“An Agreement without consideration is void.” Explain this rule and state exceptions if any.
Indian Contract Act 1872 in section 2(e) says that every promise and every set of promises that form consideration for each other is an agreement. Thus, it is clear that the formation of consideration for a promise or promises is a key ground on which a promise becomes an agreement. There cannot be an agreement if there is no consideration. Section 25 of the act says the same thing in precise terms and also gives three exceptions when an agreement without consideration is a valid contract:
Section 25: An agreement without consideration is void unless
- it is in writing and registered and the promise has been made due to natural love and affection between the parties standing in near relation to each other.
- it is a promise to compensate, wholely or in part, a person who has voluntarily done something for the promisor or something that the promisor was legally bound to do.
- it is a promise to pay for a time-barred debt.
Natural Love and Affection
Rajlukhy Debi vs Bhootnath Mukherji – Court found no evidence of love.
Bhiwa vs Shivram – A person gave half of his property to his brother in order to be reconciled with him. Court held that it was due to natural love and affection.
Past and Executed Consideration
The definition in 2(d) says “…has done or abstained from doing…”. Thus, an act already done can be a valid consideration. However, a past consideration and an executed consideration must be distinguished. For example, if A saves B from drowning and if B promises to pay A 50/-, under English law, B is not bound by the promise because there was no promise when the act was done. The act of saving is past consideration. On the other hand, if A promises to pay 50/- to whoever finds his dog and if B finds and produces the dog, A is bound to pay because the promise existed before the act. This is called executed consideration.
However, in Indian law, Section 25 (2) explicitly says that a promise to compensate a person who has voluntarily done something for the promisor is binding. Thus, if B saves A from drowning and if A promises to pay B, then A is bound by the promise.
Further, in the case of past service on request without any promise to pay, it is construed that there is an implied promise to pay only the amount of payment is not fixed. Thus, a promise to pay for a past service upon request is a valid contract.
In the case of Sri Sandhi Ganpatji vs Abraham, it was held that services rendered to a minor, which were continued after his majority upon his request are a valid consideration for a promise to pay.
Value of the consideration
It is important that the consideration has some value in the eyes of law. If A promises to B to give his Rolls Royce if B brings it from the garage, the promise is not binding because the consideration has no value in the eyes of law. However, if A sells his horse worth 1000/- to B for 10/-, it is a valid consideration even if it is not adequately provided that the consent was free. Explanation 2 of section 25 says that inadequate consideration may be considered to be against free consent.
Haigh vs Brooks – A promise to pay for returning a document, which later on was found to be worthless, was held to be valid because the document was considered of some value at the time of the contract.
However, consideration need not be adequate.
De La Bere vs Pearson – A person lost money due to financial advice given in a newspaper. The newspaper was held liable because the consideration of buying the newspaper was of some value even if not adequate.
Debi Radha Ranee vs Ram Dass – Forbearance to sue is a valid consideration.
Performance of existing duties
In general performance of something that one was already required to do is not valid consideration.
Performance of Legal Obligation
For example, a policeman is under legal obligation, and the performance of his duties cannot be a valid consideration.
Performance of contractual Obligations
In the case of Ramchandra Chintaman vs Kalu Raju 1877, a lawyer was promised to get 100/- more if he wins the case. The promise was held not binding because the lawyer was already under a contractual duty to do his best in the case.
However, a performance of a pre-existing contract with a third party was held a valid consideration. In the case of Shadwell vs Shadwell, an uncle’s promise to pay his nephew if he married some girl was held valid. This was held by MP HC in the case of Gopal Co. vs Hazarilal Co AIR 1963.
Promise to pay less than the amount due.
Section 63 of the Indian Contract Act says that payment of a smaller sum in satisfaction of a larger dept is valid if this has been done under an agreement between the creditors and the debtors. It further gives an illustration that if A owes B 5000 rs and if B accepts 2000Rs as a satisfaction of the whole amount at the time and place where 5000 rs were due, the payment of 2000 rs discharges A of his debt.
Q. What are the important components of a consideration?
Section 2(d) defines consideration as follows:
When, at the desire of the promisor, the promisee or any other person, has done or has abstained from doing, does or abstains from doing, or promises to or abstain from doing, such an act or abstinence becomes a consideration for the promise.
At the desire of the promisor
To be a valid consideration, the act must be at the desire of the promisor and not of anybody else. In the case of Durga Prasad vs Baldeo 1880, the plaintiff had built the shops on the desire of the collector and not of the defendants. Therefore the promise by the defendants to pay a percentage of sales was held not binding.
In the case of Kedar Nath vs Gauri Mohd. 1886, the defendant had pledged 100/- for the construction of the town hall. The plaintiff started work on that pledge and so the defendant was held liable to pay.
Provider of the consideration (Privity)
British law has two principles governing the consideration.
1. The consideration must move from the promisee to the promisor.
2. Only the person who is a party to the contract can sue for the performance.
Privity of Consideration
In India, the first rule is not followed at all. In fact, section 2(d) specifically says that consideration can be provided by the promisee or any other person. This was held in the case of Chinnaya vs Ramaya 1882.
Privity of Contract
In the case of Tweddle vs Atkinson 1882, it was held by the privy council that the person who is not a party in the contract cannot sue. SC in the case of MC Chacko vs State Bank of Travancore 1969 has adopted the same principle and held that since the bank was not a party to the contract between the father and the son, it cannot enforce the contract.
However, based on the Privy Council’s observation of the culture in terms of marriage and family relationships, in the case of Kwaja Mohd. Khan vs Hussaini Begum 1910, some exceptions to this rule have been accepted.
1. Trust or Charge
When an agreement forms a trust for the benefit of a third person, the third person can enforce the agreement. This was held in the case of Kwaja Mohd. Khan vs Hussaini Begum 1910 as well as in Rana Uma Nath Bakhs Singh vs Jung Bahadur AIR 1938.
2. Marriage, partition, and other family matters
In the case of Daropti vs Jaspat Rai 1905, it was held that the wife was able to enforce the husband to fulfill a promise that he gave to her father about providing her a separate residence.
3. Acknowledgement or Estoppel
Where by the terms of a contract a party is to make payments to a third party and the party acknowledges this to the third party, a binding obligation is created towards him. This was held in the case of Devraja Urs vs Ram Krishnaiya AIR 1952.
Keywords: Agreement without consideration in India, Concept of Agreement without consideration, Definition of An agreement under the Indian Contract Act 1872
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