Professional Documents
Culture Documents
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
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.
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
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
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
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
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
• 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.
• 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?