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3.

Consideration

• Consideration is elemental to a contract. A


promise is not binding unless made for
something in return - consideration.

• E.g. when one buys goods the


consideration buyer gets is the goods and
free ownership and possession and the
money paid is the consideration for the
seller.
CONSIDERATION Legal Definition
• ‘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 an act or
abstinence or promise is called a consideration for the
promise.’
• Thus, the term ‘consideration’ is used in the sense
of quid pro quo, meaning thereby something in return.
It may involve a positive act (i.e., doing something) or
an abstinence (i.e., something given up).
• Consideration may be in the form of some right,
interest, profit, or benefit accruing to one party, or
some forbearance, detriment, loss, or responsibility.
Examples
1. A offers to sell his plasma TV set to B for Rs 50,000. B accepts
the offer. Here, B’s promise to pay Rs 50,000 is the consideration for
A’s promise to sell the TV and A’s promise to sell the TV is the
consideration for B’s promise to pay Rs 50,000.
2. X applies for a loan from Y, who is unwilling to advance
the amount, unless S guarantees the repayment of the loan if X
defaults and thereupon Y advances money to X. In this case, the
benefit conferred on X by Y at the surety of S is a sufficient
consideration on the part of Y as against the promise of S to repay
the loan. In other words, the detriment which Y may not suffer by
advancing loan to X due the guarantee of S is sufficient
consideration on the part of Y in respect of the promise of S to
repay the loan.
3. A promises to maintain B’s child, and B promises to pay A Rs
1,000 annually for the purpose. Here, the promise of each party is
the consideration for the promise of the other party.
4. A promises Y, his debtor, not to file a recovery suit against him on
B’s agreeing to repay the amount of loan along with a compound
interest @ 12% p.a. within a year. A’s abstinence is the
consideration for Y based on B’s promise to pay.
RULES GOVERNING CONSIDERATION

1. Simple Contracts must be supported by


Consideration

2. Consideration Must Move at the Desire of


the Promisor (Promissory Estoppels)
 Consideration Moving at Desire Of Third
Person is Not Valid
CL - Durga Prasad vs Baldeo
Durga Prasad vs Baldeo

‘D’ the plaintiff had constructed, at his own expense, a market


at the instance of the Collector of the District. The
occupants of the shops i.e., shopkeepers in the market
promised to pay the plaintiff a commission on the articles
sold through their shops. Subsequently the shopkeepers
refused to pay any commission. ‘D’ sued the shopkeepers
against their alleged default. It was held that there was no
consideration because the plaintiff (the promisee) had
constructed market not at the desire or request of the
defendants (the promisors), but at the desire of a third
person (i.e., the Collector) to oblige him and thus, the
contract between D and the shopkeepers was void.
Rules Governing Consideration
3. Consideration May Move From the Promisee
or Any Other Person

4. Consideration must have some Value


5. Consideration Need not be Adequate But It
Must Be Sufficient
6. Consideration can be for an act done in Past,
Present or Future
7. Consideration must be Legal
STRANGER TO A CONTRACT AND STRANGER TO CONSIDERATION

A stranger to a contract is one who is not a party to the contract.


The rule that consideration ‘may move from the promisee or any
other person’ implies that the consideration is permitted to be
supplied by a third person (i.e., stranger) as well, thereby need not
necessarily be supplied by the promisee himself. In other words, as
long as there is a consideration in exchange of a promise, it is
immaterial who has furnished it. Thus, a stranger to the
consideration may maintain a suit. But the English Law on this point
is different. Nonetheless, a stranger to a contract cannot sue upon a
contract both under the British Law as well as the Indian Law. A
stranger to a contract is the base to the doctrine of privity of
contract.
Privity of Contract
The doctrine of Privity implies that, in general, a person who is not
privy to a contract, that is a third party, can neither sue nor be sued
on the contract. The rule prevents the burden of a contract being
imposed on a third party. Therefore, a stranger to the
consideration must be distinguished from a stranger to a contract.
Examples on Strangers to Contracts

1. Jamna Das vs Ram Autar.


A is indebted to B. A sells his property to C who undertakes to
discharge his debt vis-à-vis B. In case C fails to keep his promise, B has
no right to sue C because C is a stranger to the contract (between A
and B)

2. Tweedle vs Atkinson, A promised B to pay a certain amount to B’s


son C on C’s marriage to A’s daughter, as the young man was to take up
the new responsibilities of marital life. After the demise of both the
contracting parties, ‘C’ sued the executors of A (his father-in-law) upon
the agreement between A and his father. It was held that ‘C’ could not
maintain the suit against the defendant being stranger to the contract.
Exceptions to the Doctrine of Privity of Contract

The rule that a stranger to a contract cannot sue


on the contract is, however, subject to certain
statutory exceptions both under the Indian Law
and the English Law. Thus, a person who is not a
party to a contract can sue upon it in the
following cases.
• Trust or Charge
• Marriage settlements
• Family settlements
• Agency
VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION

The Indian Contract Act contains certain exceptions, which make a


promise without consideration valid and binding, stated as under.
1. Natural Love and Affection
• An agreement without consideration is valid if it is
• made in writing,
• registered,
• made out of natural love and affection, and
• between the parties standing in near relation to each other [Section
25 (1)]

• In Rangaswamy’s Case an elder brother, on account of natural


love and affection, promised to pay off the debts of his younger
brother. The agreement was put into writing and was registered.
Later the elder brother stopped making payments for which the
younger brother moved to the court. The court held the agreement
as valid and binding.
2. Promise to Compensate for Past Voluntary Services Cont…
VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION
Illustrations: Compensation for Past Voluntary Services
Example 1
A finds B’s purse and, gives it to him. B promises to give A Rs 50. This is a
valid contract.
Example 2
A supports B’s infant son. B promises to pay A’s expenses in future. This is
a valid contract.

3. Promise to Pay Time-barred Debt

4. Completed Gift

5. Agency

6. Guarantee
4. Competent Parties
Every person who has attained the age of
majority; is of sound mind, and is not disqualified
from contracting by any law, to which he is
subject, is competent to contract. [S11]
Incompetent Parties
• Minors
• Lunatics; and
• Persons disqualified by law to which they are
subjected.
Minor
A minor is a person, being domiciled in India,
who has not attained the age of 18 years.
Accordingly, every person, male or female,
who is under 18 years of age, is a minor.

Exceptions
1. Where a guardian of a minor's person or his
property or both has been appointed by a
court of law under the Guardian and Wards
Act, 1890, and
2. Where his property has passed under the
superintendence of the court of wards.
The Legal Position of Minor's Agreements
The legal position of minor's agreements may be
studied under the following heads:
• An agreement by a minor is void altogether
• Minor can always plead minority
• No ratification on attaining the age of majority
• Contracts for the minor’s benefits
• Contract by a parent or guardian – have limited
enforceability
• Contract by minor and adult jointly
• Minor as a partner
• Minor as an agent
• Minor as a shareholder
Cont…
• Minor and Insolvency
• A minor can become a shareholder, or a member of a company in respect
of fully paid shares (e.g., in case of transfer or transmission of shares) if
the articles of the company so permit. However, if a minor is allotted
partly paid shares, he being incompetent to contract, incurs no liability.
Thus company will not be able to recover the uncalled amount from the
minor in future.
• Contract of Apprenticeship by the Guardian of a Minor
• A contract of apprenticeship entered into on behalf of the minor or by his
parent or guardian is valid and is binding upon a minor as such a contract
is protected by the Apprentices Act, 1961 provided that the minor is not
less than 14 years of age at the time of making the contract.
• Minor's liability for Supply of Necessaries
• A Minor’s liability in Tort
• A tort refers to civil wrong or breach of duty other than under the
contract leading to incurring liability for damages. A minor is liable in tort
unless his act is directly connected with the contract and is the means of
producing it.
2. PERSONS OF UNSOUND MIND

A person is said to be of sound mind for the purpose of making a


contract if at the time, when he makes it, he is capable of
understanding it and of forming a rational judgment as to its effect
upon his interests [Section 12].
Accordingly, for the purpose of making a contract, a person is
deemed to be of unsound mind if at the time of entering into an
agreement he is:
• Incapable of understanding its terms; and
• Unable of forming a rational judgment as to its effect or
implications upon his interests.
• Unsoundness of mind may be caused by a variety of factors viz.,
idiocy, lunacy or insanity, intoxication (either from alcohol or the
use of narcotic drugs), mental festering due to old age etc.
Agreements by Idiots
• Inder Singh vs Parmeshwardhari Singh. A
property worth about Rs 25,000 was agreed to be sold
by a person for Rs 7,000 only. His mother proved that
he was a congenital idiot, incapable of understanding
the transaction. Holding the sale to be void,
• The Judge stated that, ‘…. It does not necessarily mean
that a man must be suffering from lunacy to disable
him from entering into a contract. A person may, to all
appearances behave in a normal fashion but, at the
same time he may be incapable of forming a judgment
of his own, as to whether the act he is about to do is in
his interest or not. In the present case he was
incapable of exercising his own judgment.’
Agreements by Lunatics

• As against idiocy, lunacy is not God-given. Hence,


a person can become a lunatic at any stage of his life.
He is a person who is mentally disturbed on account of
mental strain or other personal experiences and of
course; he may have some lucid intervals of sanity.
• Accordingly, he is bound for contracts entered into
during intervals of lucidity. But he shall not be liable as
regards contracts entered into during his lunacy i.e.,
while he was of unsound mind.
Cont…
• Agreements by Intoxicated Persons
An intoxicated person is placed in the same category as a
lunatic. In order to avoid a contract on this ground it must
be shown that the person was so intoxicated that he was
unable to understand the terms of the contract or form a
rational judgment as to its effects on his interests.
• Exceptions
If a contract, entered into by a person of unsound mind, is
for his benefit, it can be enforced (for his benefit) at law
against the other party [Jugal Kishor vs Chedelu]. [Quasi -
Section 68].
• Burden of Proof
Where a person is usually of sound mind, the burden of
proving that he was of unsound mind at the time of
execution of a document lies on him who challenges the
validity of the contract.
PERSONS DISQUALIFIED BY LAW
1. Alien Enemies.
2. Convicts.
3. Undischarged Insolvents.
4. Foreign Sovereigns and Ambassadors.
5. Joint Stock Companies and Statutory
Corporations.
5. Free Consent
The term ‘consent’ indicates meeting of minds also referred
as ‘consensus-ad-idem’ i.e., contracting parties understand
the same thing in the same sense.

Consent is said to be free when it is not caused by coercion,


undue influence; fraud; misrepresentation; mistake.

Flaws in Consent and Their Effect on Validity of the Contract

Undue Misreprese
Coercion Fraud Mistake
Influence ntation
(Voidable) (Voidable) (Void)
(Voidable) (Voidable)
I - Coercion
• ‘Coercion’ is the committing, or threatening to commit,
any act forbidden by the Indian Penal Code or the
unlawful detaining, or threatening to detain, any
property, to the prejudice of any person whatever, with
the intention of causing any person to enter into any
agreement.
• What amounts to Inducing Coercion?
• Committing any act forbidden by the Indian Penal Code
• Threatening to commit any act forbidden by the IPC
• Unlawful detaining of any property
• Threatening to detain any property
Acts outside the Purview of Coercion
1. Threat to File a Suit. A threat of civil or criminal
prosecution does not constitute coercion since the
same is not an act forbidden by the Indian Penal
Code. However, a threat to file a suit on false
charge is forbidden by the Indian Penal Code and,
therefore, amounts to coercion.
2. Threat to Commit Suicide. A ‘suicide’ and a
‘threat to commit suicide’ are not punishable under
the IPC. An attempt and abetment to suicide are,
however, offence under IPC and, therefore,
punishable under it. If a person obtains the consent
of the other by threatening to commit suicide such
consent is also said to be caused by coercion.
II - Undue Influence
‘A contract is said to be induced by ‘undue influence’ where the relations
subsisting between the parties are such that one of the parties was in a
position to dominate the will of the other and used that position to obtain
an unfair advantage over the other.’
• Presumption of Domination of Will
a) Where he holds a real or apparent authority over the other. Instances of
such relations are relations between father and son, master and servant,
police officer and culprit, etc.
b) Where he stands in a fiduciary relationship to the other. Fiduciary
relationship refers to relationship based on trust and confidence.
 Doctor and patient
 Trustee and beneficiary
 Solicitor and client
 Spiritual advisor (guru) and his devotee
 Woman and her confidential managing agent
 Parent or guardian and child
 Transactions With Pardanashin Women
III - MISREPRESENTATION

Misrepresentation refers to a misstatement of fact made by


one party to the other, which, while may not be a term of
contract, induces the other party to enter the contract. A
contract, the consent to which is induced by
misrepresentation, is voidable.

• The positive assertion, is not true, though he believes it to


be true;
• Any breach of duty without an intent to deceive, gains an
advantage of the person committing it
• However innocently stated, a party to an agreement to
makes a mistake as to the substance of the thing, which is
subject of the agreement.
Essentials of Misrepresentation

• Made innocently, believing it to be true and without an


intent to deceive the other party.
• The representation or assertion should be of facts
material to the agreement.
• The statement must be untrue or turned out to be
untrue but was made with an honest belief in its truth.
• The person to whom the misrepresentation was made
must have relied on it in the sense that it must have
induced him to enter in to the contract.
• A party cannot complain of misrepresentation if ‘he
had the means of discovering the truth with ordinary
diligence’ .
Classification of Misrepresentations
Unwarranted Statements of Material Facts
• Where a person makes a positive statement of material facts not
warranted by his information say without any reasonable ground,
believing it to be true though it is not true, such act amounts to
misrepresentation
 For example, B wants to buy a high mileage giving car, A, a car showroom
employee shows a car stating its Fuel efficiency to be 40kmpl, later the
fuel efficiency turns out only to 15kmpl.
• Breach of Duty which brings Advantage to the Person Committing it
 The car model is soon to be discontinued
• Inducing Mistake about Subject matter
 The car is the demo car/ test drive car
Fraud
'Fraud' means and includes any of the following acts
committed by a party to a contract, or by his agent,
with intent to deceive another party to induce him to
enter into the contract.
• False and willful representation or assertion
• Perpetrator of Representation: Party to the contract or a stranger
• Intention is always to Deceive
• Representation Must Relate to a Fact
• Active Concealment of Facts
• Promise is Made Without Intention of performing it
• Representation must have Actually Deceived the other Party
• Any Other Act Fitted to Deceive
• Any such act or omission that the law specially declares as void
• The Party Misled must have suffered some Loss
Does Silence Amount to Fraud?

Mere silence is no fraud, even if its result is to conceal facts


likely to affect the willingness of a person to enter a
contract except,
• Where it is the duty of the person keeping quiet to speak,
and
• Where the silence is equivalent to speech
• Contracts of insurance.
• Contracts of family settlements.
• Fiduciary relationship.
• Contract of share allotment.
• Others . marriage engagement, sale of immovable
property, guarantee, etc.
Where Silence is Equivalent to Speech

• The silence of a person is equivalent to speech


when he keeps silent irrespective of an enquiry made
by the other person in a positive manner. The person
so maintaining silence is no less guilty of fraud.
• For example, A sells a TV set to B for a price. The
set apparently seems to be faultless. Even then B says
to A, ’If you don't deny it, I shall assume that the TV set
is not defective.’ A keeps mum. Here A's silence is
equivalent to speech. And if B subsequently discovers
any latent defect in the set, it amounts to fraud.
Mistake
Mistake usually, takes place when the concerned parties
are not well acquainted with the terms or subject matter of
the agreement, and they take the terms in a different
sense.

The mistakes in relation to contracts may be of two types,


namely:
 Mistake of Law
-Mistake of Law of Country
-Mistake of Foreign Law

 Mistake of Fact
-Bilateral Mistake
-Unilateral Mistake
6. Legality of Object
• WHAT IS A LAWFUL OBJECT?
The consideration or object of an agreement is lawful
unless it
• is forbidden by law, or
• is of such a nature that, if permitted, it would defeat the
provisions of any law; or is fraudulent; or
• involves or implies, injury to the person or property of
another; or
• is regarded as immoral by a court, or opposed to public
policy
In each of these cases, the consideration or object of an
agreement is said to be unlawful. Every agreement of
which the object or consideration is unlawful is void.

7. Certainty of Meaning
According to Section 29,"Agreement the meaning of which is not Certain
or capable of being made certain are void."
8. Possibility of Performance. If the act is impossible in itself, physically or
legally, if cannot be enforced at law. For example, Mr. A agrees with B to
discover treasure by magic. Such Agreements is not enforceable.
9. Not Declared to be void or Illegal. The agreement though satisfying all
the conditions for a valid contract must not have been expressly declared
void by any law in force in the country. Agreements mentioned in Section
24 to 30 of the Act have been expressly declared to be void for example
agreements in restraint of trade, marriage, legal proceedings etc.
10. Legal Formalities. An oral Contract is a perfectly valid contract, expect
in those cases where writing, registration etc. is required by some statute.
In India writing is required in cases of sale, mortgage, lease and gift of
immovable property, negotiable instruments; memorandum and articles
of association of a company, etc. Registration is required in cases of
documents coming within the scope of section 17 of the Registration Act.
All the elements mentioned above must be in order to make a valid
contract. If any one of them is absent the agreement does not become a
contract.

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