachel took an interior contract from Ross. Rachel agrees to accept ₹50,000 from Ross in satisfaction of
the debt of ₹1,00,000. Rachel subsequently cannot claim the amount of ₹50,000 which she has rescinded.

PRIVITY OF CONTRACT: STRANGER TO A CONTRACT CANNOT SUE:

Only persons who are parties to a contract can sue and be sued on that contract. It is known as the doctrine of
'privity of contract'

Privity of contract: Privity of contract means relationship subsisting between the parties who have entered
into contractual obligations or subject knowledge of the contract.

Privity of contract is a common law principle that states that only parties to a contract can have rights or
obligations imposed on them. This means that a person who is not a party to a contract cannot enforce its
terms, even if the contract was created to benefit them.

Eg 1: If there is a contract between A and B, C cannot enforce it.

Eg. 2: Dunlop Pneumatic Tyre Co. Ltd v/s Selfridge & Co. Ltd: 'Dunlop & Co', a tyre company, sold certain
tyres to D, a wholesaler and secured an agreement from D not to sell the tyres to other traders below the
Dunlop's price list. A further condition was also imposed that any retailer to whom D re-supplied the tyres
should also promise D not to sell the tyres to the public below Dunlop's price list. D sold the tyres to 'Selfridge
& Co" who agreed not to sell the tyres to the public below the Dunlop's price list. But 'Selfridge & Co' sold
the tyres below the Dunlop's price list. 'Dunlop & Co' sued 'Selfridge & Co' for damages for breach of the
contract. 'Dunlop & Co's action to recover damages from 'Selfridge & Co' failed as 'Dunlop & Co' was a
stranger to contract between D and 'Selfridge & Co'
Under Indian law there are certain exceptions to the rule that a stranger to a contract cannot sue.
Exceptions:

1. A trust or charge: A person in whose favour a charge in some specific immovable property has been created
may enforce it even though he is not a party to the contract.

Eg.: 'Mr. O agrees to transfer certain properties to X, to be held by Mr. X in trust for the benefit of Mr. B. B
can enforce the agreement even though he is not party to it. (Madhav Trading Co. v/s Union of India)

2. Contracts entered into through an agent: The principal can enforce contracts entered into through his
agent. However, the agent must act within the scope of his authority and also in the name of his principal.

3. Marriage settlement, partition or other family arrangements: If a provision is made for the benefit of a
person, he may sue although he is not a party to the agreement.

Eg.: Two brothers, on a partition of joint properties, agreed to invest certain sum of money in favour of their
mother. The court held that she (mother) could claim the same even though she was a stranger or third party
to the contract. (Shuppa Ammal v/s Subramanyam)

4. Assignment of a contract: In the case of assignment of rights under a contract in favour of a third party
either voluntarily or by the operation of law, the assignee can enforce the rights and benefits of the contract.

Eg.: The assignee of an insurance policy or the official receiver of an insolvent person has a right to sue on
the contract; even though he is a stranger to it.

5. Estoppel or Acknowledgement: If a party to a contract had already admitted his liability to a third party
or had already per- formed part of the promise, he shall be estopped from denying his liability to the third
party. Thus, in such cases, the third party can enforce his right arising from the contract.

Eg.: X gives Y Rs. 5,000 again to be given to Z. Y informs Z that he is holding the money for him. Later on,
Y refuses to pay the money. Z is entitled to recover the money from Y (Lily v/s Hays).

CAPACITY TO CONTRACT
The parties who enter into a contract must have the capacity to contract. 'Capacity to contract' means the
competence of the parties to enter into a valid contract. Section 10 lays down that an agreement becomes a
contract if it is entered into between the parties who are competent to contract. Section 11 lays down that:
"Every person is competent to contract:
Who is of the age of majority according to the law to which he is subject;
Who is of sound mind; and
Who is not disqualified from contracting by any law to which he is subject".

Thus, section 11 declares that the following persons are incompetent to contract:
1. Minors,
2. Persons of unsound mind,
3. Persons disqualified by any law to which they are subject.

1. MINOR
Minor is not eligible to enter into a valid contract. An agreement with the minor is void ab initio.

Meaning and Definition:

A minor is a person who has not attained the age of majority.
A minor is a person who has not attained the age of 18 years.

Section 3 of the Indian Majority Act 1875, defines "A minor is a person who has not completed 18 years of
age". However, under the following two circumstances a minor attains majority on the completion of 21 years,
viz:
1. When a guardian has been appointed for a minor under the provisions of the Guardian and Wards Act, 1890.
2. Where the court of wards has assumed the superintendence of the minor's property.

Nature of minor's agreement or law relating to minor's agreements:

According to section 10 of the Indian Contract Act, the party to the contract must be competent.

Section 11 lays down that every person is competent to contract if he is not a minor. Hence it is clear that a
minor is not competent to contract.

Mohiribibi v/s Dharmodas Ghosh: It was held that a minor’s contract was absolutely void. In this case, a
minor had mortgaged house for Rs. 20,000. The money lender had paid the minor Rs. 10,000. The minor
subsequently filed a suit for setting aside the mortgage. The money lender claimed the refund of Rs. 10,000.
It was held that a contract with a minor was absolutely void and hence, the money advanced by the
moneylender to the minor could not be recover under Sections 64 and 65 of the Indian Contract Act.

EFFECTS OF MINOR'S AGREEMENT:

1. Void ab initio: Agreement with a minor is absolutely void and inoperative. It creates no legal rights and
obligations. Thus, minor cannot be held liable for the contracts made by him in the course of business
undertaken by him and cannot be enforce in a Court of Law.

Eg.: Mr. A, a minor mortgaged his house to B and raised a loan of Rs.20,000. Later A sued for the cancellation
of the mortgage on the plea that he was a minor. The court held that the mortgage was absolutely void.

2. No estoppel against minor: The 'principle of estoppel' is a rule of evidence. When a man has, by words
spoken or written, or conduct, induced another to believe that a certain state of things exists, he will not be
allowed to deny the existence of that state of things. "Estoppel arises when you are precluded from denying
the truth of anything which you have represented as a fact although it is not a fact" (Lord Halsbury). The term
estoppel may be defined as prevention of a claim by law. When a minor fraudulently enters into a contract
representing that he is a major but in reality, he is not, later on he can plead his minority. He cannot be estopped
from doing so. Thus, a minor cannot be prevented or estopped from pleading minority as a defence in an action
or agreement.
Loslie v/s Sheill: In this case, S, a minor, by fraudulently misrepresenting himself to be of full age, induced L
to lend him 400 pounds. Afterwards, S refused to repay the loan and therefore, L sued him for the money. It
was held that the contract was void and S was not liable to repay the loan.

3. No liability in contract: A minor's agreement is absolutely void. He is not liable either for breach of contract
or for damages. As far as minor's liability is concerned the minor is not liable to pay even a single rupee.
4. No Doctrine of restitution: It is the act of restoring to the rightful owner, that which has been taken away.
When a person obtains goods by false representation, he can be compelled to restore it to the true or real
owner. This doctrine applies to a minor. It applies not only to property but also to money.

5. No ratification: Ratification means approving or confirmation of an act already been done. An agreement
made by the minor cannot be approved by him on attaining majority. An agreement ab initio void cannot be
made valid by subsequent ratification because a new agreement requires fresh consideration.

Armugam v/s Duraisinga: In this case a minor had borrowed Rs. 5,000 from a moneylender by executing a
promissory note in favour of the moneylender. After attaining majority, he executed another promissory note
in settlement of the first one. The money lender sued him for the recovery of money on the basis of the second
promissory note. It was held that the second promissory note was void for want of consideration and hence,
the suit filed by the money lender was dismissed.

6. Liability for necessaries (Section 68): If a person supplies necessaries to a person incapable of entering
into contract he can claim reimbursement from the property of such incapable persons. The liability of the
minor is not personal. Minor's property is liable only when the goods are reasonably necessary to support his
life.
Therefore, if he owns no property, the supplier will lose the price of necessaries. Loans taken by a minor for
buying necessaries bind him for repayment.

7. Beneficial contracts: A minor can be a beneficiary or a promisee. If a contract is beneficial to a minor, it

can be enforced by law. Minor can become a partner only for the profits, not for the loss as per section 30.

8. Specific performance: There can be no specific performance of the agreements entered into by him, as
they are void ab initio.

9. Minor and insolvency: Minor cannot be adjudged as insolvent because he is incapable of contracting any
debts.

10. Minor as an agent: A minor can be appointed as an agent. He can bind his principal by his acts done in
the course of such an agency. But he cannot be held personally liable for negligence or breach of duty. It may,
however, be noted that the principal will be liable to the third persons for the acts of the minor agent which he
does in the ordinary course of dealings.

11. Minor's parents: The minor's parents or guardians are not liable for contracts made by a minor even if
the contracts are of 'necessaries'. It may, however, be noted that the parents or guardian can be held liable
when the minor child is acting as an agent of his parents or guardians.

12. Minor as shareholder: A minor cannot be a shareholder of company since he is incompetent to contract.
In case a minor has been registered in the register of the company as a member by mistake, the company can
rescind the transaction and remove his name from the register of members. Another point to be noted is that
in case a minor inherits certain shares, the shares may be registered in the name of the lawful guardian of the
minor in the books of the company.

13. Minor and surety: If an adult stands surety for a minor in a contract of guarantee, the adult is liable and
not the minor. Principal debtor may be incompetent (minor), however, surety and creditor must be competent
to enter into a contract. When the principal debtor is a minor, surety liability is primary one.
14. Minor's Liability for Tort: A minor is liable for his tort (i.e. civil wrong), provided the tort is in reality a
breach of contract.
Eg: If a minor hires a horse or a cycle for riding and damages it by overriding or careless riding, he is liable.
However, a minor cannot be made liable for breach of contract.

Jennings v/s. Rundall (1799): Here an infant entered into a contract to hire a mare for riding. He rode the
mare negligently as a result of which she was injured. In an action against the infant, it was held that he was
not liable as the action that arose out of a contract and not in tort. So, one cannot convert a contract into a tort
to enable one to sue an infant.

15. Contract by a minor and an Adult jointly: If a contract has been made by a minor and an adult jointly
with another person, the minor is not liable under it, but it can be enforced against the adult.

16. Minor cannot enter into a contract of partnership: Minor cannot become a partner in a firm. However,
as per section 30 of the Indian Partnership Act, a minor may be admitted to the benefits of an existing firm.
He cannot be a full-fledged partner. He cannot be held liable for debts of the firm.
Thus, there cannot be a partnership consisting of all the minors or one major and all other minors.

Rights and liabilities of a minor in a firm: It may be divided into two categories:
1. Position of a minor before attaining majority:
➢ A minor has a right to receive the agreed share of property and profits of the firm.
➢ A minor has the right to access and inspect the accounts of the firm.
➢ A minor has a right to file a suit for his share of profits or property.

II. Position of a minor after attaining majority:

Within six months after attaining majority, he has to exercise the option of becoming or not becoming a partner.
When he chooses to become a partner his rights and liabilities are:
➢ His rights and liabilities will be similar to those of a full-fledge partner.
➢ He will be personally liable for all the acts of the firm.
➢ His share in the profit remains the same as it was before becoming a partner.

If he does not become a partner after attaining majority:

➢ His rights and liabilities shall continue to be those of minor up the date of public notice.
➢ His share shall not be liable for any act of the firm after the date of public notice.

II. PERSONS OF UNSOUND MIND

What is 'sound mind'?
Section 12 lays down the test of soundness of mind. Accordingly, "a person is said to be of sound mind for the
purpose of making contract, if, at the time when he makes it, he is capable of understanding it and of forming
a rational judgment, as to its effects upon his interests".

A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he
is of unsound mind. A person, who is usually of unsound mind, but occasionally sound mind, may not make
a contract when he is of unsound mind.
An analysis of the above definition shows that soundness of mind of a person depends upon two facts: (i) his
capacity to understand the business concerned, and (ii) his interests. If a person is incapable of both, he is
considered to be of unsound mind:

1. Lunatics: Lunacy is a disease of the brain. A lunatic is a person who is mentally deranged due to some
mental strain or disease. He suffers from intermittent intervals of sanity and insanity. He can enter into a
contract when he is sane.

2. Idiots: An idiot is a person who has lost his mental power permanently. Therefore, he is permanently
incapable of entering into contracts.

3. Drunken or intoxicated persons: Drunkenness produces temporary incapacity, provided the person is so
drunk that he becomes incapable of forming a rational judgment. During such period, he is incompetent to
contract.

III. PERSONS DISQUALIFIED BY ANY OTHER LAWS

The other persons who are disqualified from contracting by any law to which they are subject are as follows:

1. Alien enemies: An alien is a person who is a citizen of a foreign country. An alien living in India can enter
into a contract with citizens of India during peace time and that too, subject to certain restrictions imposed by
the Government of India. But when war breaks out with the country to which he belongs, he becomes an alien
enemy and then he cannot enter into contracts. "An alien friend can contract but an alien enemy cannot
contract".

2. Foreign sovereigns and ambassadors: Under the Indian law, they are competent to contract but they
cannot be sued on such contracts without the prior permission of the Government of India. But at the same
time, they have a right to sue others to enforce the contracts.

3. Convicts: A convict is one who is found guilty and is imprisoned. During the period of imprisonment, he
is incompetent to enter into a contract and to sue upon a contract made before conviction.

4. Married Women: Married women are competent to enter into contracts with respect to their own property.
A married woman can act as an agent of her husband and bind her husband's property for necessaries supplied
to her, if he fails to provide her with the same.
5. Insolvent: An insolvent person is not capable of entering into a contract of selling his property which vests
in the Official Receiver. He also suffers from certain disqualifications viz., he cannot be a magistrate or a
director of a company or a member of a local body.

6. Joint stock companies and corporations: A company or a corporation is an artificial person created by
law. It cannot enter into contracts outside the powers conferred on it by its Memorandum of Association or by
the provisions of a Special Act as the case may be. It cannot also enter into contracts that require natural
existence of a person. Eg: contract to marry.