CONTRACT LAW - PART II (CONSIDERATION)

CONSIDERATION

Section 25 of the Indian Contract Act 1872 openly declares, “an agreement made without consideration is void…”

In other words, the presence of consideration is essential for a contract to be valid.

According to Section 2(d) of the Indian Contract Act, 1872, Consideration is defined as:

"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 abstain from doing something, such act or abstinence or promise is called a consideration for the promise."

It is the price paid by one party for the promise of the other.

Consideration is the benefit accruing to the parties to a contract. [Abdul Aziz vs Masum Ali, (1914)]

Consideration can be ‘right, interest, profit or benefit’ for one party. It can also be ‘some forbearance, detriment, loss or responsibility given, suffered or undertaken.’ by the other. [Kedarnath Bhattacharji v. Gorie Mahomed (1887)]

1.     Agreements without consideration are not enforceable.

2.     Consideration does not have to be commensurate or sufficient.

3.     Consideration must move at the desire of the promisor. [Durga Prasad v Baldeo (1880)]

4.     Consideration may move from the promisee or any other person. [Chinnaya v Ramayya (1882)]

5.     It must have some value in the eyes of the law.

6.     It must be real, not illusory. [Stilk v Myrick (1809) & Williams v Roffey Bros & Nicholls (Contractors) Ltd [1989]]

7.     It must be something that one is not already bound to do. [Ramachandra Chintaman v Kalu Raju (1877)]

Nude Contracts: An agreement made without consideration is void

According to Section 25 of The Indian Contract Act, an agreement made without consideration is void unless-

1)   It is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a, near relation to each other; or unless

2)   It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless

3)   It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1. - Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.

Explanation 2. - An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the inadequacy of the consideration may be taken into account by the Court in determining the question of whether the consent of the promisor was freely given.

The above provisions can be summarised as follows:

Exceptions:

·       Love and affection. (A written and registered agreement based on natural love and affection between near relatives.) [Rajlukhy Dabee v. Bhootnath Mookerjee (1900)]

·       Compensation for past voluntary services.

·       Promise to pay a time barred debt.

Additionally:

·       Completed gift. (Transfer of property by one person to another as a gift according to the provisions of Transfer of Property Act.)

·       Contract of agency does not require consideration.

·       Consideration is not required for the remission of a debt.

·       A contract of guarantee is made without consideration.

Cases

1.     Abdul Aziz vs. Masum Ali, (1914)

It was held in this case that the promise was not enforceable because “there was no consideration in the sense of benefit”, as “the person who made the promise gained nothing in return for the promise made”, and the secretary of the Committee to whom the promise was made, “suffered no detriment as nothing had been done to carry out the repairs.”

Summary

A movement having been set on foot for re-constructing a mosque, Mr Abdul Karim & Mr Jan Mohammed promised to subscribe Rs. 500 each. Mr Abdul Karim was appointed treasurer of the committee for collecting subscriptions. Mr Jan Mohammed gave a cheque for his promised subscription of Rs. 500, but owing, first, to some defect in the endorsement, and later onto its having become out of date, it was never cashed. The mosque also was never re-constructed.  Mr Abdul Karim, having died, his heirs were sued by the committee members for unpaid subscriptions.

2.     Kedarnath Bhattacharji v. Gorie Mahomed (1887)

In this case, it was held that an obligation incurred on the faith of a promise to donate was constituted as a good consideration.

Summary

The town planners of Howrah thought advisable to erect a town hall at Howrah, provided sufficient subscription were collected. With the object in view, the Howrah municipality commissioner started to raise necessary fund by public subscription. The defendants, one of the subscriber’s of this fund for Rs 100, signed his name in the subscription book at that amount.

On the faith of the promised subscription the plaintiff (commissioner of the Howrah municipality) entered into a contract  with a contractor for the purpose of the building the town hall.

Later the defendant subscriber refused to pay the amount upon the promise to pay. He contended that there would be no personal benefit from the construction of the hall.

He was held liable. It was observed that in this case that the persons were asked to knowingly subscribe to the purpose to which the money was to be applied or used. They also knew that an obligation was to be incurred to pay the contractor for the work on the faith of their subscription. The Act of the plaintiff, that is, entering into a contract with the contractor, was done at the desire of the promisor, constituting a good consideration within the meaning of section 2(d).

3.     Durga Prasad v Baldeo (1880)

Consideration must be given at the desire of the promisor.

Summary

On the order of the town collector, Durga Prasad built some shops at his own expense in a market. The shopkeepers who occupied these shops promised to pay Durga Prasad commission on their sales. Durga Prasad sued the shopkeepers when he did not receive the commission. The court held that the promise was not supported by any consideration as the shops were built on the collector’s order and not at the request of the shopkeepers. Therefore there could not be a recovery.

4.     Chinnaya v Ramayya (1882)

When a promisor promises, the promisee or any other person may provide a valid consideration in return.

Summary

An old lady agreed with her daughter that she would gift her some landed property, but the condition was that the daughter would pay her aunt some amount regularly as a maintenance allowance. The daughter promised her aunt (mother’s sister) the maintenance money. However, later she stopped paying the money to her aunt. The aunt filed a case against her niece for not paying the money. The decision was in favour as this was a perfectly valid consideration.

Note: Under English Law, consideration must move from the promisee. The Indian Law states that consideration may move from the promisee or any other person. It may even move through a stranger. However, the stranger to a contract can only sue if he/she is a party to the contract. This means that it is important to have some valid consideration to an agreement to make it a valid contract.

5.     Stilk v Myrick (1809)

In cases where an individual was bound to do duty under an existing contract, that duty could not be considered valid consideration for a new contract.

Summary

Stilk was contracted to work on a ship owned by Myrick for £5 a month, promising to do anything needed in the voyage regardless of emergencies. After the ship docked at two men deserted, and after failing to find replacements, the captain promised the crew the wages of those two men divided between them if they fulfilled the duties of the missing crewmen as well as their own. After arriving at their homeport, the captain refused to pay the crew the money he promised them.

Note: Harris v. Watson was a 1791 case regarding sailors' wages.

The plaintiff was a seaman on board the ship Alexander, of which the defendant was master and commander. The Alexander was bound on a voyage to Lisbon, and whilst the ship was on her voyage the defendant, in consideration that the plaintiff would perform some extra work in navigating the ship promised to pay him five guineas over and above his common wages. The plaintiff proved that the ship had been in danger and that the commander, to induce the seamen to exert themselves had made the promise stated in the declaration.

The issue was whether the reformation of the contract was enforceable.

The reformation of the contract to provide extra wages in exchange for extra work under exigent circumstances was not enforceable for public policy reasons. If such an agreement were enforceable, it would enable sailors to act opportunistically while at sea.

6.     Williams v Roffey Bros & Nicholls (Contractors) Ltd [1989]

It is a leading English contract law case. It decided that in varying a contract, a promise to perform a pre-existing contractual obligation will constitute good consideration so long as a benefit is conferred upon the promisee. This was a departure from the previously established principle that promises to perform pre-existing contractual obligations could not be a good consideration.

Summary

Roffey Bros was contracted by Shepherds Bush Housing Association Ltd to refurbish 27 flats at Twynholm Mansions, Lillie Road, London SW6. They subcontracted carpentry to Mr Lester Williams for £20,000, payable in instalments. Some work was done, and £16,200 was paid. Then Williams ran into financial difficulty because the price was too low. Roffey Bros would be liable under a penalty clause for late completion, so they had a meeting on 9 April 1986 and promised an extra £575 per flat for on-time completion. Williams did eight flats and stopped because he had only got £1,500. New carpenters were brought in. Williams claimed.

Held that Williams should get the eight times £575 with a few deductions for defects and some of the £2,200 owing from the original sum. Held that they had agreed that the original price was too low, and that raising it to a reasonable level was in both sides’ interests.

7.     Ramachandra Chintaman v Kalu Raju (1877)

The promise was void for want of consideration. The Vakil was under a pre-existing contractual obligation to render the best of his services under the original contract.

Summary

There was a promise to pay to the Vakil an additional sum if the suit was successful.

8.     Rajlukhy Dabee v. Bhootnath Mookerjee(1900)

There is always some degree of instinctive love and affection between parties nearly related. But this instinct may sometimes be overruled by external circumstances.

Summary

The defendant promised to pay his wife a certain amount every month for maintenance. The promise was made in writing, and the quarrels the husband and wife had were also mentioned. A case was filed to recover the amount promised to be paid as maintenance. However, the judge decided in favour of the defendant as although the two were in near relation, the court held that there was no natural love and affection between them.