Consideration in Contract: Definition, Essentials, Kinds and Privity of Contract

What is Consideration in Contract?

Meaning of Consideration in Contract: – 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 in a contract for the promise. Consideration is the foundation of every contract. The law insists on the existence of consideration if a promise is to be enforced as creating legal obligations. A promise without consideration is null and void.

Consideration means “something in return“. When at the desire of the promissory, the promise or any other person has done or abstained from doing or does or abstains from doing or promise to do or abstain from doing. Something such act or abstinence or promise is called a consideration in contract for the promise. This is the price paid for the contract. It should be valid. The contract is void without consideration. Consideration is necessary for the formation of a contract.

Consideration in contract must be of value and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). Contracts may become unenforceable for failure of consideration when the intended consideration is found to be worth less than expected, is damaged or destroyed, or performance is not made properly. Acts which are illegal or so immoral that they are against established public policy cannot serve as consideration for enforceable contracts.   

For Example: – In the contract for the sale of a car, the price paid for the car is a consideration.

Section 2(d) of the Indian Contract Act, 1872

Meaning of Consideration: – Section 2(d) of Indian Contract Act states that, “when on the will of the promisor, the promisee or any other person has done or abstained from doing, promised to do or abstains from doing anything, such act or abstinence or promise is said to be known as consideration of a promise”.

If the promisee does either of the two below-mentioned act on the promisor’s will,

• Does something (past, present or future) or
• Abstain from doing something (in the past, present or future)

1. Example 1- Doing something: –
   • Peter and John enter into a contract where Peter promises to give John 15 curtains in a month. Also, John promised to pay Peter Rs 3,000 on delivery. In this contract, John’s promises to pay 3,000 rupees is the consideration for Peter’s promise. Also, Peter’s promise to give 15 curtains is the consideration of ​​John’s promise to pay.

2. Example 2- Abstain from doing something: –
   • Peter has taken a loan from his friend John. However, he has not yet paid the debt. John promises not to file a lawsuit against Peter if he promises to repay the loan within a week. In this case, the restraint on behalf of John is due to Peter’s consideration of his promise to repay the loan.

What are the kinds of Consideration in contract?

There are three kinds of consideration in contract, as follows: –

1. Past consideration
2. Present consideration
3. Future consideration

Explanation: –

1. Past Consideration: –
   • Past consideration is something which is completely done by the promisee even before making of agreement. It is supported by the future promise.
   • For example: – ‘X’ was a child and at his will, ‘Y’ provided him with certain commodities. ‘X’ promises ‘Y’ that after attaining the age of majority ‘X’ will compensate ‘Y’ for what he did in the past.
   • In English Law, there is no past consideration.
2. Present Consideration: –
   • If the promise and the consideration are together, then it is the present or executed consideration.
   • Example:- ‘A’ went to a shop to buy some vegetables from the shop keeper ‘B’. In return ‘A’ gave money to ‘B’ on the spot. In this case, the consideration is the present consideration.
3. Future Consideration: –
   • When consideration for a promise moves after the contract is formed, it is the future consideration. It is also valid if it depends on the situation.
   • Example:– Peter has promised to make architectural plans for John’s new house. John promises to pay Peter Rs. 50,000, provided that his wife approves the plans.

What are the essentials of a valid consideration in contract law?

According to Section 2 (d) of the Indian Contract Act, the following essentials are required for valid consideration: –

1. Consideration should be made at the Promisor’s Desire: – Only at the request or desire of the promisor, consideration can be offered by the promisee only. If an act is done at the desire or will of the third-party, then it is not a consideration. In order to constitute legal consideration, the act or abstinence forming the consideration for the promise must be done at the desire or request of the promisor. Thus acts done or services rendered voluntarily, or at the desire of third party, will not amount to valid consideration so as to support a contract.

2. Consideration may move from the Promisee to Any Other Person: – The second essential of valid consideration, as contained in the definition of consideration in Section 2(d), is that consideration need not move from the promisee alone but may proceed from a third person. This essentially means that in India, consideration can move beyond promising another person. However, it is important to note that there may be no stranger to the contract but there can be a stranger to consideration. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promisee or from any other person. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract. This is sometimes called as ‘Doctrine of Constructive Consideration’.

3. It can be in the Past, Present or Future: – The words, “has done or abstained from doing; or does or abstains from doing; or promises to do or to abstain from doing,” used in the definition of consideration clearly indicate that the consideration may consist of either something done or not done in the past, or done or not done in the present or promised to be done or not done in the future. To put it briefly, consideration may consist of a past, present or a future act or abstinence.
   • Past consideration: – When something is done or suffered before the date of the agreement, at the desire of the promisor, it is called ‘past consideration.’ It must be noted that past consideration is good consideration only if it is given by the promisee, ‘at the desire of the promisor. It is important to note that the consideration is given in the past because it is not given in exchange for the promise. According to Indian law, a ‘past consideration’ is a ‘good consideration’ if it was given at the will of the promissor.
   • Present consideration: –  Consideration which moves simultaneously with the promise is called ‘present consideration’ or ‘executed consideration’. If the promise and the consideration are together, then it is the present or executed consideration. An example is Peter goes to a store, buys a bag of chips and pays for the same on-spot.
   • Future Consideration: – When the consideration on both sides is to move at a future date, it is called ‘future consideration’ or ‘executory consideration’. When consideration for a promise moves after the contract is formed, it is the future consideration. It consists of an exchange of promises and each promise is a consideration for the other. It is also valid if it depends on the situation. Peter has promised to make architectural plans for John’s new house. John promises to pay Peter Rs. 50,000, provided that his wife approves the plans.

4. It must have value in the eyes of the law: – The fourth essential of valid consideration is that it must be ‘something’ to which the law attaches a value. The consideration need not be adequate to the promise for the validity of an agreement. While the law allows the parties to decide a ‘substantial’ consideration for them, it must be genuine and must have value in the eyes of the law. Although the Court will not consider the inadequacies, it will look to determine whether the will of the party is free or not.

5. It must not be unlawful: – According to section 23 of the Indian Contract Act, an agreement which has unlawful consideration is considered to be void. A consideration that is against the law or public policies is not valid. Peter offered John Rs. 10,000 to beat his business rival. John kills him but Peter refuses to pay him. John cannot sue for recovery because the idea is against the law.

What is Privity of Contract?

Meaning of Privity of Contract: – The principle of privity of contract states that, only the contracting parties can enforce the contract or take action against it. A person who is not a party to the contract but have certain benefits from the contract, is not entitled to take any enforcement action.

As a general rule, contractual rights and liabilities only affect the parties to the contract and not the other person, who is not a party to the contract. A contract cannot impose rights and liabilities on a person who is not a party to the contract.

For example: – If ‘B’ promises ‘A’ to give 100 rupees to a third party ‘C’. Thus, ‘A’ and ‘B’ can sue each other in case of breach of contract. However, ‘C’ cannot sue the parties. This is known as the privity of contract.

Different courts in India have different views about the concept of privity of contract. There have been cases where the third party has not sued in case of default due to the operation of the privity of contract rule, while there are some cases where the rule of privity of the contract is completely disregarded. Therefore, the rule of privity of contract is the subject of great debate among scholars.

What are the exceptions to the doctrine of privity of contract?

There are some exceptions to the principle of privity of contract where the third party is allowed to enforce the contract, as follows: –

1. Agency: –
   • In the case of a principal-agent relationship, which is between the third party and the contracting party, here the third party is the principal party who has expressly consented that the other has to act on his behalf and the contracting party is the agent who consents to act in that manner.
   • The third-party, who is the principal party, can also enforce the contract.

2. Family Settlement: –
   • If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
   • For Example: – Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary.

3. Trust: –
   • If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
   • If one party ‘A’ promises the ‘B’ for the benefit of ‘C’. Here, ‘C’ can enforce the contract because ‘B’ is the trustee of ‘C’.
   • Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of the estate in Ravi’s name, once he becomes 21 years old. After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue upon the contract between Arjun and his father, even though he was not a party to it.
   • A person can become a trustee of a contract if he fulfills the following conditions: –
     • There should be an intention of the party to create trust.
     • The intention is to benefit a third party and not all the third parties.

4. Assignment of a Contract: –
   • If a contract is made for the benefit of a person, then he can sue upon the contract even though he is not a party to the agreement. It is important to note here that nominees of a life insurance policy do not have this right.

5. Acknowledgment or Estoppel: –
   • If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied.
   • For Example: – Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the amount.

6. Collateral Contract: –
   • If the contract is the collateral contract, all the parties who are involved in collateral contract can enforce the contract. the party involved in the contract are as follows: –
     • Manufacturer
     • Seller and Purchasor
   • For Example: – If ‘A’ purchases goods from ‘B’, there is a contract between ‘A’ and the manufacturer of the goods.

7. The Sale of Defective Goods: –
   • One exception to privity is manufacturers’ warranties for their products. It used to be the case that a lawsuit for breach of warranty could only be brought by the party to the original contract or transaction; so, consumers would have to sue retailers for faulty goods because no contract existed between the consumer and the manufacturer.
   • Now, under modern doctrines of strict liability and implied warranty, the right to sue has been extended to third-party beneficiaries, including members of a purchaser’s household, whose use of a product is foreseeable.

8. A Covenant Running with the Land: –
   • When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.
   • For Example: – Peter owned a piece of land which he sold to John under a covenant that a certain part of the land will be maintained as a public park. John abided by the covenant and eventually sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.

Case laws under Consideration in contract

1. Rana Uma Nath Baksh Singh vs. Jang Bahadur (1939) 41 BOMLR 659
   • Facts of the Case: – In this case, Rana Uma Nath Baksh Singh was given possession of the entire property by his father. In return, Rana Uma Nath Baksh Singh had to give some money and a village to his father’s illegitimate child Jung Bahadur.
   • The Judgement of the Case: – It was held in this case that trust was formed for the benefit of Jung Bahadur and hence he is entitled to enforce the contract.
2. White vs. Bluett 
   • Facts of the Case: – In this case, a father promised his son that if he stopped complaining about the portion of the property given to him, he would release him from his debts.
   • The Judgement of the Case: – However, it was held by the court that the consideration was not a good consideration and therefore the son was found liable for the debt.