Consideration and Legality of Object

Chapter Objectives

• Consideration Defined
• Examples of Consideration
• Rules Governing Valid Consideration
• Stranger to a Contract and Stranger to Consideration
• Validity of Agreements without Consideration
• Legality of Object
 Consideration Defined

Consideration simply means that both the contracting parties are

bound to give something (of value) to each other.
Legal Definition:
‘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 abstain from doing, something, such an act or
abstinence or promise is called a consideration for the promise.’
[Section 2 (d)]
Thus, the term ‘consideration’ is used in the sense of quid pro quo,
meaning thereby something in return. It may involve a positive act
(i.e., doing something) or an abstinence (i.e., something given up).
 Examples on Consideration

1. A offers to sell his plasma TV set to B for Rs 50,000. B accepts the offer.
Here, B’s promise to pay Rs 50,000 is the consideration for A’s promise to
sell the TV and A’s promise to sell the TV is the consideration for B’s
promise to pay Rs 50,000.

2. A promises to maintain B’s child, and B promises to pay A Rs 1,000

annually for the purpose. Here, the promise of each party is the
consideration for the promise of the other party.

3. A promises Y, his debtor, not to file a recovery suit against him on B’s
agreeing to repay the amount of loan along with a compound interest @
12% p.a. within a year. A’s abstinence is the consideration for Y based on
B’s promise to pay.
 Rules Governing Consideration

1. Simple Contracts must be supported by Consideration

In the absence of a valid consideration passing between the parties the general rule is that
the agreement they have made will be of no legal effect. The purpose of the
requirement of consideration is to put some legal limits on the enforceability of
agreements even when they are intended to be legally binding otherwise and are not
vitiated by factors such as, mistake, misrepresentation, and illegality etc. Consideration
acts as an aid in determining whether promises are worth enforcing. The existence of a
consideration implies that the parties have devoted some reflection to the matter, and
seriously desire their promises to have legal consequences.
2. Consideration Must Move at the Desire of the Promisor
Whatever is done must be done at the desire or request of the promisor and not
voluntarily or at the desire of a third party. For instance, if A rushes to the rescue of B
whose house has been trapped in fire, it is not a consideration but a voluntary act on the
part of A. He cannot ask B to compensate him for the services rendered by him as B had
never requested him to help. However, if A goes to B’s rescue at the latter’s express
request, this will be regarded as consideration as A did not wish to do the act voluntarily.
•
 Consideration At Desire of Third Person Not Valid

• In Durga Prasad vs Baldeo, ‘D’ the plaintiff had constructed, at his

own expense, a market at the instance of the Collector of the District.
The occupants of the shops i.e., shopkeepers in the market promised
to pay the plaintiff a commission on the articles sold through their
shops. Subsequently the shopkeepers refused to pay any commission.
‘D’ sued the shopkeepers against their alleged default. It was held
that there was no consideration because the plaintiff (the promisee)
had constructed market not at the desire or request of the
defendants (the promisors), but at the desire of a third person (i.e.,
the Collector) to oblige him and thus, the contract between D and the
shopkeepers was void.
 Rules Governing Consideration

3. Consideration May Move From the Promisee or Any Other Person

• As long as there is a consideration for the promise, it is immaterial
who has furnished it. This is sometimes referred to as Doctrine of
Constructive Consideration. It may proceed from the promisee, or if
the promisor has no objection, from any other person who is not a
party to the contract. But the English Law on this point is different. In
the United Kingdom a person to whom a promise was made can
enforce it only if he himself provided the consideration for it. He
cannot sue of the consideration for the promise moved from a third
party.
 Rules Governing Consideration

• Consideration must have some Value

• Another notable feature of valid consideration is the idea of
reciprocity. ‘Something of value’ must be given for a promise in order
to make it enforceable as a contract. An informal gratuitous promise
therefore does not amount to a contract. A person or body to whom
a promise of gift is made from purely charitable or sentimental
motive gives nothing for the promise. Justice Patterson observed in
Thomas vs. Thomas - Consideration means something which is of
some value in the eyes of the law. It may be some benefit to the
plaintiff or some detriment to the defendant.
 Rules Governing Consideration

Benefit and Detriment

Something of value’ must be given, and accordingly stated that consideration
is either some detriment to the promisee (in that he may give value) or
some benefit to the promisor (in that he may receive value). Thus payment
by a buyer is consideration for the seller’s promise to deliver and can be
described as a detriment to the buyer or as a benefit to the seller.
Conversely, delivery by a seller is consideration for the buyer’s promise to
pay and can be described either as a detriment to the seller or as a benefit
to the buyer. In a suit on a contract, the plaintiff must show that he give or
promised to give some advantage to the defendant in return for his
promise.
A bare promise (nudum pactum) is not binding. For example if A promises to
gift a diamond ring to B, his fiancée, but subsequently changes his mind, B
cannot sue him for breach of promise. B cannot show that she gave some
advantage to A in return for the promise, which was bare.
 Rules Governing Consideration

Past, Present or Future Consideration

Depending upon the circumstances and facts of each case in India
consideration may be in the past, present or future.
• Past Consideration
In Section 2 (d), the expression, ‘has done or abstained from doing’ is
recognition of the doctrine of past consideration. Past consideration
means a past act or forbearance which took place and is complete
(wholly executed) before the agreement is made. Past consideration
may consist of services rendered at request but without any promise
at the time or it may consist of voluntary services.
 Rules Governing Consideration

Consideration Need not be Adequate But It Must Be Sufficient

Sufficiency of consideration is not the same thing as adequacy of
consideration, at least in law. The word adequate in this context refers
to fairly equal to the promise given. On the contrary, sufficiency is
used here as a legal term, and it means that what is promised must
be real, tangible and have some actual value. The courts do not exist
to repair bad bargains (Haigh vs Brooks). Adequacy will be decided by
the parties themselves.
 Rules Governing Consideration

Present or Executed Consideration

The expression in Section 2 (d) ‘does or abstains from doing’ refers to present or executed
consideration. It is an act or forbearance, which moves simultaneously with the promise. In other
words a consideration, which consists in the performance of an act or forbearance, is said to be
executed at present.
For instance A pays Rs 1000 to B, and B promises to deliver a certain quantity of wheat the following
day. In this case, A pays the amount but B has merely made a promise. Therefore, the
consideration paid by A is executed, whereas the consideration promised by B is executory. If A
pays the price and B delivers the goods at the same time, consideration is said to be executed by
both the parties

Future or Executory Consideration

The expression ‘promises to do or to abstain from doing’ in Section 2 (d) refer to future. Here the
bargain consists of mutual promises. An example is an agreement in which the seller promises to
deliver goods next week, and the buyer agrees to pay for them on delivery. However,
consideration on part of one party may be executed and in respect of the other executory.
Consider the following illustration in this behalf.
 Rules Governing Consideration

Consideration must be Legal

Consideration may not be adequate but must invariably be legal i.e., it
must not involve an illegal act. For example, promising to pay money
to a witness to turn hostile. An illegal consideration makes the whole
contract invalid. It should be noted that attempting to enter into an
illegal contract might itself give rise to criminal liability.
Moreover, consideration should not be physically impossible or illusory.
For example, promise to double the money by magic or to make a
dead man alive, are impossible acts and therefore such promises
constitute no consideration. Similarly, a son’s promise to ‘stop being a
nuisance’, or an agreement to ‘perform an existing obligation made
with the promisor being illusory with no considerations.
 Stranger to a Contract and Stranger to Consideration

A stranger to a contract is one who is not a party to the contract. The rule that
consideration ‘may move from the promisee or any other person’ implies that the
consideration is permitted to be supplied by a third person (i.e., stranger) as well,
thereby need not necessarily be supplied by the promisee himself. In other
words, as long as there is a consideration in exchange of a promise, it is
immaterial who has furnished it. Thus, a stranger to the consideration may
maintain a suit. But the English Law on this point is different. Nonetheless, a
stranger to a contract cannot sue upon a contract both under the British Law as
well as the Indian Law. From this arises the doctrine of privity of contract,
discussed below.
Privity of Contract
The doctrine of Privity implies that, in general, a person who is not privy to a
contract, that is a third party, can neither sue nor be sued on the contract. The
rule prevents the burden of a contract being imposed on a third party. Therefore,
a stranger to the consideration must be distinguished from a stranger to a
contract.
 Examples of Strangers to Contracts

1. A is indebted to B. A sells his property to C who undertakes to discharge

his debt vis-à-vis B. In case C fails to keep his promise, B has no right to sue
C because of privity of contract between B and C. C is a stranger to the
contract (between A and B) the example is based on Jamna Das vs Ram
Autar.

2. In the famous English case of Tweedle vs Atkinson, A promised B to pay a

certain amount to B’s son C on C’s marriage to A’s daughter, as the young
man was to take up the new responsibilities of marital life. After the
demise of both the contracting parties, ‘C’ sued the executors of A (his
father-in-law) upon the agreement between A and his father. It was held
that ‘C’ could not maintain the suit against the defendant being stranger to
the contract.
 Strangers to Contracts
• Example 1 – In Sindha Vs Abraham, the plaintiff rendered services to
A, the defendant, at his desire when he was a minor. These services
were continued even after A attained the age of majority at his
request. A subsequently promised to pay an annuity to the plaintiff.
The Bombay High Court held that services rendered to a minor at
his request and which were continued after attaining majority at the
same request were good consideration for his promise to pay.
 Exceptions to the Doctorine of Privity of Contract

The rule that a stranger to a contract cannot sue on the contract is,
however, subject to certain statutory exceptions both under the
Indian Law and the English Law. Thus, a person who is not a party to a
contract can sue upon it in the following cases.
• Trust or Charge
• Assignment
• Marriage settlements
• Family settlements
• Agency
• Acknowledgement of Liability
 Exceptions to the Doctorine of Privity of Contract

Trust or Charge
In the case of trust or charge, the beneficiary can enforce an agreement,
even though s/he was not a party to it. For example, in Khwaja
Muhammad vs Hussaini Begum, K the father-in-law of H executed an
agreement with the H’s father to pay Rs. 500 a month in perpetuity to the
bride (H) in the name of Kharchi-I-Pandan (betel-leaf expenses), equivalent
of pin money, in consideration of her marriage to his son. K also put in H’s
charge certain properties with payment, with power to the beneficiary (H)
to enforce it. However, H separated from her subsequently following a
quarrel. This resulted in stoppage of allowance by H’s father-in-law, K. H,
the plaintiff brought a suit against her father-in-law for the recovery of the
arrears of the said annuity. The Privy Council held that although H was not
party to the agreement, yet, ‘she was entitled, in equity, to enforce her
claim.’
 Exceptions to Doctrine of Privity of Contract

Assignment In the case of assignment of a contract, when the benefit under

a contract has been assigned, the assignee can sue upon the contract for
the enforcement of his rights, title and interest. [Kishan Lal Sadhu vs
Pramila Bala Dasi]. However, a mere nominee cannot sue on the policy as
the nominee is not an assignee.
Marriage Settlement In the case of certain marriage contracts,
provision of marriage expenses to female members of Hindu Undivided
Family entitle a female member to sue for such expenses on a partition of
the family [Sunder Raja vs. Lakshmi].
Family Settlements In the case of a family settlement, if the terms of the
settlement are reduced to writing, the members of the family, who
originally had not been parties to the settlement, may enforce the
agreement [Shuppu vs Subramanium].
 Exceptions to the Doctrine of Privity of Contract

Agency Agency is a major common law exception to the doctrine of

privity. A contract of agency arises when one person (the principal)
appoints an agent to make a contract on his or her behalf with third
parties. As a general rule, the principal, even if undisclosed may sue the
third party .
Acknowledgement of Liability In case someone acknowledges liability to a
third person, a binding obligation is thereby incurred towards the former.
This exception covers cases where the promisor by his conduct,
acknowledgement or otherwise, constitutes himself as an agent of the
third party. For example, A receives money from B for paying it to C, the
creditor of B. A subsequently makes part payment to C informing him that
this was out of the money held for him. But A, afterwards refuses to remit
the balance. C will be entitled to recover the same from A [based on
Devaraja vs Ram Krishniah].
 Validity of Agreements Without Consideration

The Indian Contract Act contains certain exceptions, which make a promise without consideration
valid and binding, stated as under.
Natural Love and Affection
• An agreement without consideration is valid if it is
• made in writing,
• registered,
• made out of natural love and affection, and
• between the parties standing in near relation to each other [Section 25 (1)]
• In Rangaswamy case an elder brother, on account of natural love and affection, promised to
pay off the debts of his younger brother. The agreement was put into writing and was registered.
The court held the agreement as valid and binding.
Promise to Compensate for Past Voluntary Services
As per Section 25 (2) a promise to compensate, wholly or in part, a person who has already done
something voluntarily for the promisor, or something, which the promisor was legally compellable
to do, is enforceable
 Validity of Agreements Without Consideration

Illustrations: Compensation for Past Voluntary Services

Example 1
A finds B’s purse and, gives it to him. B promises to give A Rs 50. This is a
valid contract.
Example 2
A supports B’s infant son. B promises to pay A’s expenses in doing so. This is
a valid contract.

Promise to Pay Time-barred Debt

A promise made in writing and signed by the person to be charged
therewith, or by his agent to pay a debt (wholly or in part) barred by the
law of limitation is valid without consideration [S 25 (3)].
 Validity of Agreements Without Consideration

Completed Gift In case of completed gifts (i.e., gifts actually made), the
rule no consideration no contract does not apply. Here nearness of
relation between the parties is immaterial and even if it, there may
not be any natural love and affection between them.
Agency As per Section 185 of the Indian Contract Act, no consideration
is required to create an agency.
Guarantee In a contract of guarantee there is no consideration
between the creditor and the surety. [Section 127]
 Legality of Object/ What is a Lawful Object
• Every agreement of which the object or consideration is unlawful is
void. Thus, an unlawful object renders an agreement void ab initio.
The consideration or object of an agreement is lawful unless it
• is forbidden by law, or
• is of such a nature that, if permitted, it would defeat the provisions of
any law; or is fraudulent; or
• involves or implies, injury to the person or property of another; or
• is regarded as immoral by a court, or opposed to public policy
In each of these cases, the consideration or object of an agreement is
said to be unlawful. Every agreement of which the object or
consideration is unlawful is void.
 Examples of Lawful Object

1. A, B, and C enter into an agreement for the division of gains

acquired, or to be acquired, by them by fraud. The agreement is void,
as its object is unlawful
2. A, being an agent for a land proprietor, agrees for money, without
the knowledge of his principal, to obtain for B a lease of land
belonging to his principal. The agreement between A and B is void, as
it implies a fraud by concealment, by A, on his principal.
3. A agrees to live with B as a concubine. The agreement is void,
because it is immoral, though the act may not be punishable under
the Indian Penal Code.
Circumstances Under Which An Object or Consideration is Deemed to be
Unlawful

• Forbidden by law
Where the object or the consideration of an agreement is the performance of an
act forbidden by law, the agreement is void. For example, the Excise Act prohibits
the production or sale of excisable articles except upon a license from the
government. For this very reason the sale of liquor without license is prohibited
(under the Excise Act) and therefore illegal.

• Defeat the Purpose of Provisions of any Law

Sometimes the object of, or the consideration for, an agreement is of such a
nature that, though not directly forbidden by law, it would, if permitted, defeat
the purpose of the provisions of the law. An agreement having such an object or
consideration is void. For instance, A’s estate is sold for arrears of revenue under
the provisions of an Act of the Legislature, by which the defaulter is prohibited
from purchasing the estate. B, upon an understanding with A, becomes the
purchaser, and agrees to convey the estate to A upon receiving from him the
price, which B has paid. The agreement is void.
 Circumstances Under Which An Object or Consideration is Deemed to be Unlawful

• Fraudulent
An agreement, the object of which is to defraud others is void. Where the parties
agree to practice a fraud on a third person, not a party to the contract, their
agreement is unlawful and void. To render an agreement unlawful and void on
the basis of fraudulent object or consideration, the fraud, must, however, be
established beyond reasonable doubt and cannot be based on mere suspicion
and conjecture.
• Injurious to person or property
If the object of an agreement involves or implies injury to the person or property
of another, the agreement is unlawful and void. For example, in Ram Saroop V.
Bansi case, A person borrowed hundred rupees and in consideration executed a
bond in favour of the lender, also the plaintiff in this case, promising to work for
him for two years failing which agreed to pay a very exorbitant rate of interest
and the principal amount at once. It was held that the contract was void since the
promise contained in the bond was tantamount to slavery on part of the
defendant, which is both injurious to a person as well as illegal.
 Circumstances Under Which An Object or Consideration is Deemed to be Unlawful

• Immoral If the object or consideration of an agreement is opposed to morality, it is void. The following
example would help understand the point better.
A, a landlord, let his house on rent to B, to a person , knowing that it would be used for immoral trafficking.
The landlord cannot recover the rent. Here, the object being immoral, the agreement to pay rent is void.

Agreements Opposed To Public Policy The term public policy in a wider sense means restriction of
freedom of persons from doing something in the larger interest or for the good of the community. An
agreement is void if the law regards it as opposed to public policy.

In law, the doctrine of public policy covers many heads such as the follows.
 Trading with an alien enemy
 Interference with administration of justice
 Marriage brokerage agreements
 Trafficking in public offices
 Unfair or unreasonable dealings
 Effect of Partial Illegality

If any part of a single consideration for one or more objects, or any one, or any part of any
one of several considerations for a single object is unlawful, the agreement is void.
[S 24]
Example 1. A promises to superintend on behalf of B a legal manufacture of indigo, and an
illegal traffic in other articles. B promises to pay A a salary of Rs 10,000 rupees per
annum. The agreement is void, as the object of A’s promise, and the consideration for B’s
promise, is in part unlawful.

Example 2 . A acquired a license to sell opium and marijuana with the restriction that he
would not take any partner in his ganja business without permission from the collector.
He, however, admitted B into the whole business on receiving from him a fixed sum of
money as his share of capital, without seeking the collector’s permission. Later on due to
some disagreement between the two, B sought a dissolution and refund of his capital. It
was held that the contract as to partnership was void and B’s claim was dismissed. The
court in its verdict observed, “it is impossible to separate the contract or to say how
much capital was advanced for the opium and how much for the marijuana.” [Gopal Rao
vs Kalllappa]
 What the Law Says on Partially Legal Agreements
• Example 1 – A promises to superintend on behalf of B, a legal manufacture of
indigo, and an illegal trafficker in other articles. B promises to pay A a salary of
₹10,000 rupees per month. The agreement is void, as the object of A’s promise ,
and the consideration for B’s promise, is in part unlawful [illustration appended
to Section24)
• Example -2 – A acquired a licence to sell opium and marijuana with the
restriction that he would not take any partner in his ganja business without
permission from the collector. He, however, admitted B into the whole business
on receiving from his a fixed sum of money as his share of capital, without
seeking the collector’s permission. Later on because of some disagreement
between the two, B sought a dissolution and refund of his capital.
It was held that the contract as to partnership was void and B’s claim was
dismissed. The court in its verdict observed, ‘it is impossible to separate the
contract of to say how much capital was advanced for the opium and how much
for the marijuana’ [Gopal Rao vs Kalllappa]
• Qu.1. State whether the following contract can be enforced.
“Where an orphanage wishes to enforce a promise made by a
philanthropist to donate a specified sum”.
 Legal requirements regarding consideration
• Question 2
Mr. Singh, an old man, by a registered deed of gift, granted certain
landed property to A, his daughter. By the terms of the deed, it was
stipulated that an annuity of ₹2,000 should be paid every year to B,
who was the brother of Mr. Singh. On the same day A made a
promise to B and executed in his favour an agreement to give effect
to the stipulation. A failed to pay the stipulated sum. In an action
against her by B, she contended that since B had not furnished any
consideration, he has no right of action.
Examining the provisions of Indian Contract Act, 1872, decide,
whether the contention of A is valid?
 Suit by a Third Party
• Question 3
X transferred his house to his daughter M by way gift. The gift deed,
executed by X, contained a direction that M shall pay a sum of ₹ 5,000 per
month to N (the sister of the executor). Consequently M executed an
instrument in favour of N agreeing to pay the said sum. Afterwards, M
refused to pay the sum to N saying that she is not liable to N because no
consideration had moved from her. Decide with resons under the provisions
of the Indian contract Act, 1872 whether M is liable to pay the said sum to N.
• Question 4
State whether the following contract can be enforced.
Where there is a family settlement in writing and a family member who is
not a party to the settlement wishes to enforce his claim.
Validity of an agreement without consideration
• Question 5
State whether the following contract can be enforced.
“An agreement to create an agency, in which consideration is absent.”
 Unlawful consideration
• Question 6
Mr. Seth an industrialist has been fighting a long drawn litigation with
Mr. Raman another industrialist. To support his legal campaign Mr. Seth
enlists the services of Mr. X a legal expert stating that an amount of
₹ 5 lakhs would be paid, if Mr. X does not take up the brief of Mr.
Raman. Mr. X agrees, but at the end of the litigation Mr. Seth refuses to
pay. Decide whether Mr. X can recover the amount promised by Mr.
Seth under the provisions of the Indian Contract Act, 1872.
• Question 7
‘X’ agreed to become an assistant for 5 years to ‘Y’ who was a Doctor
practicing at Ludhiana. It was also agreed that during the term of
agreement ‘X’ will not practice on his own account in Ludhiana. At the
end of one year, ‘X’ left the assistantship of ‘Y’ and began to practice on
his own account. Referring to the provisions of the Indian Contract Act,
1872, decide whether ‘X’ could be restrained from doing so?
 Caselets
• A promises in writing to give B ₹500 for no consideration. Is a A liable
to pay
• A owes B ₹5000 but the Limitation Act bars the debt. A orally
promises to pay the debt. Can B recover the money from A
• X contracts with Y to give his minor son in adoption to Y and takes
₹50,000 towards the consideration for the promise. X later on refuses
to fulfil the contract. Can Y be successful if he tries to enforce the
contract or brings an action for damages against X
 Caselets
• X promises to obtain for Y an employment in the public service and Y
promises to pay X ₹50,000. Decide the validity of the agreement.
• B agrees to illicit cohabitation with A. A agrees to pay ₹5000 per
month in consideration of her services. Can B lawfully recover the
promised amount from A, if the latter refuses to pay her
• A promises to pay ₹5000 per month to B, a married woman, for extra-
marital cohabitation but later refuses to pay. Can B lawfully recover
the amount?