Sir Fredrick Pollock has defined consideration “as an act or forbearance of one party, or the promise thereof is the price for which the promise of the other is bought”. It is “some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other” (Currie v. Misa (1875) L.R. 10 Ex. 153). Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: “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”. 

Essentials of valid consideration 

Consideration, as given under Section 2(d) of the Indian Contract Act, 1872, defines it as “when at the desire of the promisor, the promisee or any other person has done or abstained from doing something, does or abstains from doing or promises to do or to abstain from doing something. Such an act, abstinence or promise is called a consideration for the promise”. 

Consideration can only be moved at the desire of the promisor

For valid consideration, it should be moved only at the desire of the promisor and no one else. A voluntary act by the promisee or at the occurrence of some third party would not amount to a valid consideration as it was not done at the request or desire of the promisor. 

Consideration by promisee or any other person

Consideration can be provided either by the promisee or any other person, but the condition that needs to be satisfied is that it should be moved at the desire of the promisor only. According to English law, the rule is somewhat different, as under English law, consideration can only be moved by the promisee and no third party who is a stranger or who is not a party to the contract can move the consideration.

Under Indian law, a person can bring an action even though the consideration might have been moved by a third party. It is a general rule that a stranger who is not a party to the suit can sue if the contract is for his enjoyment. Thus, under English law, a third party cannot initiate action for the same, but under Indian law, a stranger who may not be a party to the contract can also enforce the contract against the promisee. 

 In Indian law, however, consideration may move from the promisee or any other person, so that a stranger to the consideration may maintain a suit. In Chinnaya v. Ramaya, (1882) 4 Mad. 137, a lady by a deed of gift made over certain property to her daughter directing her to pay an annuity to the donors brother as had been done by the donor herself before she gifted the property. On the same day, her daughter executed in writing in favour of the donors brother agreeing to pay the annuity. Afterwards the donee (the daughter) declined to fulfil her promise to pay her uncle saying that no consideration had moved from him. The Court, however, held that the uncle could sue even though no part of the consideration received by his niece moved from him. The consideration from her mother was sufficient consideration.

Privity of Contract

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract. The following illustration explains this point. In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd. (1915) A.C. 847, D supplied tyres to a wholesaler X, on condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below Ds list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price. Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for Ss promise to X nor was he party to the contract between D and X. 

Exception to the doctrine of privity of contract: 

Both the Indian law and the English law recognize certain exceptions to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a person who is not a party to a contract can enforce the contract: 

(i) A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit. In Khawaja Muhammad v. Hussaini Begum, (1910) 32 All. 410, it was held that where a Mohammedan lady sued her father-in- law to recover arrears of allowance payable to her by him under an agreement between him and her own father in consideration of her marriage, she could enforce the promise in her favour in so far as she was a beneficiary under the agreement to make a settlement in her favour, and she was claiming as beneficiary under such settlement.

 (ii) An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, tittle and interest. But a mere nominee (i.e., the person for whose benefit another has insured his own life) cannot sue on the policy because the nominee is not an assignee. 

(iii) In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which place them in the position of beneficiaries under the contract, and can therefore, sue. 

(iv) In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and admits to C the receipt of that amount, then A constitutes himself as the agent of C. 

(v) Whenever the promisor is by his own conduct estopped from denying his liability to perform the promise, the person who is not a party to the contract can sue upon it to make the promisor liable. 

(vi) In cases where a person makes a promise to an individual for the benefit of third party and creates a charge on certain immovable property for the purpose, the third party can enforce the promise though, he is stranger to the contract.

  

Rules Governing Consideration 

(a) Every simple contact must be supported by valuable consideration otherwise it is formally void subject to some exceptions.

(b) Consideration may be an act of abstinence or promise.

(c) There must be mutuality i.e., each party must do or agree to do something. A gratuitous promise as in the case of subscription for charity, is not enforceable. For example, where A promises to subscribe `5,000 for the repair of a temple, and then refuses to pay, no action can be taken against him.

(d) Consideration must be real, and not vague, indefinite, or illusory, e.g., a son’s promise to “stop being a nuisance” to his father, being vague, is no consideration.

(e) Although consideration must have some value, it need not be adequate i.e., a full return for the promise. Section 25 (Exp. II) clearly provides that “an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate”. It is upon the parties to fix their own prices. For example, where A voluntarily agreed to sell his motor car for `500 to B, it became a valid contract despite the inadequancy of the consideration.

(f) Consideration must be lawful, e.g., it must not be some illegal act such as paying someone to commit a crime. If the consideration is unlawful, the agreement is void.

(g) Consideration must be something more than the promisee is already bound to do for the promisor. Thus, an agreement to perform an existing obligation made with the person to whom the obligation is already owed, is not made for consideration. For example, if a seaman deserts his ship so breaking his contract of service and is induced to return to his duty by the promise for extra wages, he cannot later sue for the extra wages since he has only done what he had already contracted for: Stilk v. Myrick (1809). 

Consideration can be past, present or future (types of consideration)

Past consideration

When the consideration is made prior to the promise and the promise is made subsequently, it is called past consideration or executed consideration. Under such a type, consideration induces the promise and is made after an act has been done in the past without the other party making a promise by the other party. A Promise for consideration is made for an act already done in the past so as to motivate the promisor to subsequently pay the consideration for the impugned act. For past consideration, the promisor does not expect anything in return for an act or obligation, already performed. Past consideration is more likely a moral obligation and in most cases, it is not legally required.

Generally, such an obligation of past consideration cannot be enforced until a material benefit is involved for the promise of the benefit that was made after consideration. For example, if A asks B to find his lost dog, after which he will give him Rs 500, It is a valid example of past consideration or executed consideration. In the case of M/S Atma Ram Properties Pvt Ltd Vs. M/s Federal Motors Pvt. Ltd (2004), the Supreme Court held that a decree for eviction of the tenant has been passed. The tenant is entitled to pay the mesne profits or compensation for the use and possession of the concerned premises at the same rate at which the landlord would have released the premises to some other person if the impugned tenant had vacated. Moreover, the landlord is not bound by the contractual rate of rent until the proceeding at a superior forum on the same issue continues.

Executed consideration

Every contract is based on the performance of an act. An act forms consideration for the promise. When the consideration is constituted simultaneously with the promise, it is called an executed consideration. Executed consideration involves an act for a promise. The act stipulated exhausts the consideration so that no new act would be performed until further consideration is made. Under such contracts, the performance of one of the parties is completed, and it is only the other party that is yet to perform his part of the promise. Both acts and promises forming consideration are essential and correspond to the same transaction. It was held in the case of Mohammad Ebrahim Molla Vs. Commissioners (1926) that the absence of a tinder seal in a contract of executed consideration does not nullify it but where it is expressly provided, this exception does not even apply to executed consideration in a contract.

Executory consideration

When parties to a contract agree to execute an agreement on a future date, in other words, when the promisor makes an offer to the promisee that would take place on a future date and the promisee in return accepts that offer and promises to pay for it at a future date, it is executive consideration. Under such contracts, the performance of the obligations by each of the parties is to be made ensuing to the making of the contract. Under an executory consideration, one promise is exchanged for another promise. In other words, the liability is outstanding on both sides. Valid promises from both sides conclude a contract. Therefore, under such contracts rights and liabilities are outstanding on both sides. It was held in the case of The Minicipal orporation of the … V The Secretary of State for India (1932) that executory promise includes two promises which are also called mutual promises. One promise is a consideration for another, and contrarily.

Consideration needs to be adequate 

While dealing with the adequacy of consideration, courts do not enquire regarding the adequacy of the consideration but about its sufficiency if the matter comes before the court of law. It is up to the consent of the parties to decide what should be the consideration after bargaining and negotiating for an agreement involving the two parties. Consideration should be a reasonable equivalent in the eyes of the law. The adequacy or inadequacy of consideration is not a legal base as per Section 25(2) of the Indian Contract Act, but where the question is regarding the free consent of the promisor in deciding the consideration the courts can take into account the adequacy of consideration if in its opinion there is a fraud, misrepresentation, conjunction etc as a factor for determining the same.

In the case of Vijay Minerals Pvt Ltd Vs. Bikash Deb (1995) the Court held that it would not enquire concerning the adequacy of consideration when the question is whether an agreement is binding or not. In the case of K Kumara Gupta Vs. Shri Omkareswara Swami Temeple (2022), the Supreme Court held that where a public auction has taken place and the sale is effected in the favour of the highest bidder, no subsequent offers made by any third party would be taken into consideration so as to set aside the impugned sale. It could be only done if there was an inadequate consideration offered due to fraud, collusion, misrepresentation, etc, or if there was any material irregularity in conducting the public auction.

Consideration should be real

Consideration as per the Indian Contract Act of 1872 should be real and significant. In other words, consideration should be physically real and should not be deceptive or legally impossible. It was held in the case of Leelamma Ambikakumari & Anr. Vs. Narayana Rama Krishnan (1991), that it is always permissible to prove that consideration in a document was not a real consideration but something different.

Legally impossible means something which is prohibited by law. For example- A makes an offer to B to commit robbery in the house of C for which he would pay a consideration of Rs 10,000 to B. Here, the offence of robbery is prohibited by law.

Consideration should be legal

According to Section 23 of the Indian Contract Act of 1872, consideration should not be illegal, immoral, or opposed to public policy. It was held in the case of Raj Bahadur H.P.Vs. Commissioner of Income Tax (1940), that the task of the courts is to examine whether the consideration is good and legal in a case

Performance of a pre-existing duty is not consideration

The legal duty of a person cannot be regarded as a consideration in the eyes of the law. As consideration requires a person to do something more than which he is already compelled to perform. Consideration must originate from a new obligation.

Promise to pay less than the amount due

A promise to pay less than the amount due was not considered a good discharge. It was held in the famous Pinnel’s case that the debtor was bound to pay the whole amount, but if the debtor gifted a horse, hawk, robe, etc., it would be considered a good consideration. The courts, over a period of time, have accepted a number of exceptions for Pinnels’s rule:

Part-payment by a third party

When the creditor accepts part payment of the money due to him by the debtor in place of a larger sum of money, he cannot afterwards maintain an action for the same.

Compromise

When the parties enter into a compromise agreement regarding accepting a lesser amount of money instead of the larger sum due.

Payment before time

Sometimes, the payment before time in a different mode or different place than what was agreed by the parties is valid.

Promissory estoppel

When a promise is made in the future with the intention of being acted upon and is actually acted upon then it is binding and the parties cannot alter their positions afterwards. The rationale behind the doctrine of promissory estoppel is to protect the interests of the people who rely upon such promises from any injustice. The doctrine of promissory estoppel is an evacuation from the doctrine of consideration.

CONCLUSION

Consideration is one element critical to the formation of a contract and it must be legally sufficient for the contract to be enforceable.The contract of consideration can only be enforced upon the behest of the parties to the contract and therefore, no third party can enforce the contract upon anyone. The contract arises due to the prevalence of a contractual relationship between the two parties. According to this rule, no third party can enforce any contract, and also the contract cannot levy an obligation on any person other than those who are a part of the contract. Though, in certain cases, strangers either benefit or are involved in the contact other than the two parties. This happened in cases of the marriage settlement, land properties, and acknowledgement to the third party as per the need of the contract.