Page 22 - DMGT407Corporate and Business Laws

Unit 1: Laws of the Contract

1.7 Consideration [Ss.2(d), 23-25 and 185] Notes

1.7.1 Meaning of Consideration

One of the essential elements of a valid contract is that it must be supported by consideration. In
simple terms consideration is what a promisor demands as the price for his promise. The term
consideration is used in the sense of quid pro que, i.e., “something in return”. This something or
consideration need not be in terms of money. This “something” may even be some benefit,
right, interest or profit accruing to one party, or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other party. Also a promise by one party
may be consideration for the promise of other party. Thus, a person who makes a promise to do
something usually does so as a return of equivalent of some loss, damage or inconvenience that
may have been occasioned to the other party in respect of the promise. The benefit so received,
or the loss, damage or inconvenience so caused is regarded, in law, as the consideration for the
promise.
Section 2(d) 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”.

Example: A agrees to sell his motorcycle to B for ` 20,000. Here B’s promise to pay the
sum of ` 20,000 is the consideration for A’s promise to deliver the motorcycle, and A’s promise
to deliver the motorcycle is the consideration for B’s promise to pay ` 20,000.

1.7.2 “No Consideration, No Contract” [Ss.10 and 25]

A promise without consideration cannot create a legal obligation. A person who makes a promise
to do or abstain from doing something usually does so as a return of equivalent of some loss,
damage, or inconvenience that may have or may have been occasioned to the other party in
respect of the promise. The benefit so received or the loss, damage or inconvenience so caused
is regarded in law as the consideration for the promise.
Exceptions to the rule “no consideration, no contract”. There are some cases where contracts,
even though not supported by consideration, are enforceable. Firstly, an agreement made without
consideration is valid if it is expressed in writing and is registered under the law relating to
registration of documents and is made an account of natural love and affection between parties
standing in a near relation to each other. Secondly, a promise without consideration is valid if it
is a promise to compensate wholly or in part a person who has already voluntarily done
something for the promisor or something the promisor was legally compellable to do. Thus,
where A finds B’s purse and gives it to him, and B promises to give A ` 100, this a valid contract.
Thirdly, a promise to pay wholly or in part a debt which is barred by the Limitation Act can be
enforced if it is in writing and is signed by the debtor or his authorised agent. A debt barred by
limitation cannot be recovered. Therefore, a promise to pay such a debt is, strictly speaking,
without any consideration. But if a written promise to pay is made by the debtor then the same
is enforceable by the creditor. Fourthly, the rule ‘no consideration, no contract’ does not apply
to completed gifts. Fifthly, no consideration is required in the case of an agreement between a
principal and an agent (s.185).

LOVELY PROFESSIONAL UNIVERSITY 15