Understanding Consideration in Contracts in India

In contracts, “consideration” is a crucial concept that helps turn promises into legally binding agreements. Whether buying a product, hiring a service, or entering into any agreement, understanding what consideration means can help you navigate these transactions more confidently. This article breaks down the idea of consideration into simple terms, using relevant provisions from the Indian Contract Act, 1872, to clarify how it works.

What is Consideration?

Consideration is something of value that both parties agree to exchange when they enter into a contract. It’s the “give-and-take” that makes the contract meaningful.

For example, when you buy a phone, your payment is the consideration you give, and the phone itself is the consideration you receive.

Key points about consideration

1. Must be at the request of the person making the promise: Consideration only counts if the person who made the promise asked for it. If you do something nice for someone, without being asked, it doesn’t count as a consideration in a contract.
2. Can come from anyone: It’s not necessary for the person who benefits from the promise to be the one who gives the consideration. Even a third person can provide the consideration.
3. Must be legal: The thing of value being exchanged must be legal. You can’t have a valid contract for something illegal.
4. Must be real and possible: The consideration must be something that can actually be done. You can’t base a contract on something impossible.
5. Doesn’t have to be equal: The value of what’s being exchanged doesn’t have to be the same. One person might get a better deal, but that doesn’t make the contract invalid, as long as both parties agree.

Types of Consideration

1. Past Consideration: This happens when something has already been done before the promise was made. The Indian Contract Act recognizes past consideration, unlike English law, which generally does not.
   • Illustration: A teaches B’s son in January at B’s request. In February, B promises to pay A Rs. 200 for the teaching services. A’s teaching in January is considered past consideration because the promise to pay was made after the service was already provided.
2. Present Consideration: Also known as executed consideration, this occurs when both parties do something of value at the same time.
   • Illustration: You buy fruit from a vendor and immediately pay him the price. This exchange is a present consideration.
3. Future Consideration: Also known as executory consideration, this happens when one party provides consideration now, and the other party promises to provide their part at a later date.
   • Illustration: A agrees to supply laptops to B, and B agrees to pay A at a later date. The payment by B is a future consideration.

Exceptions to the rule of consideration

While usually, no consideration means no contract, there are some exceptions:

1. Love and affection: If someone gives something out of love, like a parent giving a house to their child, it can still be a valid contract even without consideration.
   • Illustration:  Mukesh promises to give his son  Akash a house out of natural love and affection. If this promise is put in writing and registered, it becomes a valid contract.
2. Paying for past services: A promise to pay for something done voluntarily in the past is enforceable, even without new consideration.
   • Illustration: A doctor, A, treats B’s family member in an emergency without discussing payment. Later, B promises to pay A Rs. 1,000 for the treatment. The treatment provided by A is past consideration, and B’s promise is enforceable.
3. Promise to pay an old debt: A promise to pay a debt that has become too old to enforce by law is valid if it is made in writing and signed by the debtor.
   • Illustration: A owes B money, but the debt is time-barred. If A writes and signs a promise to pay B the debt, it is enforceable.

Consideration in specific contexts

1. Gifts: The rule of “no consideration, no contract” does not apply to completed gifts. If a gift is given according to the law, it is valid even without consideration.
   • Illustration: A gives B a gift of a piece of land, and the gift is registered according to the law. A cannot later demand the land back, claiming there was no consideration.
2. Agency: No consideration is necessary to create an agency relationship, where one person acts on behalf of another.
   • Illustration: A authorizes B to act on his behalf in a business deal. Even though B is not paid for this, the agency relationship is still legally valid.

Conclusion

In simple terms, consideration is what you give and get in a contract. It’s an essential part of making sure that both parties are committed to the agreement. Understanding this concept, along with the types of consideration and exceptions, helps you know your rights and obligations in any contract you enter into.