Last Updated on May 24, 2022 by
The Indian Contract Act states the rules for promises exchanged between two parties. If you promise something to another person, who assents to it, you both enter into an agreement. Once this agreement becomes enforceable by law, it becomes a legally binding contract.
According to the Act, a contract has specific features and essentials that define its existence. For instance, there must be free consent between the parties and an intention to create a legal obligation. Moreover, there must be some consideration in the contract.
But what exactly is consideration? Let us find out.
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What is consideration?
Consideration is what makes the foundation of a contract. An agreement without consideration cannot amount to a legally enforceable contract. According to the Indian Contract Act, 19872, consideration is something done at the desire of the promisor. As consideration, the promisor may ask the promisee or any other person to do or abstain from doing something. This act of abstinence from it is known as the consideration to the contract.
Let us understand this in simpler terms with an example.
Assume Mr. X sells his car to Mr. Y for Rs. 2,00,000. Mr. Y accepts the offer and agrees to pay him the amount. The sum of Rs. 2,00,000 will be a valid consideration, making this agreement a contract.
To get into more detail, let us see the types of consideration to a contract.
What are the types of consideration?
Consideration may be of three types– past, present, and future. These are explained as:
Past consideration
Past consideration is something that the promisee has already done (or abstained from doing) before entering into any agreement. For example, Mr. A provided transportation to Mr. B in June. In July, Mr. B agreed to pay Mr. A Rs. 1,000 for the service. Since the act occurred before promising to pay, it serves as past consideration.
In many cases, it is also known as moral consideration. Let us see how.
Assume that you are driving when you witness an accident on the road. You help the injured person and take them to a hospital. A few days later, as a token of appreciation, the person offers Rs—2,000 for your help and any expense you may have incurred. The help you extended is taken as past consideration.
Present or executed consideration
This is when you provide the promisor with the consideration simultaneously while entering into a contract. This kind of act is always done (or not done) in response to an agreement with another party.
For example, you buy fruits from a vendor and immediately pay him the price. This payment is taken as executed or present consideration.
Future or executory consideration
Future consideration is when the promisor, promisee, or both move the act to a future date. It means that the parties have not yet performed their obligations.
For instance, you purchase a car from a showroom, which will be delivered next week. You agree to pay the seller when the car arrives. This implies that there is a contract between you and the seller, with a future consideration.
Various factors make the consideration valid. Let us get into the details.
What are the essentials of a valid consideration?
The following things are required to make a consideration valid:
The consideration must move at the desire of the promisor
This implies that the consideration will only be valid when the promisor has requested it. Effectively, any act done voluntarily does not constitute valid consideration. For example, if you help a person find his missing wallet and then ask for a reward, he is not bound to pay you. The help you provided was voluntary and not asked for by the person.
The consideration may move from the promisee to any other person
It is not necessary for the promisee to supply the consideration. It may move from any other person. Even if you are a stranger to consideration, you can sue as long as you are a party to the contract.
The consideration must be lawful
An illegal consideration is not valid and makes the contract void. The Act declares consideration as unlawful if it is a forbidden act under any law, if it causes injury to a person or his property, or if it is immoral.
The consideration must be real and possible
An impossible act cannot be classified as valid consideration. Whatever is decided and agreed to as consideration must be capable of being performed. Impossibility may be legal or physical. Moreover, the consideration must not be uncertain.
The consideration may not be adequate
The Indian law states that adequacy of consideration is not necessary. The parties are free to bargain. A poor negotiation by one party does not make the contract void. However, the decision must be made with the free consent of both parties. For example, you sell your books worth Rs. 1,000 for Rs. 200 as per your wish. You cannot legally claim this as inadequate consideration later.
Importance of consideration in a contract?
The Indian Contract Act, 1872 clarifies that any contract without consideration is void. It is essential because it creates an obligation on both parties to fulfill their promises. If it is not present, the burden on the parties may not be enough to ensure the completion of the contract.
However, there are exceptions to this rule. Here is how they are classified.
Can there be contracts without any consideration?
Even though the Act deems consideration as necessary, there are cases where you can enter into valid contracts without consideration. These are:
- When the agreement is out of natural love and affection. This is between parties who are closely related. The agreement should be in writing.
- When someone provides voluntary services for another person’s benefit. The first condition is that the act must be done in gratitude, not for personal benefit. Secondly, the promisor’s intent must be to compensate the promisee. The agreement may be oral or written.
- A promise to pay a time-barred debt can also be without consideration. However, the agreement must be in writing.
- If it is a contract to create an agency.
- If the promise is to give a complete gift.
In conclusion
Consideration is an essential element of a valid contract. Without it, the contract is void and thus cannot be enforced. It is important to note that when you enter into a contract, you must have a valid consideration, adequacy of which is immaterial. It may be an act done in the past, present, or future.
