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Legal rules regarding consideration

Legal rules regarding consideration

Edited By Ritika Jonwal | Updated on Jul 02, 2025 05:47 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.

This Story also Contains
  1. What is Consideration?
  2. Importance of Section 2(d)
  3. Essentials of a Valid Consideration
  4. Rules for consideration
  5. Legality of Object
  6. Conclusion
Legal rules regarding consideration
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.

Background wave

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:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

6. What is the "benefit-detriment" theory of consideration?
The benefit-detriment theory states that consideration exists when the promisee receives a benefit or the promisor suffers a detriment. This theory helps explain why forbearance can be consideration, even though no tangible item is exchanged.
7. Why is consideration important in contract formation?
Consideration is crucial because it distinguishes a contract from a gift or a mere promise. It ensures that both parties are giving up something of value, which helps to make the agreement fair and enforceable in court.
8. What is the difference between good consideration and valuable consideration?
Good consideration refers to natural love and affection, while valuable consideration involves something of economic value. In most modern legal systems, only valuable consideration is recognized as valid for contract formation.
9. What is nominal consideration?
Nominal consideration is a very small amount, often symbolic, given to support a contract. For example, paying $1 for a piece of property. While courts generally don't question the adequacy of consideration, extremely low amounts might be scrutinized in some cases.
10. Is love and affection valid consideration?
In most jurisdictions, love and affection are not considered valid consideration for a contract. Consideration must have some economic value, even if small. Emotional factors alone are typically not enough to create a legally binding agreement.
11. Can past consideration make a contract enforceable?
Generally, past consideration is not valid to support a new promise. Consideration must be given in exchange for the promise at the time of contract formation. However, some jurisdictions recognize exceptions for previous requests or understandings.
12. Can silence be consideration?
Generally, silence is not consideration. However, in some cases where there's a duty to speak or a prior course of dealing, silence might be interpreted as acceptance and thus part of the consideration.
13. How does consideration work in bilateral contracts?
In bilateral contracts, the mutual promises of the parties serve as consideration for each other. Each party's promise is both a benefit to the other party and a detriment to themselves.
14. How does the concept of consideration apply to gratuitous promises?
Gratuitous promises, or promises made without expectation of anything in return, generally lack consideration and are not enforceable as contracts. However, they might be enforceable through other legal doctrines like promissory estoppel.
15. What is the role of consideration in seal contracts?
Historically, contracts under seal did not require consideration to be enforceable. While most jurisdictions no longer recognize seal contracts, some still give them special status, either eliminating the need for consideration or extending the statute of limitations.
16. Can illegal acts serve as consideration?
No, illegal acts cannot serve as valid consideration. A contract that involves illegal consideration (such as promising to commit a crime) is void and unenforceable.
17. Can a promise to perform a voidable obligation serve as consideration?
Yes, a promise to perform a voidable obligation can serve as valid consideration. For example, if a minor (who can usually void contracts) promises to honor a contract upon reaching majority age, this can be valid consideration for a new agreement.
18. What is the role of consideration in contract modifications?
In common law, modifications to existing contracts typically require new consideration to be enforceable. However, many jurisdictions now allow good faith modifications without new consideration, especially in commercial contexts.
19. What is the "bargain theory" of consideration?
The bargain theory of consideration states that consideration exists if the promise is given as part of a bargained-for exchange. This theory focuses on the process of negotiation rather than the comparative value of what's exchanged.
20. How does consideration work in option contracts?
In option contracts, the consideration is typically a payment for the right to exercise the option. This payment keeps the option open for a specified period, during which the offeror cannot revoke the offer.
21. Can past actions serve as consideration?
Generally, past actions cannot serve as consideration. Consideration must be given in exchange for the promise at the time the contract is formed. However, there are some exceptions, such as when there's a previous request or understanding between the parties.
22. What is the peppercorn theory of consideration?
The peppercorn theory states that courts generally won't examine the adequacy of consideration as long as it has some value. Even a peppercorn (a very small amount) can be sufficient. This principle emphasizes freedom of contract, allowing parties to determine the value of their exchanges.
23. Can a promise to perform a pre-existing duty be consideration?
Generally, a promise to perform a pre-existing duty is not valid consideration. For example, if an employee promises to do their job in exchange for extra pay, this wouldn't typically be enforceable. However, there are exceptions, such as when the duty is owed to a third party.
24. What is the concept of "mutuality of obligation" in relation to consideration?
Mutuality of obligation means that both parties to a contract must be bound to perform. Each party must provide consideration to the other. If only one party is bound to perform, the contract may lack consideration and be unenforceable.
25. Can forbearance be consideration?
Yes, forbearance (refraining from doing something you have a legal right to do) can be valid consideration. For example, agreeing not to sue someone in exchange for a payment can form a valid contract.
26. What is consideration in contract law?
Consideration is something of value exchanged between parties to make a contract legally binding. It can be money, goods, services, or a promise to do (or not do) something. Consideration is essential for most contracts to be enforceable.
27. How does consideration differ from a gift?
Consideration involves an exchange of value between parties, while a gift is a voluntary transfer without anything expected in return. Gifts are not legally enforceable promises, whereas contracts supported by consideration generally are.
28. Can a promise to make a gift be enforced?
Generally, a promise to make a gift is not enforceable because it lacks consideration. However, if the promisee detrimentally relies on the promise (promissory estoppel), or if the promise is made in a deed, it may become enforceable.
29. How does consideration relate to promissory estoppel?
Promissory estoppel is a legal doctrine that can sometimes be used to enforce a promise even without consideration. It applies when one party reasonably relies on another's promise to their detriment. While not replacing consideration, it can serve a similar function in specific circumstances.
30. How does consideration work in unilateral contracts?
In unilateral contracts, consideration is the performance of the requested act. For example, if someone offers a reward for finding a lost item, the act of finding and returning the item serves as consideration, completing the contract.
31. Can moral obligation serve as consideration?
Generally, moral obligation alone is not sufficient consideration. However, some jurisdictions recognize moral obligation as consideration in specific circumstances, such as promises to pay debts barred by statute of limitations.
32. Can a promise to accept less than what is owed be valid consideration?
Traditionally, a promise to accept less than what is owed (partial payment) was not considered valid consideration due to the pre-existing duty rule. However, many modern courts and statutes now recognize such agreements if made in good faith.
33. What is the concept of "adequacy of consideration" in equity?
While courts of law generally don't examine the adequacy of consideration, courts of equity may do so when considering whether to grant equitable remedies like specific performance. Gross inadequacy of consideration might lead a court to deny equitable relief.
34. How does consideration interact with the parol evidence rule?
The parol evidence rule generally prevents the introduction of external evidence to modify or contradict the terms of a written contract. However, evidence of lack of consideration can sometimes be introduced to challenge the validity of the contract itself, as consideration is essential to contract formation.
35. What is the "pre-existing duty rule" in consideration?
The pre-existing duty rule states that performing or promising to perform an existing legal duty is not valid consideration for a new promise. This rule prevents parties from extracting additional benefits for duties they're already obligated to perform.
36. How does the concept of "adequacy of consideration" apply in contract law?
Courts generally don't examine the adequacy of consideration, focusing instead on whether consideration exists at all. This principle, known as the "peppercorn rule," allows parties to determine the value of their exchanges freely.
37. What is the difference between executed and executory consideration?
Executed consideration is an act or forbearance completed at the time the contract is formed. Executory consideration is a promise to do something in the future. Both types can be valid consideration.
38. What is the "illusory promise" problem in consideration?
An illusory promise is one that appears to be a promise but actually imposes no obligation on the promisor. Such promises cannot serve as consideration because they lack mutuality of obligation. For example, "I'll buy your car if I feel like it" is an illusory promise.
39. How does consideration interact with the statute of frauds?
The statute of frauds requires certain types of contracts to be in writing to be enforceable. While consideration is still necessary for these contracts, the writing requirement adds an extra layer of formality and proof.
40. Can a promise to perform a public duty serve as consideration?
Generally, a promise to perform a public duty (like reporting a crime) cannot serve as consideration, as it's already legally required. However, going beyond the public duty might constitute valid consideration.
41. What is the concept of "failure of consideration"?
Failure of consideration occurs when the promised consideration is not provided, making the contract potentially voidable. This is different from lack of consideration, which would make the contract void from the beginning.
42. How does consideration work in third-party beneficiary contracts?
In third-party beneficiary contracts, the consideration flows between the two contracting parties, not to the beneficiary. The beneficiary's right to enforce the contract derives from the parties' intent to benefit them, not from providing consideration.
43. Can a promise to perform part of an existing contractual duty be consideration for a new promise?
Generally, no. Promising to do only part of what one is already obligated to do is not valid consideration for a new promise. This falls under the pre-existing duty rule. However, if the partial performance is coupled with some additional benefit or different performance, it might be valid.
44. What is the role of consideration in promissory notes?
In promissory notes, the consideration is typically the loan or debt that the note represents. The promise to repay is given in exchange for receiving the loan, forming a valid contract.
45. How does consideration work in employment contracts?
In employment contracts, the employee's promise to work is consideration for the employer's promise to pay. Additional promises, like non-compete clauses, usually require additional consideration to be enforceable.
46. Can a promise to settle a disputed claim serve as consideration?
Yes, a promise to settle a disputed claim can serve as valid consideration, even if the claim turns out to be invalid. This is known as the "forbearance to sue" doctrine and is based on the idea that giving up the right to pursue a claim has value.
47. What is the "performance and return promise" rule in consideration?
This rule states that either a performance or a return promise can serve as consideration. In unilateral contracts, it's the performance that serves as consideration, while in bilateral contracts, it's the mutual promises.
48. How does consideration apply in requirements and output contracts?
In requirements and output contracts, the consideration is the promise to buy all that's required or sell all that's produced. The indefinite quantity is balanced by the commitment to deal exclusively with the other party.
49. Can a promise to perform an impossible act be consideration?
No, a promise to perform an impossible act cannot be valid consideration. Contracts must be for something possible to be enforceable. However, if both parties believed the act was possible at the time of contracting, the contract might still be valid.
50. How does consideration work in subscription contracts?
In subscription contracts (like magazine subscriptions), the subscriber's promise to pay is consideration for the publisher's promise to deliver. The publisher's promise to all subscribers can be consideration for each individual subscriber's promise.
51. Can a promise to do something one is morally obligated to do be consideration?
Generally, a moral obligation alone is not sufficient consideration. However, some jurisdictions recognize moral obligations as consideration in limited circumstances, such as promises to pay debts barred by bankruptcy.
52. What is the role of consideration in releases and waivers?
In releases and waivers, the consideration is often the payment or benefit received in exchange for giving up a right or claim. Without consideration, a release might be considered a gratuitous promise and potentially unenforceable.
53. How does the concept of "past consideration" apply to ratification of minors' contracts?
When a person ratifies a contract made during their minority upon reaching the age of majority, the original consideration from the contract can support the ratification. This is an exception to the general rule against past consideration.
54. Can a promise to accept part payment of a debt in full satisfaction be enforceable?
Traditionally, under the "rule in Pinnel's Case," such promises were not enforceable due to lack of consideration. However, many modern courts and statutes now recognize these agreements if made in good faith, especially in commercial contexts.
55. What is the "mutuality of obligation" requirement in consideration?
Mutuality of obligation requires that both parties to a contract be bound to perform. If only one party is bound, the contract may lack consideration. This concept ensures that there's a true exchange of promises or performances.

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