Legal rules regarding consideration

Edited By Ritika Jonwal | Updated on Nov 28, 2024 03:21 PM IST

The Indian Contract Act lays forth the guidelines for agreements made between two people. When you make a commitment to someone and they accept it, you two come to an understanding. This agreement becomes a binding contract as soon as it is made legally enforceable.

The Indian Contract Act, 1872 states that a contract must have certain characteristics for it to be considered valid. To establish a legal duty, for example, the parties must freely assent to one another. The contract also has to include some sort of consideration.

The cornerstone of each contract is a consideration. The commitments made as part of the consideration would be the only ones that the law would enforce.

What is Consideration?

According to Section 2(d) of the Indian Contract Act, 1872, an act, abstinence, or promise made at the request of the promisor and performed or abstained from performing, or promised to perform or abstain from performing something, is considered a consideration for the promise.
To put it more simply, consideration is something of value that is pledged or provided by one party to another in return for fulfilling a commitment.
Although consideration is most often associated with money, it may also relate to a specific action or a pledge not to do a certain action.
Each participant must benefit in some manner from the other parties participating in this two-way street.

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This Story also Contains

What is Consideration?
Importance of Section 2(d)
Essentials of a Valid Consideration
Rules for consideration
Legality of Object
Conclusion

Legal rules regarding consideration

Example:

Suppose X agrees to install a house air conditioner for Y and Y agrees to pay X Rs. 1,100 for the service.
The payment of Rs. 1,100 by Y upon completion of the project is the price that X has received in exchange for his duty to install the unit.
likewise, the payment that Y has received in exchange for her pledge to pay the Rs. 1,100 is her right to have the unit installed.

Importance of Section 2(d)

Section 2(d) of the Indian Contract Act defines consideration. In accordance with section 2(d), three conditions must be met in order for the act of abstinence or act to be considered validly upheld. These conditions include that the act be performed at the promisor's request, that it be performed by the promise or by any other person, and that it be executory—that is, that it be performed as promised.

According to this definition, consideration is something that is given in exchange for a commitment and includes:

According to the promisor's wishes, consideration must proceed.
Consideration can shift from the pledge to a different individual.
It is possible to consider the past, present, or future.
Adequate consideration is not required.
Real consideration is required, not just theoretical.
Amoral or illegal behaviour is not taken into account.

Essentials of a Valid Consideration

To be considered legitimate, a consideration must include the following elements:

The consideration must proceed at the promisor's request

This suggests that the consideration won't be considered legitimate unless the promisor makes that request. In other words, voluntary actions do not qualify as legitimate consideration. For instance, you are not obligated to compensate someone if you assist them in finding their misplaced wallet and then want compensation. You helped them out voluntarily; they didn't beg for it.

The promisee may transfer the consideration to another individual.

The promisee does not have to provide the consideration. It might shift from any other individual. As long as you are a party to the contract, you have the right to litigate even if you are unfamiliar with consideration.

Consideration Might be in the Past, Present, or Future

Past Consideration: Under Indian law, a promise or conduct that is carried out prior to the contract's creation qualifies as past consideration.
Present Consideration: In a contract, present consideration is what remains after one party fulfils his or her portion of the promise, which is what the other party is expected to do.
Future Consideration: A consideration is considered to be future when one party promises something in return for another party's commitment, and the consideration must be performed after the contract is made.

The consideration needs to be legitimate

A contract that contains an unlawful consideration is null and invalid. The Act defines a concept as illegal if it violates any legal prohibitions, harms a person or his property, or is immoral.

The consideration ought to be plausible and genuine

It is difficult to classify an impossible deed as legitimate contemplation. Anything that is decided upon and accepted as consideration ought to be able to be carried out. One can be physically or legally impossible. Furthermore, the factor in question must be certain.

The amount of consideration might not be sufficient.

According to Indian law, enough deliberation is not required. Parties are allowed to negotiate. A party's bad bargaining does not render the agreement null and void. But both parties must freely consent to the choice being made. For instance, you might choose to sell your books, which are worth Rs. 1,000, for Rs. 200. Legally, you cannot subsequently argue that this was insufficient deliberation.

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Rules for consideration

In addition to the factors of consideration, the following basic norms of consideration apply:

Consideration adequacy: Consideration signifies "something in return". This "something in return" does not have to be equivalent in value to "something given". The law only requires that a contract be backed by consideration. The Courts are not concerned with the appropriateness of contemplation as long as it exists and has some value.
It must have legal worth: A valuable consideration might be a right, interest, or property acquired by one party or a loss or liability experienced or assumed by the other. Furthermore, the consideration must be certain. A pledge to pay a reasonable fee in exchange for a service cannot be enforced due to uncertainty.
It must be actual, not illusory: The consideration must be real, meaning it cannot consist of an impossible deed or promise. It must not be an illusion or a farce, such as discovering a treasure by magic.
It must be something that the promisor is not already obligated to do: Doing or promising to do something that one is already obligated to do does not constitute good consideration.
Consideration must be legitimate: Section 10 of the Act states that an agreement is unlawful unless the consideration is lawful.

Section 23 says that consideration is illegal if:

It is prohibited by law.
or is of such a kind that if authorised, it would undermine some of the country's laws.
It is fraudulent.
It entails harm to the other's property or person.

Legality of Object

The definition of legality for an item is "the quality of being lawful." This indicates that an object is lawful if it complies with the laws established by the governing authority.

According to Section 23 of the Indian Contract Act, 1872 (ICA), a contract must have a lawful goal and consideration in order to be legitimate. The object is the reason for why the parties enter into a contract. The fulfilment of the purpose results in the transfer of the agreed-upon consideration from one party to the other.

Many elements influence whether or not an object is lawful, including its purpose and intended usage. However, it is not deemed lawful when:

Used for criminal objectives such as crime.
Are bogus and violate copyright laws.
Used unlawfully by someone else.

Importance of Section 23 of the Indian Contract Act

Section 23 of the Indian Contract Act specifies that for a contract to be legitimate, both the object and the compensation must be lawful.
The object is the reason why the parties enter into a contract.
The fulfilment of the purpose results in the transfer of the agreed-upon consideration from one party to the other.

Lawful Object and Lawful Consideration

The legality of the object in contract law states that the consideration and object of a contract are regarded valid except when:

Exception	Brief	Example
Forbidden by law	A contract is null and void if it contains an illegal item or consideration. illicit consideration of the object refers to illicit conduct that is penalised by law. The activities prohibited by the relevant authorities through their laws and regulations are also considered while establishing legality. However, if these rules and regulations do not comply with the law, they are ineffective.	Example: The Forest Department issued me a licence to cut the grass in a certain region. The department officials informed him that he could not pass on such interest to another person. However, the Forest Act lacks such legislation. So A sold his shareholding to B, and the transaction was deemed genuine.
Fraudulent in Nature	The contract's goal and consideration must not be fraudulent; otherwise, the contract will be void.	Example: A signs a contract with B agreeing to reimburse B if he embezzles money from C. This is regarded as a fake item, and the contract is invalid.
Defeats the purpose of the law	If the goal of entering into the contract is to violate any legal restrictions, the deal will be invalid. A contract is invalid if: The purpose of the pact is to do an unlawful conduct. The contract's goal is legally banned, either expressly or implicitly. The deal cannot be completed without violating the law.	For example, A enters into a contract with B in which B agrees not to seek legal action against A if A conducts a robbery at B's home. This contract violates the terms of the IPC legislation.
Causes injury or harm to another person or property	The contract's object must not destroy property or injure another individual.	Examples: Publish a book on a person's life without his permission. Destruction of property. License violations. Copyright violations.
Immoral as per the law.	If the contract's object and/or consideration are deemed immoral, it will not be invalid. Immoral acts are those that go against the reasonable and acceptable general behaviour or personal conduct that society expects.	Example: A gives money to B on the condition that B divorces C and subsequently marries A. If B does not divorce C, A cannot sue B to collect the money. This contract's underlying concept is immoral, hence it will be considered void.
Against Public Policy	A legitimate purpose in company law indicates that it does not violate public policy. The goal of public policy is to maintain and safeguard the community's overall well-being, not to limit individual liberties.

Cases Related to Legality of Object

There have been several cases involving the legality of objects determined in courts worldwide. Here are some instances of how these laws connect to one another:

A person who commits a crime using an object is not legally permitted to keep that object. This is because the crime is illegal and violates the governing body's laws.
On the other hand, if you lawfully utilise an object for your business, you are following the law. For example, using a computer to generate invoices and track payments is a lawful activity. However, using the same computer to download copyrighted content without authorisation is prohibited.

Case laws

United States vs. Miller

The first case is United States vs. Miller. In this case, the defendant challenged the validity of legislation that made it illegal for anybody to own or use any firearm other than those used by armed forces and law enforcement personnel. The Supreme Court found in Miller's favour, finding that the Second Amendment did not guarantee an individual right to keep firearms, but rather safeguarded state militias against federal intrusion.

Gherulal Parakh vs. Mahadeodas Maiya & Others (1959)

The Supreme Court ruled that any arrangement that violated public policy would be considered detrimental to the person and hence invalid.

Clay v. Yates (1856)

In Clay v. Yates (1856), the English Court ruled that any agreement with an illegal intent or consideration is invalid.

Allen v. Rescous (1676)

In Allen v. Rescous (1676), the English Court determined that the goal of the agreement was criminal assault with the intent to injure a person. As a result, it was rejected, rendering the agreement null and invalid.

Conclusion

Consideration is a key component of any legal transaction. Without it, the contract is void and can't be enforced. It is essential to remember that when entering into a contract, you must have a legitimate consideration, the appropriateness of which is inconsequential. It might be an act from the past, the present, or the future.

Frequently Asked Questions (FAQs)

1. What are the many types of Considerations in a contract?

Consideration is a legal word that refers to the benefits that each contracting party obtains. This is typically used as payment in exchange for products or services. Consideration does not have to be money; it may be anything of value that you get as part of a contract, such as equipment or work.

2. What are the ground rules for consideration?

In contract law, the essential elements of consideration are: 1) It must have worth; 2) It must be discussed and agreed upon by both parties. 3) It must be something that the law considers valuable; and 4) it must be present or future, not past.

3. What is consideration and what does it entail?

In general, consideration might be defined as what we offer to another individual when he or she fulfils a commitment. In a contract, the promise must be accompanied by compensation; otherwise, the party is not obligated to carry out their commitments.

4. Which provision of the contract is under consideration?

Section 2(d) of the Indian Contract Act, of 1872, defines consideration as "promisee or any other person." This simply indicates that in India, consideration may be transferred from the promise to any other person.

5. What is a contract's consideration?

Consideration is a promise, performance, or forbearance made by a promisor in exchange for another commitment. Consideration is the primary component of a contract. A contract cannot be enforced unless both parties provide consideration.