IPCC Paper 2 Business Laws, Ethics & Communication The Contract Act 1872
Unit 1 Part 4: Consideration
CA. Manish Dafria
Learning Objective
Meaning Of Consideration
Legal Rules About Consideration
Validity of Agreement Without Consideration
Doctrine of “Privity of Contract” and its
exceptions
What Is Consideration?
Consideration
• One of the essential element
contract is consideration.
for a valid
• Subject to certain exceptions, an agreement
which is without consideration is void.
Raja promises, for no consideration, to give to Hari Rs. 1,000. This is a void agreement.
Consideration‐ Meaning [Sec.2(d)]
When, at the desire of the promisor,
has done or abstained from doing, or The promisee or any other person‐
does or abstains from doing, or Such act or abstinence
or promise is called a consideration for the promise. promises to do or to abstain from doing, something, Legal Rules To Consideration
Legal Rules to Consideration
• Consideration may be past, present or future.
• It need not be adequate.
Legal Rules to Consideration
 Move at the desire or request of promisor –
 An act constituting consideration must have been done at the desire
or request
of thefrom
promisor,
else
it isp.a.
notbutaAgood
consideration.
E.g., A borrows
Rs. 20,000/‐
B at a rate
of 10%
fails to
pay the amount. B is now
about
to file a some
suit and
A agrees
to pay
higher rate
of district.
interest.InBconsideration,
agrees for not
a suit.
X constructed
shops
at the now
request
of aCollector
of the
Y filing
a shopkeeper
This
forbearance
a valid consideration.
promised
to pay Rs.is1,00,000
to X. This agreement between X and Y is void for want of consideration.
• It may consist of an Act or Abstinence (means not doing
something)
• It must be something which the promisor is not already
bound to do:
– A promise to do what one is already bound to do, either by
general law or under an existing contract, is not a good
consideration for the new promise, since it adds nothing to
There was a promise to pay to the lawyer an additional sum if the suit was successful.
the pre‐existing legal or contractual obligation.
Held, the promise was void for the want of consideration. The lawyer was under a pre‐
existing contractual obligation to render the best of his services under the original
contract. (Ramachandra Chintaman vs. Kalu Raju)
Legal Rules to Consideration
– Physical impossibility
• Must be real & not
illusionary
A promises to put life into B’s dead wife on the consideration of
Rs.999. A’s promise is physically impossible to perform.
– Legal impossibility
– It must have some value in the eyes of A agrees to pay Rs. 5000 to B who in turns agrees to get a driving
– Uncertain
law.
license to A without a trial drive. This is a legal impossibility.
consideration
– There is no real
A engages B for doing certain work and promises to pay a
consideration “Reasonable
in sum”. There is no recognized method of ascertaining
the “Reasonable Sum”. The promise is unenforceable due to
uncertainty.
following cases ‐:
Validity of Agreement Without Consideration
Validity of Agreement Without Consideration
Contract On Account Of Natural Love And Affection
Compensation For Past Voluntary Services
Promise To Pay Time Barred Debts
Contract Of Agency
Completed Gifts
Contract On Account Of Natural Love And Affection [Sec. 25(1)] Where an agreement is in writing and is registered under the law and
is made on account of natural love and affection between parties
which are near relative to each other, it is enforceable even if there is
no consideration.
Eg: On a birthday party of Abhi, his father Mr. Amit promises to give him Rs.
1,00,000/‐. Mr. Amit puts his promise in writing and gets it registered it. It is a
valid contract.
Agreement is in writing Registered under the law
Made on account of natural love and affection where parties are near relative
Enforceable
Without
Consideration
Completed Gifts
• The rule “No consideration, No contract” does not apply to
completed gifts. [Explanation to Sec. 25(1)]
• In order to attract this exception, there need not be natural
love and affection or nearness of relationship between donor
and donee.
• In this case, the gift must be complete and should not be only
a promise for gift.
Compensation For The Past Voluntary Services
A promise to compensate a person, who has already
voluntarily done something for the promisor, is
enforceable, even though this promise is without
consideration.
E.g. P finds S’s purse and gives it to him. S promises to give P Rs. 100/‐. This is
a valid contract.
Promise To Pay Time Barred Debts
A promise in writing to pay a debt which is barred by
limitation, is valid even though it is
without
consideration.
Contract Of Agency
No consideration necessary for a contract of Agency.
(Sec. 185)
Doctrine of “Privity Of Contract”
Suit By A Third Party To An Agreement
Suit By A Third Party To An Agreement
• As a general rule, a
contract creates rights
and impose obligations
Dunlop Pneumatic Tyre Co. V Selfridge and Co.
only
on those persons
•
D entered into a contract of sale of certain tyres
to P.
This Rule is known as the
who
are
party
to
it.
•
The contract provided that P shall not sell the tyres below the list price. “Doctrine of Privity of
Also, the contract provided that P shall, at time of resale, impose a condition on the retailer that sale by retailer shall not be made below the Contract”
list price.
• A A who is indebted to B, sells his property to C. C promises to pay off the debt third person can not
•to B. When C fails to pay; B has no right to sue C, because he is a stranger to P sold certain tyres to S. S resold certain tyres below the list price.
enforce
contract. performance of
the
contract.
•
In a suit instituted by D against S, the court held that such suit was not maintainable since there was no Privity of contract between S and D.
Privity of Contract‐ Exceptions
A Trust
Marriage, Partition or Other Family Settlement
Acknowledgement or Estoppel
Assignment of Contract
Conditions Running With Land
Privity of Contract‐
Exceptions
A person in whose favor.. ..a trust or other interest in some specific immovable property has been created.. ..can enforce it even though he is not a party to the contract.
Privity of Contract‐
Exceptions
When an arrangement is made in connection with marriage, partition or other family arrangements and ..
..a provision is made for the benefit of a person,.. ..he/she may sue although he/she is not a party to the agreement. Privity of Contract‐
Exceptions
• The assignee of rights and
benefits under a contract
not involving personal skill
can enforce the contract.
Privity of Contract‐
Exceptions
Where the promisor... ....by his conduct, acknowledges or otherwise constitutes himself as an agent of the third party,... ...a binding obligation is thereby created.
Privity of Contract‐
Exceptions
In cases of transfer of immovable property, the purchaser of land, with notice that the owner of the land is bound by certain conditions
created by an agreement affecting the land, shall be bound by them
even if he was not a party to the original agreements which contained the conditions. Summary
An agreement without consideration is void.
The consideration may be past, present or future. Summary
The consideration need not be adequate.
It may be in the form of doing or not doing something. It should flow on the request of promisor.
It should not be something which the party is already bound to do. It should be real and not uncertain or illusionary. Summary
Act provides for certain contracts which are treated as valid even if they are without consideration. Subject to certain exceptions, a person who is not a party to a contract can not claim its enforcement. Thank You