Importance of Consideration

This Act came into force on 1 st September , 1872 and is called the contract act 1872.The legislative intent behind its legislation is to ensure that contractual obligations must be performed .it provides terms and conditions for the validity of the contracts but leaves the form and the conditions of  contract to be mutually settled by the contracting parties.

Meaning according to the Black’s law dictionary (6th edition) “An agreement between to or more persons which creates an obligation to do or not to do a particular thing.”

According to Contract Act 1872 Section 2(h)

“An agreement enforceable by law is contract.” Contract =agreement + enforceability

What is enforceability? enforceability? It is the basically factor of recognition that court gives to the obligations arising from contractual relationship

Contract

Offer

Acceptances

Consideration

OFFER  Section 2(a)  “When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtain the assent of that their to such act or abstinence, he is said to make a proposal.” 

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You can modify your offer, but not after acceptance (Lefkowitz ) Items on shelf = Invitation to treat; Register = Offer; Cashier accepts (Dawood ) Offer is item on shelf & acceptance is implied by taking it to cashier!!! (Sanchez-Lopez 

According to section 2(b) of the contract Act 1872

“when the person to whom the proposal is made signifies His assent thereto ,the proposal is said to be accepted. A proposal when accepted becomes a promise.”

Mr. A offers Mr. X to purchase a Car and tell all the terms and conditions afterward Mr. X signifies his Assent to purchase a car it is called acceptances

“Something which is given and taken.” Section 2 (d) of the Contact Act1872:

Definition:

“When at the desire of the promissory, the promisee 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 for the Promise.”

The courts will not enforce a simple contract unless it is supported by valuable consideration, which is therefore an essential element in most contracts. (Consideration is not necessary in contracts of record.) r ecord.)

It has been defined as ‘the price for which a promise is bought’ (Sir Frederick Pollock) Consideration itself means ‘some right, interest, profit pr ofit or benefit accruing to one party or some forbearance, detriment, loss of responsibility given, suffered or undertaken by the other’: per Lush J ., Currie v . Misa (1875). Consideration therefore means the element of exchange in a bargain, and in order to satisfy the requirements of English law it must be valuable consideration, i.e. something which is capable of being being valued in terms of  money or money’s worth, however slight. It may take the form of money, goods, services, a promise to marry, a promise to forbear from suing the  promise, etc.

(Ref: introduction to B.law by P W Redmond Revised by R G Lawson)

Executed consideration

consideration is an act in return for a promise. If , for example, A offers a reward for the return of lost property, his promise  becomes binding when B performs the act of returning A’s property to him. A is not bound to pay anything to anyone until the prescribed act is done. C’s act in Carlill’s case in response to the smokeball’s company’s promise of reward was thus executed consideration. Executory consideration consideration is a promise given for a promise. If, for example, customer orders goods which shopkeeper undertakes to obtain from the manufacturer, the shopkeeper promises to supply the goods and the customer promises to accept and pay for them. Neither has yet done anything but each has given a promise to obtain the promise of the other. It would be breach of contract if either withdrew without the consent of the other. Both executed and excutory consideration is provided at the time when the  promise is given; the act required as executed consideration is given subsequently (eg the return of lost property). Anything which has already  been done before a promise in return is given is past consideration which as general rule is not sufficient to make the promise binding. In such a case the promisor may by his promise recognize a moral obligation (which is not consideration), but he is not obtaining anything in exchange for his promise (as he already has it before the promise is made).

Case: Re McArdle 1951 Under a will the testator’s children were entitled to a house at their mother’s death. In the mother’s lifetime one of the children and his wife lived in the house with the mother. The wife made improvements to the house. The children later agreed in writing to repay to the wife the sum of ₤ 488 which she spent on improvements. But at the mother’s death they refused to do so. Held:

At the time of the promise the improvements were past consideration and so the promise was binding. Case: Roscorla v Thomas 1842 The parties agreed on the sale and purchase of a horse. Thereafter the seller warranted that the horse was “sound and free from vice”. The plaintiff sued for breach of this promise. Held:

The promise was made after the sale had been concluded and was unsupported by fresh consideration.

In deciding whether consideration is past the courts do not always take a strictly chronological view. If the consideration and the promise are substantially the same transaction, it does not matter in which order they are given. Thus manufacturers may give guarantees to persons who buy their   products from retailers. The buyer then sends a card to the manufacturer to claim the benefit of the guarantee, and he usually does this after he has  bought the goods. In three cases past consideration for a promise does suffice to make the promise binding.

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Past consideration is sufficient to create liability on a bill of exchange (such as a cheque) under s27 Bills of Exchange Act 1882. Most cheques are issued to pay existing debts.

After six (or in some case twelve) years the right to sue for recovery of a debt becomes statute-barred by the Limitation Act 1939. if , a fter that period, the debtor makes written acknowledgement of the creditor’s claim, it is again enforceable at law. The debt, although  past consideration, suffices.

When a request is made for a service this request may imply a promise to pay for it. If, after  the service has been rendered, the person who made the request promises a specific reward, this is treated as fixing the amount to be b e paid under the previous implied promise rather than as a new promise.

Essentials of a valid consideration:

The essentials of valid consideration are as under: 1: 2: 3: 4:

At the desire of the promisor . Promisee or any other other person. person. Consideration may be past, present or future. future. Consideration must be real.

1: At the desire of the promisor: In order to constitute legal consideration the act or abstinence forming the consideration for the promisor. The act performed at the desire of the third  party cannot be said to be the consideration. Similarly the acts done or  services rendered voluntarily will not amount to valid consideration.

2: Promisee or any other person: The valid consideration is that consideration needs not to move from the  promise alone but may proceeds from a third person. This means that even stronger to the consideration can sue on a contract.

3: Stranger to a contract cannot sue: He/She shouldn’t be a stranger because “privet of contract”(mutually of  will) is essential for enforcing any of the rights arising out of the contract. So the stranger cannot be sue.

Exceptions: 1: Trust: In case of trust, the beneficiary can sue to enforce his rights under the trust, though he was not a party party to the contract between between the settler and the trustees.

2: Charges:

A person in whose favour a charge in same specific immovable property has  been created may enforce it. Though he may be a stranger to the contract creating the charge.

3: Family settlements: This exception arises in cases of family arrangements or marriages settlements or where provision is made for the marriage expenses of female members. Such members though not parties to the agreements can sue on the  breach of agreements.

4: Agent: Where a person act as a agent for his principal , the principal can sue on a contract though he is not a party to a contract.

5:Agency: A principal even if undisclosed may sue on a contract made by an agent

6:Assignment: Assignmets of rights under a contract in favour of a third party either  voluntary or by operation Of law , the assignee can enforce the benefits of the contract.

3:Consideration may be Past , Present or Future: The words “has done or abstained from doing (past) or does or abstains from doing or promises to do (present) or to abstain from doing (future)” It indicates which has already been done at the desire of the promise or in  progress or is promised to be done in future.

1: Positive or Negative: It’s may consists of either a positive act or an abstinence i.e a negative act.

2:Past Consideration: When the act has been done before means its show its past consideration

3:Present: PLD 1958 section (Ind) – 1: It takes simultaneously with the promise is called “Present Consideration” or  Executed Consideration”. The act constituting constituting the consulting consulting is wholly or  completely performed.

4:Future: 18 PLD -1957 – DACCA- 233: When the consideration on both sides is to move at a future date . It is called “Future Consideration” or executory Consideration. It consists of promises and each promise is a consideration for the other.

4:Consideration Must Be Of Some Value: It must be of some value. It is not necessary that consideration should be adequate to the promise for the validity of an agreement. The law only insists on the presence of consideration and not on the adequacy of it . An agreement to which the consent of promise has been freely given is a valid contract need with standing of the consideration .Courts never inquire a  promise is equivalent to promise obtained. The adequacy of the consideration is for the parties to consider at the time of making the agreement.

5:Consideration Must Be Real: 1- Physic Physical al Imposs Impossibl iblee 2- Legally

3- Uncert Uncertain ain Cons Conside iderati ration on 4- Illuso Illusory ry Consi Consider derati ation on

The court will also seek to ensure that a particular act or promise can actually be seemed to be consideration. Learn these rules: a) Consideration need to be adequate (that is, equal in value to the

consideration received in return). There is no remedy at law for  someone who simply makes a poor bargain. b) Consider Consideration ation must must be suffici sufficient. ent.

c) It must must be capable capable in law of being being regarded regarded as conside consideratio ration. n.

It is presumed that each party is capable of serving his own interests, and the courts will not seek to weigh up the comparative value of the promises or  acts exchanged. Thomas v Thomas 1842 The Facts: By his will the claimant’s husband expressed the wish that his widow should have the use of his house during her life. The defendants, his executors, allowed the widow to occupy the house (a) in accordance with her husband’s wishes (b) in return for undertaking to pay a rent of £1 per annum. They later said that their promise to let her occupy the house was not supported by consideration.

Decision:

Compliance with the husband’s wishes was not valuable consideration (no economic value attached to it), but the nominal rent was sufficient consideration.

Consideration is sufficient if it has some identifiable value. The law only requires an element of bargain, not necessarily that it should be a good bargain. Chappell & Co v Nestle Co 1960 •

The Facts: As a sales promotion scheme, the defendant offered to supply a record to anyone who sent in a postal order for 1s.6d and three wrappers from 6d bars of chocolate made by them. The claimants owned the copyright of the tune. They sued for infringement of copyright. In the ensuing dispute over  royalties the issue was whether the wrappers, which were thrown away when received, were part of the consideration for the promise to supply the record. The defendants offered to pay a royalty based on the price of 1s.6d per  record, but the claimants rejected this, claiming that the wrappers also represented part of the consideration. Decision: The wrappers were part of the consideration as they had commercial value to the defendants. As stated earlier, forbearance or the promise of it may be sufficient consideration if it has some value, or amounts to giving up something of value. •

Horton v Horton 1961 The Facts: Under a separation agreement, the defendant agreed to pay his wife (the claimant) £30 per month. Under the deed this amount was a net payment after deduction of income tax; for nine months the husband paid it without any deduction so that the wife had to make the deductions herself. He then signed a document agreeing to pay such amount as´ after the deduction of  income tax should amount to the clear sum of £30´. He paid this for three years, then stopped, pleading that the later agreement was not supported by consideration. Decision:

The later was supported by consideration: the wife could have sued to have the original agreement rectified, but did not. (Ref: ACCA –Paper 2.2 corporate & business law)

In English law a contract under seal is enforceable without consideration. In the words of  Anson: “English law recognizes only two kinds of contracts, the contract made by deed that is under seal, which is called a deed or specially and the simple contract” A contract under seal means a contract which is in writing and which is signed. Sealed and delivered. The Indian law of contract does not recognize such exceptions. But section 25 of the contract Act 1872 lays down some exceptions. 1. Contract with blood relatives on the basis of natural love and 2. 3. 4. 5. 6. 7.

affection. Contract to compensate for past voluntary service. Contract for the payment of a time barred debt. Contract to give something as gift. Contract to remit something. Agency contract. Donation contract.

Agreement without consideration void, unless it is in writing and registered.--- it is expressed in writing and registered under the law for the time being in force for registration of documents, and is made on account of  natural love and affection between parties standing in a near relation to each other. (Section 25)

It is clear from f rom the above provision that a contract without consideration shall be enforceable if the following f ollowing conditions are satisfied. i. The co contrac ract is is in in wri writting ii. ii. The The cont contra ract ct is is regi regist stere ered d with with the the prop proper er aut autho hori rity ty The contractual relation relation must be between/among the near relatives iii.

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[Who is a near relative? The contract Act 1872 provides no guidance, nor has the expression been judicially constructed. The expression will without doubt include parties related by blood or  marriage.] The contract is based on the basis of  natural love and affection [What is meant by natural love and affection? --------- There is always some degree of instinctive love and affection between parties nearly related]

The instinctive love may sometimes be overruled by external circumstances. For example, in Rajlukhy Dabee v. Bhootnath Mokerjee, Mr. Bhootnath, a husband due to a dispute with his wife Rajlukhy Dabee signed a registered contract in favour of his wife agreeing to pay her a certain sum of money for  her maintenance. Later he refused to pay the amount. The wife filed a suit against him and claimed the maintenance amount. It was held by Calcutta High Court that the agreement was Void for want of consideration. [What is void agreement? An agreement not enforceable by law is said to  be void agreement. ----- section 2(g)]

A promise to compensate a person who has already done something for the  promisor is enforceable. It is important to note that the service should have  been rendered voluntarily. Relevant Case Law

It was held in Sindha v Abraham (1895) that services rendered at the desire of the minor expressed during his minority and continued at the same

request after his majority from fr om a good consideration for a subsequent  promise by him in favour of the person who rendered the services.

A time barred debt is one which cannot be recovered from the debtor  through the court of law, because, the limitation law helps the vigilante not the indolent. However, the section 25(3) of the law of contract states that where there is an agreement, made in writing and signed by the debtor or by his authorized agent to pay a debt barred by the law of Limitation, the agreement is valid even it is not supported by consideration.

A contract whereby one contracting party agreed with the other party to give something as gift against no reciprocal consideration is valid and enforceable. The section 25-explanation 1, states that a gift does not require reciprocal consideration to be valid and enforceable. Any gift made and  possession delivered will be binding between the contracting parties i.e., donor and donee. In order to make a valid gift the following essentials are considered necessary: i. Capacity of donor  ii. ii. Inte Inten ntio tion of of do donor nor to to mak makee gi gift iii. iii. Inte Intent ntio ion n of of poss posses essi sion on of the the gif giftt pro prope perty rty iv. iv. Acce Accept ptan ance ce of gift gift by the the don donee ee..

SOURCES: BIBLIOGRAPHY: ACCA: CORPORATE AND BUSINESS LAW (PAKISTAN VARIANT) LAW AND BUSINESS (4TH EDITION) by LAWRENCE S. CLARK, ROBERT J. AALBERTS and PETER D. KINDER  LAW FOR BUSINESS by A. JAMES BARNES, TERRY M. DWORKIN and ERIC L. RICHARDS

Net Resources Www. student law.com Www.altavista.com www.lawweb.html

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Submitted by Sabahat Javeed 084232068