Consideration under the Indian Contract Act

Table of Contents

1. Introduction

2. What is consideration

3. Exceptions to the doctrine of consideration

4. Stranger to contract vis-a-vis stranger to consideration

5. Legality of object and consideration

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1. Introduction

If Ram says to Shyam,

‘I promise to give you Rs. 1000 on June 1’,

and Shyam replies,

‘I gratefully accept your promise’.

Should Shyam be able to enforce Ram’s promise in a court if Ram refuses to pay him Rs. 1000 on June1?

From a moral standpoint, the court should enforce Ram’s promise simply because he made it. However, from legal point of view, the question arises whether power of the Government be used to enforce such a promise where no economic exchange has taken place.

The transaction between Ram and Shyam does not involve an exchange; Ram’s promise is simply gratuitous (a gift). The gratuitous promises such as Ram’s are not enforceable at law. A promise is enforced by the law only if it is supported by consideration.

Section 10 of the Indian Contract Act, 1872, describes lawful consideration as one of the essential ingredients to constitute a valid contract which means that an agreement without consideration is void. This is doctrine of consideration. We find at the outset that bare words of promise have no standing/binding on either party. The reason why the law enforces only those promises which are made for consideration is that gratuitous or voluntary promises are often made rashly and without due deliberations.

In the Contract law, our problem is to determine the presence or absence of consideration or the facts that will operate to create legal duties and other legal relations.

The law looks with disfavour upon an exchange of promises which would result in one of the parties obtaining, ‘Something for nothing’. It supplies no means nor affords any remedy to compel the performance of an agreement made without sufficient consideration.

But will the presence or absence of consideration always be proof of the existence or non-existence of an enforceable contract? Does consideration always have to have an economic value? Whether its legality also affects the enforceability of the contract? You may keep these questions in mind as you read this chapter.

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2. What is consideration

Consideration means something in exchange. It is an essential element ordinarily required in a contract. One of the basic ideas underlying the present day requirement of consideration is that one party to an agreement should not be bound by it if the other party is not similarly bound. Generally, if an agreement lacks consideration, neither party can enforce it, even if it is in writing.

Stating it positively, the concept of consideration requires that both parties to a contract shall have given and have received something as the “price” of their respective promises. For example: X promise to install a home-air conditioning unit for Y, and Y promises to pay X Rs. 1,100 for the job. Here the price X has received (in return for his obligation to install the unit) is the right to a payment of Rs. 1,100 from Y when the job is done; similarly, the price Y has received ( for her promise to pay the Rs. 1,100) is her right to have the unit installed.

In the famous English case of Currie v. Misa, consideration was defined by Lush, J. as follows – ‘a valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’

The second part of this judicial description is the more important one as it emphasizes that the consideration is reflected not so much in profit for one party but abandonment of some legal right by the other party. It does not matter whether the party accepting the consideration has any apparent benefit thereby or not; it is enough that he accepts it, and that the party giving it thus thereby undertakes some burden, or lose something which in contemplation of law may be of value.

Section 2(d) of the Indian Contract Act defines consideration as: ‘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 for the promise.’

As per this definition, consideration is something in return of a promise which consists of :

1. an act, abstinence or forbearance,
2. done at the desire of the promisor,
3. by the promisee or any other person,
4. which can be either already executed or is in the process of execution or may still be executory.

Thus if at the desire of A, B agrees to paint a picture for him at an agreed remuneration, the painting of the picture would be regarded as consideration moving from B and the remuneration as consideration moving from A.

2.1 Essential elements of consideration

The above elements of consideration can be elaborated as follows :

(1) Consideration must move at the desire of the promisor – An act or abstinence without any request from the promisor is a voluntary act and does not come within the definition of consideration. Similarly an act or abstinence done at the request of any person other than the promisor does not constitute consideration. In other words an act shall not be a good consideration unless it is done at the desire of the promisor.

Examples:

1. A sees B drowning and saves his life. A cannot demand payment for his services as it is a voluntary act on his part and B never asked him to do so.
2. The collector of a district asked D to spend some money on the improvement of a market and he did so. The shopkeepers of the market promised to pay commission to D on their sale. Later on they refused to pay the commission. D cannot demand payment from the shopkeepers who are using the market for having improved the market as he had done so at the desire of the collector and not at the request of shopkeepers – Durgaprasadv. Baldeo [1880] 3 All. 221.
3. Where a depositor drew a cheque upon a bank for an amount bigger than there was money to his credit and the bank paid the amount of the cheque because of their own mistake and not because there was any request from the depositor to honor his cheque, it was held that there was no consideration involved and hence the depositor was under no legal obligation to refund the excess amount paid by the bank – AIR 1958 AP 605 (607)
4. A person advanced money to the son on an undertaking given by the father and obtained Promissory notes (pronotes) for the amount advanced. When the father failed to pay the amount on the pronotes,it was held that these pronoteswere without consideration inasmuch as the advances were not made at the desire of the son who was the promisor under these pronotes – AIR 1948 PC 150 (155)

(2) Consideration may move from the promisee or any other person – It means that so long as there is consideration for promise, it is immaterial who has furnished it. It may move from the promisee, or from any other person if the promisor has no objection.

Examples:

1. In marine insurance, broker’s undertaking to pay premium is consideration though it moves from a third person – AIR 1926 Bom. 82 (85)
2. An old lady, by a deed of gift made over certain property to her daughter D under the direction that she should pay her aunt, P (sister of the old lady), a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the amount on the plea that no consideration had moved from P to D. Held, P was entitled to maintain the suit as consideration had moved from old lady, sister of P, to the daughter D – Chinnayav. Rammaya [1882] 4 Mad. 137.

Note: A consideration moving from third party who is a minor is no consideration [AIR 1949 Bom. 215 (217)].

(3) Consideration is an act, abstinence, forbearance or detriment – At times consideration is taken as misnomer of money form of exchange. The legal term consideration does not mean payment of money only. The Contract Act says that the consideration can be in the form of an act, abstinence, forbearance or detriment.

(a) Consideration as an act – An act done by a person can constitute consideration. Where a person executes an undertaking in favour of a bank on the basis of which he receives a substantial benefit of having a current overdraft account with a bank, the facility of overdraft account cannot be said to be without consideration – AIR 1953 Tripura 10 (10).

(b) Consideration as an abstinence – To constitute abstinence as consideration, one must refrain or promise to refrain from doing something that he or she is privileged to do.

Example – X promised to pay his nephew Y, a sum of Rs. 50,000 if he would refrain from drinking, using tobacco, swearing and playing cards for money until he becomes 21 years of age. The nephew refrained from all the specified activities as he was requested to do but his uncle died without making the payment. He claimed the money out of the uncle’s estate as his legal right. Held that, he abandoned his legal right and restricted his lawful freedom of action upon the faith of his uncle’s agreement although it may seem that such performance actually did not prove to be a benefit to the promisor. Such detriment however amounted to consideration and he was granted the promised sum of Rs. 50,000.

(c) Consideration as forbearance – Forbearance means foregoing one’s legal right or claim. Creditor forbearing to enforce execution and allowing time to pay at the request of the debtor is a good consideration – AIR 1912 Cal. 67 (69)

Examples:

1. 1. An agreement to accept a decree and not to appeal against it when parties to it would have appealed is one which is supported by good consideration – AIR1969 Bom. 221 (223, 224)
   2. A promises to pay C, his law partner, Rs. 750 if C will give up his part-time job in a dance band for the next nine months. C lives up to the terms of the offer, but A refuses to pay. If C brings suit to recover Rs.750, A is liable. Here again we have a unilateral contract, promise in exchange for a negative act (or a forbearance) – the act of not playing in the band. C’s refraining constituted both an acceptance of the offer and a legal detriment to him; thus we can see that A’s promise was supported by consideration.

(d) Consideration as detriment – A detriment suffered by the promisee or any other person, whether actual or prospective, can constitute a good consideration. The ordinary contract of guarantee is good example of detriment form of consideration. In consideration of A’s lending B Rs.1000, C promises to repay the loan if B does not. Here C derives no benefit, but A suffers detriment by parting with his money, and this is enough consideration to support C’s promise provided A lends the money at C’s request.

Example: X, a publisher, promises Y: “If you will loan Rs. 5,000 to my nephew for one year, I will run all your advertisements during that time at half the regular rate.” Y makes the loan, but X refuses to provide advertising space at the reduced rate. If Y sues X to recover damages for breach of contract – that is, Y seeks to enforce X’s promise – X is liable. Y’s act of making the loan to the nephew constituted not only an acceptance of X’s offer but a detriment to Y – the parting with something of value where he was not otherwise legally obligated to do so. Thus X’s promise, supported by consideration, is enforceable against him.

Note: That it is not necessary for the promisor to receive any benefit as long as the promisee or someone else suffers a detriment.

(4) Consideration can be past, present or future

(a) Past consideration – A past consideration consists in an act already done by one as consideration for a promise of the other. Thus when a person promises to compensate another in return for what the latter had done for the promisor in the past or before making of the promise, such promise is said to be for past consideration, i.e. consideration which took place in the past. Past consideration is as good as present or future consideration. For example, A does some work for B in the month of April without expecting any return from B. Later on, in June, B promises to pay him some money for the work done in April. This constitutes a valid contract as the work done by A is of the nature of past consideration.

Example – “A” provided extra services to B (his master), after which B promised him a bonus for the same. Later on B refused to pay the bonus. Held that, if the servants put forth extra work in consideration whereof a bonus is subsequently promised to them by the masters, it is in law a promise for past services which is good under Indian Law – AIR 1925 Mad. 192 (194) DB

Note: Under the English law, past consideration is no consideration. But under the Indian Law past consideration is good consideration because of the use of the words “has done or abstained from doing” in the definition of “consideration”.

(b) Present (Executed) Consideration – The consideration which moves simultaneously with the promise is present consideration. It consists in “doing” or “abstaining from doing something”. The best example of present consideration is cash sale where performance by both the parties (seller and buyer) is simultaneous. Another example is a contract of marriage where there is simultaneous performance by both the parties.

The present consideration is also known as executed consideration because it emphasizes on the execution part of performance. A may offer B $10 if B runs from London to Bath. Even though B says that he will accept A’s offer, yet until he has run from London to Bath, (i.e. B has performed his part of contract), there is no consideration for A’s promise. B accepts the offer and by running from London to Bath simultaneously executes the consideration which makes A’s promise a binding contract.

Note: Past consideration must be distinguished from the executed consideration. The consideration (running from London to Bath) in the above case is executed after the offer or request and simultaneously with the acceptance. But, if A promises B $10 in consideration of having run from London to Bath last week, the consideration is past. It is something wholly done before the offer or request and before acceptance of the offer.

(c) Future (Executory) Consideration – A promise to do something in future is legal consideration. When the consideration from one party to another is to move at some future date, it is called future consideration. The consideration for A’s promise to B may be a promise by B to A. The consideration is then said to be executory. If A promises to marry B in consideration of B promising to marry A, the promise made by each is the consideration for the promise made by the other.

Examples:

1. 1. M and B enter into a contract in April under the terms of which M agrees to build a swimming pool for B in June, B promising to pay Rs. 2,500 in return. M later refuses to perform, and B sues him to recover damages for breach of contract. M is liable; that is, his promise is enforceable.
   2. When the promise was given by one of the partner’s for investing certain amount in the partnership firm, it was itself consideration for agreement. Similarly, when such partner had also undertaken liability to bear losses, that was also consideration for other partners on the point of bearing loss and as such it could not be said that the agreement of partnership was without consideration – 1986 Tax LR 787 (789,790) (DB): [1986] 157 ITR 537 (Guj.).

2.2 Rules regarding consideration

In addition to the elements of consideration, the other general rules regarding consideration are as follows:

(1) Adequacy of consideration – Consideration, means “something in return”. This “something in return” need not necessarily be equal in value to “something given”. The law simply provides that a contract should be supported by consideration. So long as consideration exists, the Courts are not concerned as to its adequacy, provided it is of some value. The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the Court when it is sought to be enforced – Bolton v. Madden [1873] L.R. 9 Q.B. 57. Consideration must, however, be something to which the law attaches value though it need not be equal in value to the promise made. The Courts do not exist to repair bad bargains.

To illustrate, X contracts to sell land in MONTANA to Y for $6,000. Y later discovers that the actual value of the land is $3,000. Y is liable on this promise to pay $6,000, even though what he received was worth much less. Under the usual test, X incurred a detriment when he promised to convey the land – the surrender of his right to retain the property. The presence of this detriment constituted a consideration sufficient to support Y’s promise to pay; and Y’s claim of inadequacy is therefore of no relevance.

There are exceptions to the rule that the court will not inquire into the adequacy of the consideration. These apply in some contracts made by minors and generally in the cases where because of a special relationship, one party is able to take unfair advantage of another.

Though consideration need not be adequate to the promise, yet its inadequacy, if very great, would raise doubt in the mind of the judge trying the case, if the other party alleges that his consent to the agreement was obtained in an unfree manner.

Explanation 2 to section 25 of the Act says that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

Example – A agrees to sell a house worth Rs.1,00,000 for Rs.10,000. A’s consent to agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. However, if A says that his consent was not freely given, the inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A’s consent was freely given.

(2) It must have some value in the eyes of law – A valuable consideration may consist either in some right, interest or property accruing to one party or some loss or responsibility suffered or undertaken by the other. Moreover, consideration must be certain. A promise to give a reasonable sum in return for a service cannot be enforced on the grounds of uncertainty.

Although the court will not inquire into the adequacy of the consideration, there are certain acts and promises which, for reasons of policy, are deemed to be of no value in the eye of law and which are, therefore, an insufficient consideration. A promise to do any act, or forbearance from doing any act, which the promisor might lawfully do, is generally a sufficient consideration; but the law regards some promises as void and, if a promise is void, it is a nullity, it is not a sufficient consideration for a counter promise.

Example – In the case of White v. Bluett 1853, the promise by a father to release his son from an outstanding loan, if the latter refrained from boring the father with complaints, was refused to be enforced, since the essential elements of a bargain was lacking. The court observed that,

“It would be ridiculous to suppose that such promises could be binding. In reality there was no consideration whatever.”

Note: A consideration to be valid must be ‘good’ or ‘valuable’ in the sense in which these words appear in the English law though these words do not appear in the Indian Contract Act which speaks only of lawful and unlawful consideration.

(3) It must be real not illusory – The consideration should be real, i.e. it must not consist of impossible act or promise. It must not be illusory or sham, e.g. to discover a treasure by magic. The impossibilities can be categorized as:

Physical impossibility – A promises to pay B Rs. 1,00,000 in consideration of B bringing a star from the sky to the earth. This is unreal because B’s promise is absurd and physically impossible.

Legal impossibility – A owes Rs. 1,000 to B. He promises to pay Rs. 200 to C, the servant of B who in return promises to discharge A from the debt. This is legally impossible because C cannot give discharge for a debt due to B, his master – Harvey v. Gibbons [1675] 2 Lev. 161.

Illusory consideration – Illusory consideration gives impression of consideration which is not actually there. These agreements lack mutuality.

Examples:

1. S and D enter into a contract under the terms of which B promises to buy from S all the coal he “might wish” over the next 6 months, with S promising to sell such quantity at a specified price per ton. Because of the language used, intentionally or accidentally, B has not bound himself to buy any quantity of coal at all; thus he has incurred no detriment at all. This being true, neither promiser is liable to the other. The result is that if B later desires some coal, he is free to buy from whomever he wishes. Conversely, if B orders coal from S, S ordinarily has no duty to supply it.
2. In Stilkv. Myrick[(1809) 2 Comp 317] where two seamen deserted the ship, their Captain promised to divide their wages among the rest of the crew if they helped him take the ship home. The consideration was illusory as the crew was already duty bound to take the ship home.

(4) It must be something which a promisor is not already bound to do – Where one is doing, or promising to do something which one is already under an obligation to do will not form a good consideration. One can already be bound:

(i) under a duty imposed by law: Where a person is responsible to perform certain duty under laws of land, performance of such duties connot form a consideration to constitute a valid contract. Thus, where A promise to pay B, who had received summons to appear at a trial in a civil suit, a certain sum being a compensation for the loss of time during his attendance. It was held, the promise was without consideration as B was already under a duty imposed by law to appear and give evidence – Collins v. Godfrey [1831] 1B & AD 956.

(ii) under a duty emanating from an existing contract: If a person is bound to perform certain act under an existing contract, the same performance cannot form a good consideration for any other contract. There was a promise to pay the advocate an additional sum if the suit was successful. Held, the promise was void for want of consideration. The advocate was under a pre-existing contractual obligation to render the best of his services under the original contract – Ramachandra Chintaman v. Kaluraju [1877] 2 Bom. 302.

However, where a person being already under a legal contractual duty to do something undertakes to do something more than what he is bound to do under the original contract, this will be a good consideration for the promise, e.g., where a police constable who sued for reward offered for the supply of the information, leading to a conviction, had rendered services outside the scope of his ordinary duties, he may be held entitled to recover – England v. Davidson [1840] 19 L.J.Q.B 287.

(5) Consideration must be lawful – According to section 10 of the Act,

“All agreements are contracts if they are made for a lawful consideration”.

So a consideration must be lawful without which an agreement is void. Section 23 states that consideration is unlawful if

(a) it is forbidden by law;

(b) or, is of such a nature that if allowed it would defeat some law of the country;

(c) it is fraudulent;

(d) it involves injury to the property or person of the other;

(e) court regards it as immoral or opposed to the public policy.

There may be cases where one part of consideration is unlawful but the other is not. In such cases the whole agreement is void if the unlawful part connot be separated from the lawful part.

Example – A promises to work for B who runs both illegal and legal business for a sum of Rs. 4,000 per month and B agrees to pay this amount to A. The legal business can be separated from illegal business, the part of salary pertaining to legal business is lawful consideration.

In the above case, if legal and illegal businesses cannot be separated, whole salary of A will constitute unlawful consideration.

Lawfulness of consideration is discussed in detail in this Chapter under the heading ‘Legality of Object and Consideration’.

3. Exceptions to the doctrine of consideration

So far, we have seen that an agreement has to be supported by consideration to be enforceable at law. But there may be certain circumstances where it will not be reasonable to apply the doctrine of consideration to meet the basic motives of the law. Section 25 of the Indian Contract Act, 1872 takes care of such circumstances. It says that,

“An agreement without consideration is void unless it is in writing and registered or is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law.”

Such circumstances are elaborated below:

(1) Love and affection [Sec. 25(1)] – An agreement is enforceable even if there is no consideration, if it is

(i) expressed in writing,

(ii) registered under the law for the time being in force for the registration of documents,

(iii) is made on account of natural love and affection, and

(iv) between parties standing in a near relation to each other.

In simple words, a written and registered agreement based on natural love and affection between near relatives is enforceable even if it is without consideration –Ram Dass v. Krishan Dev AIR 1986 H.P. 9.

Examples:

1. F, for natural love and affection, promises to give his son, S, Rs. 1,000. F puts his promise to S in writing and registers it. This is a contract.
2. An agreement by a person entitled to a certain share in the income of a Trust, to pay out of that share a certain amount to his mother over and above her own share of that income is supported by consideration as per section 25 (1) of the Act [AIR 1949 Bom. 17 (18) DB].

Note: The Act does not provide any guidance as to who is near relative. The expression would therefore include parties related by blood or marriage. Further, nearness of relationship does not necessarily import natural love and affection.

3. A Hindu husband, after referring to quarrels and disagreement between him and his wife executed a registered document in favour of his wife agreeing to pay her for maintenance, but no consideration moved from the wife. Held, the agreement was void for want of consideration – Rajlukhyv. Bhoothnath, (1900) C.W.N. 488 as the essential requirement that the agreement is made on account of natural love and affection between the parties was missing.

(2) Compensation for past voluntary services [Sec. 25 (2)] – A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable, even though without consideration. In simple words, a promise to pay for a past voluntary service is binding.

Examples:

1. A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a contract.
2. A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
3. A says to B, “At the risk of your life you saved me from a serious accident. I promise to pay you Rs. 1,000.” There is a contract between A and B.
4. X agreed to pay Y Rs. 5 per mensem for life in consideration of Y having trained X in the art of singing. It was found that Y’s sister and not Y himself had rendered those services for X. In a suit by Y it was held that as Y himself had done nothing for X’, there was no consideration for the agreement and hence it was not enforceable. [AIR 1916 Pat. 80 (81)]

(3) Promise to pay a time-barred debt [Sec. 25(3)] – A time barred debt is a debt which is not recoverable because of lapse of specified time (presently 3 years) under the Limitation Act. In the normal course, once a debt becomes time barred, the lender is left with no remedy to get his money back. Therefore a debtor is not legally bound to pay the debt if it becomes time-barred.

In such a case, if the debtor subsequently promises to pay the time barred debt, apparently there is no consideration moving from the other party but the contract is still enforceable. This is because, under section 25(3) of the Act, a promise by a debtor to pay a time-barred debt is enforceable provided:

(i) it is made in writing,

(ii) is signed by the debtor or by his agent generally or specially authorized in that behalf, and

(iii) the debt must be such “of which the creditor might have enforced payment but for the Law of the limitation of suits.”

The promise may be to pay the whole or any part of the debt.

Example – D owes C Rs. 1,000 but the debt is barred by the Limitation Act. D signs a written promise to pay C Rs. 1,000 on account of the debt. This is a contract.

Note: Section 25(3) applies only :

(a) When a promisor himself was liable for the time barred debt. This means sub-section 25(3) would not apply to a case of a promise to pay a time barred debt payable by a third party – Pestonji v. Meherbai, 30 Bom. L.R. 1407.

If, however, a Hindu promises to pay a time barred debt due by his father, he can be held liable, because the Hindu law makes the son responsible for his father’s debts to the extent to which he has received property from his deceased father or to the extent of his ancestral estate – Champak Lal v. Raya Chand 1932 34 Bom. LR 1005.

(b) Where the promise is to pay an ascertained amount. A promise to pay what is due after taking accounts is not a promise within the meaning of section 25(3). [AIR 1952 Pat. 73 (77)]

(4) Completed gift [Explanation 1 to Sec. 25] – The rule “No consideration, no contract” does not apply to completed gifts. According to Explanation 1 section 25, nothing in section 25 shall affect the validity, as between the donor and the donee, of any gift actually made.

Thus transfer of properties by one person to the other as a gift according to the provisions of the Transfer of Property Act (i.e. by a written and registered document) is valid and a person transferring the property cannot subsequently demand the property back on the ground that there was no consideration.

Note: In earlier paras we have discussed that gratuitous promises/gifts are not enforceable at the court of law because in such cases there is no consideration for the donor. This is to be distinguished from the Explanation 1 to section 25 because as per the latter, once a gift has actually been made, the donor cannot demand it back on the ground that there was no consideration.

(5) Agency [Sec. 185] – Under section 185 of the Indian Contract Act, no consideration is necessary to create an agency, i.e. a transaction of agency. For giving a person authority to act as agent, consideration is not necessary. Thus if A authorises B to act on his behalf (act as an agent) before C, and B agrees to do so, the contract is enforceable at the court of law although no consideration is moving from A to B. A will be bound by the acts done by B on his behalf as against C. Even a gratuitous agent can be held liable for negligence. The principle of Promissory Estoppel emanates from this provision.

(6) Remission – Under section 63 of the Act, no consideration is necessary for an agreement to receive less than what is due, known as remission in the law.

Example – Creditor A agrees to accept Rs. 500 from B in full satisfaction of the debt of Rs. 1000. A subsequently cannot claim the amount of Rs. 500 which he has rescind.

(7) Guarantee [Sec. 127] – A contract of guarantee is made without consideration.

4. Stranger to contract vis-a-vis stranger to consideration

A stranger to the contract, not being a party to the contract, can neither sue nor be sued upon under it. However, if a party to contract is a stranger to consideration, it does not affect his legal rights under the contract.

4.1 Stranger to the contract

A person who is not a party (i.e. neither a promisor nor a promisee) to the contract is a stranger to the contract. Under the law of contract, an agreement can be binding on and can only be enforced against the parties to it. Since a contract is a private relationship between the parties who make it, the rights and obligations under such a contract are strictly confined to them – Tweedle v. Atkinson [1861-73] All. E.R. Rep. 369. This is known as the doctrine of privity of contract. From this follows a general rule of law that only parties to a contract may sue and be sued on a contract. Privity of contract means relationship subsisting between the parties who have entered into contractual obligations. The consequences of the doctrine of privity of contract are :

(i) a person who is not a party to a contract cannot sue upon it even though he has provided the consideration.

(ii) a contract cannot confer rights or impose obligations arising under it on any person other than the parties to it. Thus if there is a contract between X and Y, Z cannot enforce it.

Examples:

1. A clause in a Motor Insurance Policy providing that the Insurance Company shall indemnify the insured against his legal liability in respect of death of or accident of other passengers cannot give a right of suit against the insurance company for the money due under the policy to a passenger who is a mere stranger to the contract of insurance. [AIR 1938 Bom. 217(217)]
2. S bought tyres from the Dunlop Rubber Company and sold them to D, a sub-dealer, who agreed with S not to sell below Dunlop’s list price and to pay the Dunlop Company 5 Pounds as damages on every tyre sold below the list price by D.S sold two tyres at less than the list price and thereupon the Dunlop company sued him for the breach. Held, the Dunlop company could not maintain the suit as S was a stranger to the contract – Dunlop Pneumatic Tyre Co. Ltd.v. Selfridge & Co. Ltd.[1915] A.C. 847.

The principle that a person who is not a party to the contract cannot take advantage of its provisions is subject to certain recognised exceptions discussed under the heading ‘exceptions to the doctrine of privity of contract’.

4.2 Stranger to consideration

In the Indian Contract Act, in order to constitute a valid contract, the consideration may move from the promisee or any other person. In case, the consideration moves from a person other than the promisee, the promisee can be categorized as a stranger to the consideration. For example, if A promises to B that he will pay Rs. 1000 to B, if B can get a picture painted from C for A. Here consideration is moving from C to A (painting of picture by C for A) and from A to B (Rs. 1000) and there is no consideration from B to either party, i.e. B is stranger to the consideration, but the relationship of promisor and promisee subsists between A and B only. The relationship between A and C is that of the privity of consideration. But the privity of consideration does not confer any right to the party providing consideration to enforce the contract at the court of law, unless he is a party to the contract. This is known as the doctrine of privity of consideration. In the given example if A does not perform his part of the contract, C cannot sue upon A in the court for its enforcement, only B is entitled to do so. Conversely it can be said that a stranger to the consideration has a right to enforce a contract, provided he is party to the contract.

Example – Where a person transfers property to another and stipulates that money be paid to a third person, a suit to enforce that stipulation by that third party will not stand. [AIR 1930 Mad. 382(389) (FB)].

4.3 Exceptions to the Doctrine of privity to contract

Following are the exceptions to the rule that a stranger to a contract cannot sue :

(1) Beneficiary under trust or a charge – When a trust is created, the beneficiary can enforce the rights given to him under the trust, even though he was not a party to the contract between the settler and the trustees.

Examples:

1. A transfers some property in favour of B to be held by him in trust for the benefit of X. X can enforce the agreement even though he is a stranger to the contract.
2. In the case of Khwaja Khan v.Hussaini Begam[1910, 32 All 410 (PC)], it was held that where a Mohamaden lady sued her own father in law to recover arrears of allowance payable to her by her father-in-law under an agreement between him and her own father in consideration of her marriage, she could enforce the promise in her favour in so far as she was a beneficiary under the agreement to make a settlement in her favour, and she was claiming as a beneficiary under such settlement.
3. A appointed his son B as his successor and put him in possession of the entire estate. In consideration thereof, B agreed with A to give a certain sum of money and part of the property to C, A’s illegitimate son, on C’s attaining majority. Held, a trust was created in favour of C for the specified amount and property. Hence C was entitled to maintain a suit. – Umanath Baksh Singh v.Jang BahadurAIR 1938 PO 245.

(2) Doctrine of promissory estoppel – Courts have at times been confronted by the cases involving gratuitous promises and unaccepted offers, which are without consideration and hence not enforceable at law. Under certain circumstances, the courts will enforce gratuitous promises and unaccepted offers.

If a person makes a promise to the other, and that other person incurs a detriment relying upon the promise, in such a case, the promiser is estopped from going back from his promise to the extent the promisee has incurred a detriment on the basis of such promise. This is known as the doctrine of promissory estoppel.

For example, A promises to make a gift of Rs. 3,000 towards the repairs of temple. The trustee of the temple on the faith of his promise incurs liability worth Rs. 2,500. A does not pay. Can the trustee recover the promised amount from A ? Yes, because the trustee has taken action (i.e. spent amount on repair of the temple) on the basis of the promise made by B to the extent of amount spent by him, i.e. Rs. 2,500.

The basic idea underlying this doctrine is that if the promisor makes a promise under circumstances in which he or she should realise that the promisee is almost certainly going to react to the promise in a particular way, and if the promisee does so react, thereby causing a substantial change in his or her position, the promisor is bound by the promise even though the consideration is lacking.

Examples:

1. A tenant takes a building on lease from the landlord from January 1, 1967 to December 31, 1968. In early December 1968, the tenant indicated his intention of remodelling the premises and asked for renewal of lease for two years. The landlord replied to him that, we will get to work on a new lease soon. I don’t know about two years, but you can count on one year for sure. The tenant then spent $500 over the next few weeks on remodelling the house but the parties never executed a new lease. The landlord sought to evict the tenant in March 1969 on the ground that no renewal contract had been formed, he was held unsuccessful-and was held to fulfil his promise regarding the year 1969. In this case, the landlord should have realised the likelihood of the tenant’s conduct in consequence of his promise, he is said to be “stopped by his promises”; he cannot contend that the lack of consideration on the tenant’s part caused his promise to be unenforceable.
2. In the case of Kedar Nath v.Gauri Mohammed 1886 I.L.R. 14 Cal. 64, where the secretary of townhall had acted on the faith, that the promisee will pay Rs. 100 for construction of townhall, and incurred a liability, the court enforced the claim for the recovery of the amount to the extent of the liability incurred by the promisee.

Note: Where the promisee has not acted, i.e. not suffered any detriment based on the promise made by the promisor, then such a promise is not tenable at the court of law.

3. X promised to pay Rs. 500 for rebuilding of a mosque which he refused later on. The secretary of the Mosque Committee filed a suit to enforce the promise to subscribe Rs. 500 for rebuilding of the mosque. By that time no initiative was taken for the rebuilding. Court dismissed the suit on the ground that the Mosque committee did not suffer any detriment or liability on the faith of such promise.

(3) Family Settlements – Family arrangements or compromises made among male members for the benefit of female members of the family can be enforced by the female members, although the female members are not a party to those arrangements. Thus where an agreement is made in connection with marriage, partition or other family arrangement and a provision is made for the benefit of a person, that person may take advantage of that agreement although he is not a party to it.

Examples:

1. On the partition of a joint Hindu family property, an agreement was entered among its male members to make provision for the marriage expenses of a female member. Held, the female member was entitled to sue the parties to the partition deed to enforce the provision in her favour – Sunder Raja Aiyengar v.Laxmi Ammal1915 38 Mad. 788.
2. Two brothers on a partition of the family property agreed to pay Rs. 300 in equal share to their mother for maintenance. It was held that the mother, though a stranger could enforce the provision in her favour – Shuppu Ammal v.Subramanian1910 33 Mad. 238 41 C1083.

(4) Marriage Settlement of Minor – In case of provisions of marriage settlement of minors, the minor is entitled to sue to enforce his claim. This is because in India, marriages are contracted for minors by their parents and guardians and therefore the Doctrine of Privity of Contract does not apply in this case.

Example – R’s father entered into an agreement for her marriage with J. Subsequently, J refused to marry. It was held that R after attaining majority could sue J for damages of breach of the promise and J could not take the plea that R was not a party to the agreement – Rose Fernandis v. Joseph Gonsalvis AIR 1925 Bom. 97.

(5) Agency – Contracts entered into by an agent can be enforced by the principal.

Example – A appoints B as his agent for selling the goods. B sold the goods to a buyer C. C sued A for defective goods. In this, though there is no direct contract between A and C, yet A is liable because B has sold the goods to C as A’s agent.

When an agent sent the goods to a foreign buyer not as his own, but as agent of principal, there is privity of contract between the principal and the foreign buyer, even in cases when the agent has not disclosed the name of the principal – [1981 47 STC 62(66) Mad.]

(6) Covenants running with the land – In cases of transfer of immovable property, the purchaser of land is bound by certain conditions or covenants created by an agreement between the original buyer and the concerned authority effecting the land although he was not a party to the original agreement which contained those conditions or covenants – Tulk v. Moxhay (1919) 88 LJ KB 861.

5. Legality of object and consideration

According to section 10 of the Indian Contract Act, 1872, lawful consideration and object is one of the essential ingredients to constitute a valid contract. Section 23 lays down the cases where the consideration and object (purpose or design) of an agreement can be deemed to be unlawful.

 

Anything which is not lawful within section 23 is unlawful for the purpose of an agreement or compromise, and a decree incorporating such an agreement or compromise is a nullity. The section declares following agreements to be void for unlawfulness :

(1) Where the consideration or object is forbidden by law – A contract which is expressly forbidden and made criminal by statute can give no cause of action to a party who seeks to enforce it.

Examples:

1. A promises to obtain for B an employment in the public service, and B promises to pay Rs. 1,000 to A. The agreement is void as the consideration for it is unlawful.
2. Oral sale of any immovable property under the J&K Transfer of Property Act is forbidden and thus such oral contract would be void under section 23 of the Contract Act – [1989 3 Cur CC 56(57) J&K].
3. An agreement to sell paddy above the maximum price fixed under Maximum Price Control Order – it is unlawful or void – [AIR 1972 Andhra 367 (368)].

(2) Where the consideration or object defeats the provisions of any law– Where a contract is to do a thing which cannot be performed without an infringement of law, it is void whether parties knew the law or not.

Examples:

1. A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void as its purpose is to defeat provisions of law.
2. A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser, and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law.

(3) Where the consideration or object is of such nature that it is fraudulent – Where agreement involve the commission of a wrong, or commission of a fraud against a third person or the commission of fraud against the public, they are unlawful and unenforceable.

Examples:

1. A, B and C enter into an agreement for the division among them, of gains acquired, or to be acquired, by them by fraud. The agreement is void.
2. A, being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment by A on his principal.

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