Business law 1b

Consideration

• It is one of the most essential elements of a contract

• Subject to certain exceptions a contract without consideration is nudum pactum and void

• It is a technical term used in the sense of quid pro quo( something in return)

• When a party promises to do something he must get something in return

• Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable

Contd.

• A promise made for nothing has no force in law.

• The breach of a gratuitous promise cannot be redressed by legal remedies, it is only when a promise is made in return of something from the promisee that such promise can be enforced by law against the promisor

Definition and components• Section 2d of the Indian contract Act defines consideration as follows:

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 promise to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

• An analysis reveals following components:

an act or abstinence which forms the consideration for promise must be done at the desire of promisor.

It must be done by the promisee or any other person. It may have been already executed or is in the process of being done

or may still be executory It must something to which the law attaches value

Contd.

• Example : A agrees to sell his house to B for a price of Rs. 10,000. Here B’s promise to pay the money is the consideration for A’s promise to sell the house and A’s promise to sell the house is the consideration for B’s promise to pay money

• Example Abdul Aziz Vs Masum Ali :Secretary of mosque committee filed a suit to enforce a promise which the promisor had made to subscribe Rs. 500 to re-bulding the mosque.

Essential Elements of Valid Consideration

1. Consideration must move at the desire of the PromisorCosnideration must at the desire of the promisor in order to be legal, thus acts done or service renederd voluntarily or at the desire of third party will not amount amount to valid consideration so as to support contract

Example : A sees B’s house on fire and extinguished it. He cannot demand payment for his services.

D had built at his own expense, a market at the request of the collector of the district. The shopkeepers in the market promised to pay D commission on the articles by them in the market. When D sued the shopkeepers for the commission it was held that the promise to pay lacked consideration. (Durga Prasad Vs. Baldeo)

It is not essential that the Consideration must confer some benefit on the promisor. Example : Guarantee

Contd.

2. Consideration may move from the promisee or any other person : Consideration need not move from the promisee alone but may proceed from a third person. Thus as long as there is consideration for a promise it is immaterial who has furnished it. This means that even a stranger to a contract may sue on a contract provided he is a party to the contract.

Example : Chinayya Vs Ramayya

Doctrine of privity of Contract

• A stranger to a contract cannot sue: A person may be stranger to the contract but he should not be a stranger to the contract because “privity of contract” is essential for enforcing any of the rights arising out of the contract.A stranger to a contract cannot sue only a party to a contract can sue.

Example : A mortgages his property to B, with a promise that he would pay his debt to C. C cannot file a suit against B to enforce his promise.

contd.• Exceptions

1. Where an express or implied trust is created: In case of trust the beneficiary can sue in his own right to enforce his rights under the trust. Example A transfers his properties to B to be held by B in trust for benefit of M. M can enforce the agreement.

Example : An addresse of an article is entitled to sue the post office.

2. Family Settlement : when settlements are made in a partition or family arrangement for maintenance or marriage expense of female members such memebers though not party can sue:

Example : Father leaves a will in favour of daughter with a condition of maintaining of maintaining her mother, mother can sue for full filment of promise.

Contd.

3. When the defendant constitutes himself as agent of third party. Thus if A receives some money from B to be paid over to C and he admits of this to C then C can recover this amount from A who shall be regarded as agent Ex. (Surjan Vs Nanat)

4. In case of agency : Where a contract is entered into by the agent the principal can sue on it.

5. In case of assignment of rights under a contract :in favour of a third party either voluntarily or by operation of law, the assignee can enforce the benefits of the contract. Ex. The official assignee in case of insolvency.

Contd.3. Consideration may be present past, present or future: The word has done,

abstained from doing shows that consideration can be present, past or future.

It may be an act of abstinenece : Ex An agreement bw B and where B failing to pay the debt amount on due date to A; promises to raise the interest from 9 to 12 % in consideration of A not promising not to file a suit against him.

It may be past : Ex. Tutor getting salary at the end of month.

A consideration which moves with the promise is called present consideration. A sells and delivers book to B upon B ‘s promise to pay at a future date. i.e at the time of agreement consideration is executed from one end and executory from other.

When consideration on both sides is to move at a future date also called executory consideration. Ex. X promises to sell and deliver 10 bags of wheat to Y and Y promises to pay at the time of delivery.

Executed consideration is a liability and executory it is outstanding on both sides.

Contd.

4. Consideration must be of something of value : Something which law attaches value, it need not be adequate, it leaves people to make their own bargains

Consideration must be real , the following are not consiedred valid consideration : Physically impossible, legally impossible,uncertain conisderationillusory consideration – not something you are already bound by (Colin vs Godefroy)

Exceptions to rule of Consideration

1. Agreements made out of natural love and affection: An agreement without consideration is enforceable if it is 1)expressed in writing 2)registered under law 3) made on account of natural love 4) between parties standing near in relationship These are four essential requirements that must be compiled with to enforce an agreement without consideration.

Example A out of natural love promises to give B Rs. 1000 and registers it.

A registered document where elder brother on account of natural love promises to pay debts of younger brother.

Note A husband referring to qualrrels and disagreement agreed to pay his wife for separate residence and maintenance, the agreement lacked consioderation as it was not made out of natural love (Rajlakhidevi vs Bhootnath)

Contd.2. Agreement to compensate for past voluntary service: A promise made without

consideration is also valid, if it is a promise to compensate wholly or in part for past voluntary service

Ex A rescued B from drowning. B promises to pay Rs. 1000 to A.

3. Agreement to pay time barred debt : Where an agreement is ,made in writing and registered and signed by a debtor or by his authorised agent to pay a time barred barred by law of limitation, the agreement is valid eventhough it is not supported by consideration

Example : A time barred debt.

4. Completed gift : A gift (which is not an agreement ) does not require consideration, there need not be natural love.

5. Contract of Agency : Contract of agency does not require consideration

6. Remission by the promisee of performance of the promise: For compromising a due debt agreeing to accept less than what is due no consideration is necessary.

7. Consideration to charity: A promise to charity though gratutious would be enforceable if on faith of the promised subscription the promisee takes definite steps in furtherance of the object and undertakes a liability to the extent of liability incurred , not exceeding thje promised amount of subscription

Ex. Kedarnath Vs Gorie Mahammad