Consideration

What is Consideration?

**Consideration** is a fundamental concept in contract law that refers to something of value that is exchanged between parties to a contract. It is the price paid for the promise of the other party — the "something in return" that makes a bare promise legally binding. Without consideration, an agreement is generally not enforceable as a contract (with certain exceptions).

In simple terms, consideration is what each party gives or promises in a deal — if you agree to sell your car for Rs. 5 lakh, your car is the consideration for the buyer's Rs. 5 lakh, and the Rs. 5 lakh is the consideration for your car.

Legal Definition

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

**Section 2(d)** provides the statutory 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 abstain from doing, something, such act or abstinence or promise is called a consideration for the promise."

Breaking this down:

- **"At the desire of the promisor"** — The act or abstinence must be done at the request of the person making the promise, not voluntarily or at the request of a third party.

- **"The promisee or any other person"** — Indian law allows consideration to flow from the promisee or from any third party. This is a significant departure from English law, which requires consideration to move from the promisee.

- **"Has done or abstained from doing" (past), "does or abstains from doing" (present), or "promises to do or abstain from doing" (future)** — Consideration can be past, present, or future.

Section 25 — Agreement Without Consideration is Void

**Section 25** of the Indian Contract Act states the general rule: "An agreement made without consideration is void." However, this section provides three important exceptions:

1. **Natural love and affection (Section 25(1)):** An agreement made without consideration is valid if it is expressed in writing and registered, made on account of natural love and affection, and between parties standing in a near relation to each other.

2. **Compensation for past voluntary service (Section 25(2)):** A promise to compensate a person who has already voluntarily done something for the promisor is enforceable without fresh consideration.

3. **Promise to pay a time-barred debt (Section 25(3)):** A written and signed promise to pay a debt barred by limitation is enforceable without consideration.

Rules Governing Consideration

Consideration Must Be Real

Consideration must have some value in the eyes of the law. It need not be adequate — the law does not require that the consideration be proportionate to the promise. A person may sell a property worth Rs. 1 crore for Rs. 1 lakh, and the contract is valid (though grossly inadequate consideration may be evidence of fraud or undue influence).

The Supreme Court in **Chidambara Iyer v. Renga Iyer AIR 1966 SC 193** held that inadequacy of consideration, by itself, does not render a contract void, but may be a factor in determining whether consent was freely given.

Consideration Need Not Move from the Promisee

Under Indian law, consideration can be provided by a **third party** who is not a party to the contract. This is established by **Section 2(d)** which uses the phrase "the promisee or any other person." This was upheld in **Chinnaya v. Ramayya (1882) ILR 4 Mad 137**, where the Madras High Court held that consideration furnished by a third party (the promisee's mother) was valid.

Past Consideration is Valid

Unlike English law, Indian law recognises **past consideration** — an act done before the promise was made can constitute valid consideration, provided it was done at the desire of the promisor. The words "has done or abstained from doing" in Section 2(d) expressly cover past consideration.

Consideration Must Be Lawful

**Section 23 of the Indian Contract Act** provides that consideration is unlawful if it:

- Is forbidden by law.

- Would defeat the provisions of any law.

- Is fraudulent.

- Involves injury to the person or property of another.

- Is regarded by the court as immoral or opposed to public policy.

An agreement with unlawful consideration is void.

Consideration Must Not Be Illusory

The consideration must be real and not illusory. A promise to do something one is already legally obligated to do (such as a police officer promising to investigate a crime for payment) is not valid consideration.

Practical Examples

Sale of Goods

A agrees to sell 100 kg of rice to B for Rs. 5,000. The rice is consideration for B's payment, and the Rs. 5,000 is consideration for A's rice. Both parties provide consideration, making the agreement an enforceable contract.

Employment Contract

An employer promises to pay a monthly salary of Rs. 50,000 to an employee. The employee's work and services constitute the consideration for the employer's promise of salary. The salary is the consideration for the employee's services.

Natural Love and Affection

A father, out of love and affection, executes a registered written agreement to gift a piece of land to his son without any monetary consideration. Under Section 25(1), this agreement is enforceable despite the absence of monetary consideration because it is in writing, registered, and between near relations based on natural love and affection.

Past Consideration

A finds B's lost wallet containing Rs. 50,000 and returns it. B, grateful for the act, later promises to pay A Rs. 5,000 as a reward. A's past act of returning the wallet constitutes valid past consideration under Section 2(d), and B's promise is enforceable under Section 25(2).

When Does This Term Matter?

In Contract Formation

Consideration is one of the essential elements for a valid contract under Section 10 of the Indian Contract Act. Without consideration (and without falling under an exception), there is no enforceable contract. This is relevant in everyday commercial transactions, employment agreements, service contracts, and property deals.

In Gift Transactions

Understanding the exceptions to the consideration requirement is crucial for gift deeds and family settlements. A gift deed between near relatives, if properly written and registered, is valid under Section 25(1) despite the absence of monetary consideration. However, a gift between strangers without consideration may not be enforceable as a contract (though it may be valid as a gift under the Transfer of Property Act).

In Dispute Resolution

When contracts are challenged, the existence and validity of consideration is often a key issue. A party may argue that the contract is void because there was no consideration, or that the consideration was unlawful. Courts examine whether the consideration was real, lawful, and provided at the desire of the promisor.

In Guarantee and Indemnity

Under **Section 127 of the Indian Contract Act**, anything done or any promise made for the benefit of the principal debtor may be sufficient consideration for the surety's guarantee. This means the consideration for a guarantee need not directly benefit the guarantor.

Frequently Asked Questions

Does consideration have to be in money?

No. Consideration can be any act, abstinence, or promise that has value in the eyes of the law. It can be money, goods, services, a promise to do something, or a promise to refrain from doing something. For example, a promise not to sue (forbearance) can be valid consideration for a settlement agreement.

Can a contract be valid if the consideration is very small compared to the promise?

Yes. Indian law does not require adequacy of consideration — only that consideration exists. Section 25 (Explanation 2) explicitly states that an agreement is not void merely because the consideration is inadequate. However, the court may take inadequacy into account when determining whether the consent was freely given (i.e., to examine potential fraud or undue influence under Section 16).

What is the difference between consideration and gift?

A **contract** requires consideration — something given in exchange for the promise. A **gift** is a voluntary transfer of property without consideration. Gifts are governed by the **Transfer of Property Act, 1882** (for immovable property) and the personal laws of the parties. While a contract without consideration is generally void, a completed gift (properly executed and accepted) is irrevocable even without consideration.

Can consideration be provided by someone other than the parties to the contract?

Yes. Under Indian law, consideration can move from a third party who is not a party to the contract. This is explicitly provided for in Section 2(d), which states that "the promisee or any other person" may furnish consideration. This principle was established in the landmark case of Chinnaya v. Ramayya and is a unique feature of Indian contract law compared to English law.