Definition: In common parlance, consideration refers to something paid to someone in return for something else. In legal terminology, it can be understood as the price or compensation which has to be paid by the promisee to the promisor for doing or not doing an act.
Consideration is necessary for a valid contract, in the absence of which a promise cannot be enforceable. It may inhere some benefit, right or interest, to be received by the promisor, or loss, detriment, or obligation causing to the promisee.
Therefore, consideration can be a promise or performance of an act which the parties to the contract exchange with one another. It is the base of a contract.
Rules for Consideration
There are several rules regarding the consideration, discussed as under:
- Must move at promisor’s desire: Consideration must be provided by the promisee or any other party, as per the desire or request of the promisor. Meaning that the obligation performed must be according to the promisor’s desire and not of promisee’s own free will or not as per the desire of the third person.
- May proceed from promisee or any other party: The consideration may move out from the promisee or any other party. Here the word any other person means stranger, who is not a party to the contract. When the promisee or any other party performs an act, as per the desire of the promisor, such an act is regarded as consideration.
- Executed and Executory: When one party to a contract has performed his/her part, the consideration is said to be executed for that party, while the other has just promised to perform it, the consideration is said to be executory for that party.
- Not necessarily be adequate: Consideration is not necessarily of a specific value, i.e. it need not be equivalent to the value of the promise. This is due to the fact that something in exchange is not necessarily of equal value to something provided or promised. Therefore, what matters is, consideration must be something of value, as per law, which the parties are free to determine while entering into the contract.
- Must not be the performance of legal duty: It should not be an act which a person is bound to perform, as per law. Such contracts are regarded as void contracts. However, if a person promises to do something which is over and above of what he/she is legally bound to do, provided it does not violates any rule or public policy, then it will constitute consideration.
- Must be real: It has to be real, certain and something of value. It should not be illusory, vague and legally or physically impossible.
- Must be lawful: It has to be lawful and moral and it must not violate any public policy, otherwise, it will not be regarded as a valid consideration.
Therefore, consideration need not be monetary, rather a forbearance to sue, promise for another promise, settlement of the dispute, refraining from something, detriment can also amount to consideration.
Agreements not requiring Consideration
Consideration is the essence of the contract, without which there will be no contract at all. However, there are certain agreements which are deemed valid and enforceable even without consideration. These are:
- Written agreement based on natural love and affection amidst the parties, who are in close relation with one another.
- Promise to pay a person fully or partially, for the act performed voluntarily, in the past
- Written promise by the promisor himself or his authorised agent to pay a time-barred debt.
- Contract of Agency
- Completed gifts
- Contract of Bailment
Types of Consideration
- Executory or Future Consideration: Executory Consideration, as the name suggests is one which is yet to be performed. This means that the promise or obligation will be performed in future.
- Executed or Present Consideration: Executed consideration, means the one which is concurrently provided when the promise is made. Meaning that the act which amounts to consideration is fully performed.
- Past Consideration: Past consideration refers to the formerly performed act or forbearance which amounts to consideration has already been provided before the promise is given. Further, if consideration for a present promise is provided earlier to the date of promise, it is regarded as past consideration.
Note: As per English Law, there are only two kinds of consideration, i.e. executed and executory, while the past consideration is not regarded as consideration, but Indian law deems all the three types.