Table of Contents

Consideration is one of the essential elements of a valid contract. In simple terms, it means something given in return for a promise. It is often described by the Latin expression quid pro quo, meaning “something in return for something”.

The basic idea is simple; a promise is generally enforceable when it is made in exchange for something from the other side.

  • For example, A agrees to sell his house to B for ₹5 lakhs. A’s promise to sell the house is consideration for B’s promise to pay ₹5 lakhs, and B’s promise to pay is consideration for A’s promise to sell.

Section 25 of the Indian Contract Act lays down the general rule that an agreement without consideration is void, subject to certain exceptions.

Meaning and Definition

Section 2(d) of the Indian Contract Act, 1872 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 promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

The definition is deliberately wide. Consideration may therefore be:

  • an act;
  • an abstinence or forbearance; or
  • a promise to do or abstain from doing something.

The important point is that the act, abstinence or promise must be connected with the promise and must be done at the desire of the promisor.

Essential Elements of Consideration

1. It must be given at the desire of the promisor

An act will constitute consideration only when it is done at the request or desire of the promisor. An act done voluntarily, or merely at the request of a third person, will not ordinarily constitute consideration for the promisor’s promise.

  • Durga Prasad v. Baldeo (1880) – In this case, the plaintiff constructed a market at the direction of the Collector. The defendants, who occupied shops in the market, subsequently promised to pay the plaintiff commission on articles sold through them. The court held that there was no valid consideration because the construction had not been undertaken at the desire of the defendants.

The principle is therefore; the act must be done because the promisor wanted it to be done.

2. It may move from the promisee or any other person

Under Indian law, consideration need not necessarily move from the promisee. Section 2(d) expressly provides that it may move from the promisee or any other person.

  • Venkata Chinnaya Rau v. Venkata Ramaya Garu (1882) – In this case, property was transferred by a mother to her daughter subject to the daughter’s promise to pay an annuity to the mother’s brother. The daughter failed to make the payment. The court held that the consideration furnished by the mother was sufficient even though the brother, who sought to enforce the promise, had not himself furnished the consideration.

Thus, Indian law recognises a stranger to consideration.

This point should, however, be kept separate from privity of contract, which deals with who can enforce a contract.

3. It may be an act, abstinence or promise

Consideration does not necessarily mean doing something. It may also consist of abstaining from doing something.

  • For example, A agrees to pay B ₹1 lakh if B agrees not to file a genuine legal claim against A. B’s forbearance to sue can constitute consideration.

Similarly, a promise to perform something in the future can itself be consideration.

4. It may be past, present or future

The wording of Section 2(d) recognises different stages of consideration.

  • Past consideration exists where the act has already been performed at the desire of the promisor and the promise to compensate is made subsequently.
  • Present or executed consideration exists where the act constituting consideration is performed in return for the promise.
  • Future or executory consideration exists where both parties make promises to perform their respective obligations in the future. For example, A promises to sell goods to B next month and B promises to pay for them on delivery. Both promises constitute executory consideration.

Under English Law, past consideration is generally no consideration (Past consideration is no consideration). In contrast, the statutory phrasing of Section 2(d), ‘has done or abstained from doing’, explicitly recognizes past consideration as valid consideration in India, provided it was done at the desire of the promisor.

5. Consideration must be real

Consideration must have some value in the eyes of law. It must not be illusory, impossible or legally meaningless.

For example, a promise to discover hidden treasure by magic cannot constitute real consideration.

  • White v. Bluett (1853) – In this case, a son’s promise to stop complaining to his father about the distribution of property was held not to be valid consideration for the father’s promise to release the son’s debt.

The important distinction is, “Consideration need not be adequate, but it must be real.”

6. Consideration must be lawful

The consideration must not be unlawful, immoral or opposed to public policy. A promise cannot become enforceable merely because something has been given in return if that “something” itself is prohibited by law.

The detailed rules regarding lawful and unlawful consideration and object are dealt with separately under Section 23.

Consideration and Forbearance

Forbearance can be valuable consideration where a person deliberately gives up or refrains from exercising a legal right.

  • For example, A has a genuine claim against B. B promises to pay A ₹50,000 if A agrees not to pursue the claim. A’s agreement to refrain from suing may constitute consideration.

Similarly, where parties compromise a genuine dispute, the abandonment of the claim or settlement of the dispute may constitute consideration.

Consideration Need Not Be Adequate

One of the most important rules is that consideration need not be adequate.

Explanation 2 to Section 25 provides that an agreement is not void merely because the consideration is inadequate, provided the consent of the promisor was freely given.

  • For example, A sells a horse worth ₹1,000 to B for ₹10. The consideration is grossly inadequate, but the contract is not void merely for that reason if A freely agreed to the transaction.

The court ordinarily does not decide whether a bargain was economically fair. Parties are generally free to make a good bargain or a bad bargain.

However, inadequacy of consideration may become relevant when the court has to determine whether consent was actually free. Extremely inadequate consideration may, depending upon the circumstances, provide evidence of coercion, undue influence, fraud or other factors affecting free consent.

Therefore, Consideration must be real and lawful, but it need not be adequate.

Exceptions to the Rule “No Consideration, No Contract”

The general rule under Section 25 is that an agreement without consideration is void. However, the Act recognises certain exceptions.

1. Natural love and affection [Section 25(1)]

An agreement without consideration is enforceable where:

  • it is made out of natural love and affection;
  • the parties are in a near relationship;
  • it is in writing; and
  • it is registered.

Mere relationship is not sufficient. Natural love and affection must actually form the basis of the agreement.

  • In Rajlukhy Dabee v. Bhootnath Mookerjee (1900), an agreement between husband and wife was held unenforceable because the circumstances did not establish natural love and affection.
  • In Sonia Bhatia v. State of U.P. (1981), The Supreme Court clarified the distinction between ‘consideration’ and ‘motive/love and affection’. The court held that ‘Love and affection’ or moral obligation may serve as the motive for a transaction, but it does not constitute valuable consideration under Section 2(d). Transfer of land executed out of natural love and affection without any monetary/valuable return is a gift, not a transfer for consideration under property/land ceiling laws.

2. Compensation for past voluntary services [Section 25(2)]

A promise to compensate a person who has already voluntarily done something for the promisor can be enforceable.

  • For example, A finds B’s purse and returns it. B subsequently promises to pay A ₹500. The promise can be enforceable under this exception.

The service must essentially have been rendered for the promisor and the promise must be one to compensate for that service.

3. Promise to pay a time-barred debt [Section 25(3)]

A promise to pay a debt barred by limitation can be enforceable if the statutory requirements are satisfied.

The promise must be:

  • in writing, and
  • signed by the person to be charged or his authorised agent.

A mere acknowledgement of a time-barred debt is not sufficient; there must be a promise to pay.

4. Completed gift

A completed gift is not affected by the rule that an agreement without consideration is void. Explanation 1 to Section 25 specifically preserves the validity of a gift actually made. A completed gift therefore does not require consideration in the contractual sense.

5. Agency

Under Section 185, no consideration is necessary to create an agency.

6. Certain other statutory situations

The requirement of consideration is also modified in certain other situations under the Contract Act, such as remission by the promisee and agreements extending the time for performance, subject to the applicable statutory provisions.

Charitable Subscriptions

A mere promise to contribute to charity is generally not enforceable simply because it was made. However, where the promisee acts upon the promise and incurs liability on the faith of that subscription, the promise may become enforceable.

  • This was recognised in Kedar Nath v. Gorie Mohd. (1886), where liability was incurred for construction of a town hall on the faith of the promised subscriptions.

The important point is not simply that the promise was charitable. The enforceability arose because action was taken and liability was incurred on the faith of the promise.

Where a party alters its position or incurs liabilities relying on a promise, equity enforces the promise even in the absence of traditional consideration under the doctrine of Promissory Estoppel.