Doctrine of Consideration
Introduction
Consideration is one of the fundamental elements of a valid contract. It represents the value exchanged between the parties in return for their promises. In simple terms, consideration means “something in return.”
Under the Indian Contract Act, 1872, consideration is closely connected with the formation of a legally enforceable agreement. The general principle is that an agreement without consideration is void, subject to the exceptions provided by law.
1. Meaning of Consideration
The word consideration means something done, abstained from doing, or promised to be done or abstained from doing at the desire of the promisor.
According to Section 2(d) of the Indian Contract Act, 1872:
“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 act or abstinence or promise is called a consideration for the promise.”
In simple words:
Consideration = Something of value given in return for a promise.
Example
A agrees to sell his laptop to B for ₹40,000.
- A’s promise to deliver the laptop is supported by B’s promise to pay ₹40,000.
- ₹40,000 is consideration for A’s promise.
- The laptop is consideration for B’s promise.
2. Doctrine of Consideration
The Doctrine of Consideration is based on the principle that a promise should generally be supported by something of value in return.
The traditional principle is:
“No consideration, no contract.”
This means that an agreement without consideration is generally not enforceable as a contract.
However, this principle is not absolute. The Indian Contract Act, 1872 provides certain statutory exceptions where an agreement may be valid even without consideration.
3. Essentials or Rules of Valid Consideration
1. Consideration must move at the desire of the promisor
An act or promise must be performed at the desire of the promisor to constitute consideration.
Example
A requests B to repair his house. B repairs the house.
B’s act of repairing the house is consideration because it was done at A’s desire.
If B voluntarily performs an act without A’s request, it may not constitute consideration for A’s subsequent promise in the ordinary application of Section 2(d).
2. Consideration may move from the promisee or any other person
Under Indian law, consideration may move from the promisee or any other person.
This is an important feature of Indian contract law.
Example
A promises to pay ₹10,000 to B if C provides a particular service at A’s request.
The consideration may come from C even though B is the person receiving the promise.
3. Consideration may be past, present or future
Under Indian law, consideration can take different forms.
A. Past Consideration
An act has already been performed at the desire of the promisor.
B. Present or Executed Consideration
The act is performed at the time of the promise or transaction.
C. Future or Executory Consideration
The parties promise that something will be done in the future.
Example
A promises to deliver goods next month, and B promises to pay upon delivery. This represents future or executory consideration.
4. Consideration must be lawful
The consideration must not be unlawful.
Under Section 23, consideration or object is unlawful in circumstances such as where it is:
- forbidden by law,
- fraudulent,
- involves injury to a person or property,
- immoral, or
- opposed to public policy,
subject to the statutory provisions and judicial interpretation applicable to the particular case.
Example
A promises to pay B for carrying out an illegal activity. The consideration is unlawful and the agreement cannot be enforced as a lawful contract.
5. Consideration need not be adequate
The law generally does not require consideration to be equal or economically equivalent to the promise.
For example, a person may voluntarily agree to sell property worth ₹10 lakh for ₹8 lakh.
The inadequacy of consideration by itself does not necessarily make the contract void, although inadequacy may be relevant in determining whether consent was freely given in appropriate circumstances.
6. Consideration must be real
Consideration must have some legal value. It cannot be something completely imaginary, impossible or meaningless.
For example, a promise to do something that is legally impossible cannot ordinarily constitute valid consideration.
4. Exceptions to the Rule “No Consideration, No Contract”
The general rule is that an agreement without consideration is void. However, Section 25 of the Indian Contract Act, 1872 recognizes certain exceptions.
1. Agreement Based on Natural Love and Affection
An agreement without consideration may be valid when it is:
- in writing,
- registered where required,
- made on account of natural love and affection,
- between parties standing in a near relation to each other.
Example
A makes a written and registered promise to give a certain amount of money to his close relative out of natural love and affection, satisfying the statutory requirements.
2. Promise to Compensate for Past Voluntary Services
A promise may be enforceable where a person promises to compensate another for something that the latter has already voluntarily done for the promisor, in circumstances covered by the Act.
Example
A voluntarily helps B recover lost property. Later, B promises to compensate A for the service.
Subject to the statutory conditions, the promise may be enforceable.
3. Promise to Pay a Time-Barred Debt
A written and signed promise to pay a debt barred by limitation may be enforceable even though fresh consideration is absent, subject to the requirements of the law.
4. Completed Gifts
The law also recognizes the validity of a completed gift as an exception to the general rule relating to consideration.
A completed gift is not rendered invalid merely because there is no consideration.
5. Creation of Agency
Under Section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.
5. Importance of Consideration in Business
Consideration is important because it:
- Establishes the exchange underlying a contractual promise.
- Helps distinguish enforceable commercial transactions from many gratuitous promises.
- Creates reciprocal obligations between parties.
- Provides an economic or legal basis for contractual promises.
- Helps businesses clearly identify what each party is expected to give or perform.
- Provides a framework for determining contractual rights and obligations.
6. Example of Consideration in Business
Suppose ABC Ltd. agrees to provide advertising services to XYZ Ltd. for ₹2 lakh.
Here:
- ABC’s advertising services = consideration for XYZ’s promise to pay.
- ₹2 lakh = consideration for ABC’s promise to provide the services.
Both parties are exchanging something of value, creating the consideration element of the contractual relationship.
7. Consideration and Contract
The relationship can be shown as:
Offer
↓
Acceptance
↓
Consideration
↓
Other legal requirements satisfied
↓
Valid Contract
Consideration alone does not create a valid contract. Other requirements such as competency, free consent, lawful object and other applicable conditions must also be satisfied.
8. Important Features of Consideration
Feature Explanation Desire of promisor Must generally be at the promisor’s desire Source May move from promisee or another person Time May be past, present or future Legality Must be lawful Adequacy Need not necessarily be adequate Reality Must have legal value General rule Agreement without consideration is generally void Exceptions Statutory exceptions exist
Conclusion
The Doctrine of Consideration is a fundamental principle of contract law. Under the Indian Contract Act, consideration means an act, abstinence or promise undertaken at the desire of the promisor and forming the basis of the promise. The general rule is expressed as “No consideration, no contract,” but this rule is subject to statutory exceptions.
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