Contract act ch 1 legal aspect of business law

Business law

Ishita Adhikari Apeejay School of Management

Legal Theory and Nature of Jurisprudence

No person shall be deprived of his life or personal liberty except according to procedure established by law.– Constitution of India, Article 21

Legal theory is a systematic study of law. It is the philosophy of law that studies the legal aspects in the context of the society’s cultural, political, economic, and other areas.Jurisprudence, as against the theory, concerns itself with the procedures and application of the law.

Definition, Scope and Classification of Law

Law refers to a kind of conduct or a prescribed rule that is enforced by a controlling authority.

Definition, Scope and Classification of Law

The Constitution and the fundamental rights

Rights and Duties in all forms of social relationships

Persons and kinds of persons and their relationship

Ownership, possessions, tiles

Property, kinds of property, inheritance Commerce, contract, commercial liabilities

Banking and share markets Carriage, Transport

Taxation Labour, Trade unions, and reservation in employment

Civil procedure, Criminal procedure Crime and criminal liabilities

Human rights Social security, livelihood, Insurance

Family, religion, culture Immigration, refugees, asylumPublic interest litigation Legal aidArbitration International law

Table below : Main areas of law

(a) Society makes laws; (b) there is a system to enforce law; and (c) law develops as does society historically, culturally, economically, and politically. (refer Shah Bano case) Constituents or essential elements of law must be derived from these sources

Constituents of Law

Common law (progressive: Constitutional, statutory, case lawCivil law (Strictly codified law e.g. Ancient Roman Empire)The study of origins of Indian Legal system must consider the following:

• Law in Ancient India : e.g. Christians had Church tradition & source is Bible, Islam follows Sharia & source is Quran

• Law in Medieval India e.g. Muslim personal law, Jagir & Zamindari system

• Law in Colonial India e.g. Govt of India Act 1857• Law in Independent India

Origins of Indian Legal System

Administrative Structure of the Indian Legal System contd..

Supreme court is the guardian of the Constitution and ultimate interpreter of the law of land. It is the highest appellate court

High Court , generally found in state capitalsLower court : each HC has its subordinate courts

dealing with civil, criminal and revenue matters at the district level

Relationship between Business and Law

Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.

The Indian Contract Act 1872, Chapter 3 , para 2

Principle of Commercial Jurisprudence

• To strive towards excellence in all spheres of individuals and collective activity so that the nation constantly rises to higher levels of endeavor and achievement .

Constitution of India, Article 51,j

Economic well-being of the people is achieved through every form of work and wealth creation. The Constitution of India in article 51 enumerates the duties of every citizen

Business and legal Environment: No Business can operate without being bound by laws

Conductive Factors1. System of the rule of

law2. Federal structure that

helps uniformity3. Based on provable

evidence and beyond reasonable doubt

4. Lawyers belong to the bar

5. HC and SC have benches instead of jury

Non - Conductive Factors1. Procedural delays2. Non-availability of

specialized lawyers & legal aid

3. Corruption4. Costly-both in terms of

time and money5. Problems of legal

jargon

Legal Environment

Manager’s role in legal mattersMATTER MANAGER’s ROLE

Police complaint If a complaint has to be lodgeda) Take advice from a sr. mgrb) Appraise the lawyer

Police Investigation If police comes to investigatea) Welcome them and gain timeb) Consult a sr. Mgr & Take advice from the lawyer

Choosing a lawyer Approach a senior lawyer in consultation with the sr. mgt

Employees Gain knowledge abouta) Employee rightsb) Working conditions, Wages allowances and bonusc) Social security, Job securityd) Trade Union and Labour disputes

THE INDIAN CONTRACT ACT, 1872

Establishing The Contract

You………….Buy groceriesBoard a trainHire a cabConsult a doctor or solicitorGive your any household gadget for repair

Ever realised!In each of the above and numerous such situations

you enter into a contractual obligation.

Contract: Inseparable Part of our Life

An agreement enforceable by law is a contract. Section 2(h)

Contract = Agreement + Legal Obligation

Agreement: Every promise and every set of promises, forming the consideration for each other.

A proposal (offer) when accepted becomes a promise.Thus, a promise implies an accepted…………………Mutuality is the very base of an agreement.Legal obligation: To become a contract , an agreement must

be enforceable by law.

Contract Defined Under The Act

Forming a Contract: Essential Steps

1. A contract, essentially , is an agreement.2. An agreement is a set of two promises, one flowing

from the offeror and the other from the offeror’s counterpart i.e. acceptor.

3. A promise is an accepted offer or proposal.4. An offer is a promise of performance, which is,

however, contingent upon a return promise or an act of forbearance being received in exchange of it.

Offer→ Acceptance→ Promise→ Agreement→Contract

Contract Distinguished From Agreement

Elements: An agreement consists of an offer and its subsequent acceptance, whereas a contract is composed of an agreement and its legal enforceability.

Essence of a legal relationship :An agreement may not create legal relationship. Parties entering into a contract essentially have a common intention of entering into legal obligation

Scope: All agreements may not be contracts but all contracts are primarily agreements.

Enforceability by law :A contract is legally enforceable, whereas an agreement is not necessarily so.

• Agreement : It is necessary to establish that there was consent between the parties. An offer must be definitive, meaningful and duly communicated .

• Intention to create legal relations : is a necessary and independent element in the making of a contract e.g domestic promise ( Balfaur vs Balfur)

• Legitimate consideration : An agreement to be enforceabale by law must be supported by consideration unless the agreement is by means of written-deed.

• Capacity of parties : e.g has to be a major, mentally sound, not a convict• Genuineness of consent : means the parties in contract should mean the same

thing• Lawful object: An agreement made for any act which is prohibitable by law is

unenforceable e.g contract to supply smuggled goods• Certainty : Section 29 provides , “agreements , the meaning of which is not certain

or capable of being made certain, are void.” terms of agreement must be clear• Possibility of performance : Section 56 “An agreement to do an act impossible in

itslef is void”• Agreements not expressly declared void : e.g agreement is restraint of marriage,

agreement is restraint of trade, agreement is restraint of legal proceedings.

Essential Elements of Establishing a Valid Contract

Contracts where written document is necessary

1. An agreement to pay a time-barred debt2. Transfer of share certificate3. Hire-purchase agreement4. An assignment of assignment of copyright5. Cheques and promissory note under the NI

Act 18816. An agreement to sell land, building etc

Valid contracts : That fulfills all legal obligations e.g. intention for creating legal relations etc Void contracts : Has no binding effect on any party . Section 2 (j) “A Contract which ceases to be enforceable by law becomes void, when it ceases to be Enforceable” e.g. because of change of law, impossibility of performance Voidable contract : One which is legally enforceable unless avoided i.e. a party tothe contract refuses to abide by it. E.g contracts brought about as a result of coercion, made by minors etc

Types of Contracts

A contract becomes voidable in following two situations :

1. When contract contains reciprocal promises, and one party to the contracts prevents the other from performing his promise, the contract becomes voidable at the option of the latter (section 53) & 2. When a party to a contract promises to perform an obligation within a specified timeBut fails to so within the fixed time, the contract becomes voidable at the option of the promise (Section 55)

Difference Between Void and Voidable ContractsS. No.

Point of difference

Void contract Voidable contract

1 Definition A contract, which ceases to be enforceable by law, becomes void when it ceases to be enforceable [Section 2 (j)].

A voidable contract is an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other(s) [Section 2 (i)].

2 Nature & validity

A void contract is valid and binding upon the parties when entered into, but subsequent to its formation, it becomes unenforceable due to certain reasons.

A voidable contract is repudiable at the option of the aggrieved party. It remains a valid contract until it is set aside or rescinded by the party entitled to do so.

3. Factors responsible

A valid contract may become void due to supervening impossibility; change of law; a contingent contract due to emergence of an uncertain event etc.

Coercion, undue influence, error, fraud, misrepresentation are the main factors responsible for rendering a contract voidable.

4 Enforceability It cannot be enforced by either party.

It may be enforced or set aside at the option of the aggrieved party.

Difference Between Void and Voidable Contracts5. Relationship A void contract under no

circumstances results in a voidable contract.

When a voidable contract is rejected by the aggrieved party it results in a void contract.

6. Rights of third party

A void contract confers no rights or legal remedies to the third party.

Rights acquired under voidable contract by an innocent third party are not wiped out by such subsequent avoidance of the contract.

7. Compensation In case of void contract question of compensation or damages does not arise on the non-performance of such contract.

In case of voidable contract, the party rescinding the contract can also claim damages.

8. Effect of lapse of time

Lapse of reasonable time does not render a void contract enforceable. It always remains void i.e., unenforceable.

If a voidable contract is not rescinded by the aggrieved party within reasonable time it may become enforceable at the option of the other party (i.e, who induced the contract).

Types of Contracts contd..

Express contracts : which lucidly convey the purpose of agreementImplied contracts : contract with non verbal conduct e.g doctor’s fee

Unilateral contracts : in which a one party performs it’s promise at the time of making the contract and the other party promises to perform in future. E.g. offer to sell an item to another person.Bilateral contracts : Both parties are to perform their respective promises or obligations at some future time but not necessarily at the same time. E.g agreement to buy with a timeline

Quasi contracts : is an act of a person, permitted by law where he/she obligates himself towards another without any agreement between them e.g case of wrong delivery and consumption by receiver

Unenforceable contracts : When a contract is valid otherwise by cant’ be enforced by court of law by one or both parties due to a technical flaw e.g unwritten contract, unstamped illegal agreement e.g contract killing. Loan for the transaction.Void ab initio

Executed contract : e.g concluded car sale Executory contracts : consideration yet to be carried out


Offer And Acceptance

A contract is an agreement which is reducible to an offer by one party and its valid acceptance by the other.

An offer is a medium through which a person expresses his intention to enter into a contractual obligation against a promise or an act of forbearance.

When one person signifies to another person his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such an act of abstinence, he is said to have made a proposal. Section 2(a)

DEFINING AN OFFER

Three Properties of an Offer

Expression of readiness ‘to do’ or ‘not to do’ something. Thus, an offer may involve a positive act or forbearance.

Presence of second party. An offer by a person to himself will ne a nullity.

Intention of obtaining a response. It is made with the intention that the other person accepts it. Mere expression of willingness will constitute no offer.

Characteristics of a Valid Offer

Must intend to create and be capable of creating legal obligations

Its terms must be certain

Must be made to obtain the assent of the other party

Must be communicated

May be conditional

Must be distinguished from a query

Firm Offer Vs Invitation to Treat

Examples of Invitations to Treat

Auctions or requests for bids

Display of goods for sale in shelf

An invitation for tenders

Company prospectus for share

General advertisement of goods e.g on-line ebay, jabong etc

Types of offer• Express i.e oral or written• Implied i.e inferred from the conduct (desire to sell a

computer)• Specific offer• General offer – an advertisement to public at large e.g any

competent person• Cross offer – identical offers made by two persons or

parties to each other, neither side knowing of the other’s offer when they make their own.

• Standing offer: offer kept open for acceptance over a period of time is termed as “standing” e.g tender to supply goods at a given price as and when required

• Counter offer

Revocation/withdrawal/cancellation of offer before the offeree accepts it

Failure to fulfil a condition precedent to acceptance

Death or insanity of either party

Refusal or counter-offer

Acceptance differs from the prescribed one

Subsequent illegality or destruction of subject matter

MODES OF TERMINATION OF OFFER:

An acceptance is a manifestation of assent to the terms of the offer.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. Section 2(b)

Acceptance to an offer is what a lighted match to is to a train of gunpowder.

Thus, an offer becomes irrevocable upon its acceptance.

ACCEPTANCE

• Must be made by the offeree• Must be unconditional• Must be communicated to the offeror• May be in any form, oral or written• Must be in the mode prescribed by the offeror e.g

precise time, place and manner• Must be given within a reasonable time, if no

time limit is set• Must be given while the offer is in force

Legal Rules Governing a Valid Acceptance Section 38

• Silence is not acceptance• Sec 4 states “The communication of an offer

is complete when it comes to the knowledge of the person to whom it was made”

• Communication of acceptance• Communication of revocation of offer or

acceptance• Contracts over telephone, fax and e-mail

Legal Rules Governing a Valid Acceptance

The term ‘wager’ literally means ‘a bet’. It implies an arrangement to risk money on the result of an (uncertain) event. Therefore, wagering agreements are ordinarily betting agreements. A and B who are neighbors' bet as to whether a tremor would rock their city on a particular day or not. A promises to pay to B Rs 5,000 if the city experiences a tremor, and B promises an equal amount to A, if it does not. This is an arrangement by way of wager.The Indian Contract Act has, however, nowhere defined a wager or an agreement by way of wager. Let us now, examine the following two definitions of a wagering contract given by two law experts to understand the true nature of “wager”.

• ‘A wagering contract may be defined as a promise by A to pay money to B on the happening of a given uncertain event, in consideration of B paying money to A on the event not happening. [COCKBURN C.J.]

Agreements by Way of Wager


‘A wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent upon the determination of that event, one shall win from the other, and that other shall pay or handover to him, a sum of money or other stake, neither of the contracting parties having any other interest in that contract than the sum or stake he will win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and therefore remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract.’ [ HAWKINS J ]

An agreement by way of wager, therefore, implies nothing but a promise to give money or money’s worth upon the determination of an uncertain event. The following are the common examples of agreements by way of wager:

• Lottery• Gambling• Competitions where prizes depend upon chance

Section 30 of the Indian Contract Act states “Agreements by way of wager void.-Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made. “


Essentials of a Wagering Agreement

• Uncertain event A wagering transaction in fact is a game of chance. The

essence of a wager is the uncertainty of the event. To constitute a wager, the performance of the bargain must depend upon the ascertainment of an uncertain event.

• Mutuality There must be mutual chances of gain and loss (i.e., each party should stand to win or lose), according to the result of the uncertain event. If either of the parties may win but cannot lose or may lose but cannot win, it is not a wagering agreement.

• Neither party to have control over the event In order to effect an agreement by way of wager, neither party should have control over the happening of the event one way or the other.

• No proprietary interest in the event There being no other real consideration for the making of such contract, neither party should have any other interest in that contract other than the sum or stake he will win or lose.

Agreements by way of wager are unenforceable, and are null and void as they are considered being opposed to public policy.

• ‘Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.’

• In India wagering agreements are simply void, but not illegal. However, the States of Maharastra and Gujarat have, also, declared them as illegal. Therefore, particularly in these two states, a wagering agreement being illegal is void not only between the immediate parties, but taints and renders void all the agreements collateral to it.A borrows Rs 1,000 from C to pay to B, to whom he has lost a bet. The agreement between A and C is invalid if the transaction took place in Maharashtra or Gujarat. Accordingly C cannot recover the amount from A because this is the money paid in connection with “a wagering agreement” which is illegal in these two states. But as regards, rest of India such a transaction (i.e., betting) being only void, the agreement between A and C would be valid. Section 30

Consequences of Wagering Agreements

1. Horse-race A subscription, contribution, or agreement to subscribe or contribute, made or entered into for, or towards any prize or sum of money of the value or amount of Rs 500 or upwards, to be rewarded to the winner or winners of any horse race shall not be void. (See proviso to Section 30). Simply put, contributions, or betting money in horse races, in which there are cash rewards for the winner or winners is not deemed illegal in the eyes of the law, provided the sum is Rs 500 or more.

2. Prize competitions Prize competitions, which involve skill and intelligence (i.e., where prizes do not depend upon chance) For example, picture puzzles, literary competitions, athletic event etc., are not wagers provided the amount of prize does not exceed Rs 1,000. Lord HEWARD CJ observed in Cole vs Odhams Press , ‘If skill plays a substantial part in the result, and prizes are awarded according to the merits of the solution, the competition is not a lottery. Otherwise it is.’ An agreement to subscribe or contribute towards a prize to be awarded to the winner of a lawful game would be perfectly lawful and enforceable under the law though dependent on the outcome of an uncertain event.

Exceptions to Wagering Agreements

Exceptions to Wagering Agreements

3. Contracts of Insurance Despite bearing a resemblance to wagering contracts, contracts of insurance cannot be recognized as wagers. The law distinguishes between the two for the simple reason that in a contract of insurance the insurer’s object is to preserve himself from financial loss–called insurable interest,– and not to arrange that he should gain or someone else should lose if an uncertain event turns out in a particular way. Contracts of insurance have in fact become a necessity with the development of trade, and are recognized as contracts, which the law would enforce. An insurance contract could sometimes turn out to be a wager if the party insuring has no insurable interest.

Agreements To Do Impossible Acts

An agreement to do an act impossible in itself is void [S 56]. A agrees with B to double treasure by magic. The agreement is void. The law disregards all the agreements to do impossible acts, mainly because of the following two reasons.Firstly, the persons who purport to agree to do such obviously impossible acts are deemed to be either non-serious as to performing such acts or unable to understand what they are doing. Secondly, A promise to do an act impossible in itself cannot be of any value to the other party and therefore such agreements lack consideration.

The term ‘restitution’ legally implies giving back or restoration of the money or benefit received from the plaintiff under the agreement. When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such an agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. [Section 65]Thus, when a contract is no more enforceable, the party who has received any benefit under such a contract from the other party must return it or make compensation for the same to the other party. Example 1. A pays B Rs 1,000 in consideration of B promising to marry C, A’s daughter. C dies by the time of execution of the promise. The agreement is void, but B must return A the Rs 1,000.Example 2. A contracts with B to deliver him 250 bags of rice before the first of May. A delivers 130 bags only by the specified date, and none after. B retains the 130 bags after the first of May. He is bound to pay A for the bags that he has kept.

RESTITUTION OF BENEFITS RECEIVED UNDER VOID AGREEMENTS

Consideration is elemental to a contract. A promise is not binding unless made for something in return - consideration. For instance the seller of goods undertakes to transfer ownership in the goods for a price to be paid by the buyer for acquiring the ownership.


Consideration

CONSIDERATION DEFINED

Consideration simply means that both the contracting parties are bound to give something (of value) to each other.Legal 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 to abstain from doing, something, such an act or abstinence or promise is called a consideration for the promise.’ Section 2 (d) Thus, the term ‘consideration’ is used in the sense of quid pro quo, meaning thereby something in return. It may involve a positive act (i.e., doing something) or an abstinence (i.e., something given up). Consideration may be in the form of some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other.

1. A offers to sell his plasma TV set to B for Rs 50,000. B accepts the offer. Here, B’s promise to pay Rs 50,000 is the consideration for A’s promise to sell the TV and A’s promise to sell the TV is the consideration for B’s promise to pay Rs 50,000.2. X applies for a loan from Y, who is unwilling to advance the amount, unless S guarantees the repayment of the loan if X defaults and thereupon Y advances money to X. In this case, the benefit conferred on X by Y at the surety of S is a sufficient consideration on the part of Y as against the promise of S to repay the loan. In other words, the detriment which Y may not suffer by advancing loan to X due the guarantee of S is sufficient consideration on the part of Y in respect of the promise of S to repay the loan. 3. A promises to maintain B’s child, and B promises to pay A Rs 1,000 annually for the purpose. Here, the promise of each party is the consideration for the promise of the other party. (Illustration appended to Section 23)4. A promises Y, his debtor, not to file a recovery suit against him on B’s agreeing to repay the amount of loan along with a compound interest @ 12% p.a. within a year. A’s abstinence is the consideration for Y based on B’s promise to pay.

EXAMPLES ON CONSIDERATION

RULES GOVERNING CONSIDERATION1. Simple Contracts must be supported by Consideration

In the absence of a valid consideration passing between the parties the general rule is that the agreement they have made will be of no legal effect. The purpose of the requirement of consideration is to put some legal limits on the enforceability of agreements even when they are intended to be legally binding otherwise and are not vitiated by factors such as, mistake, misrepresentation, and illegality etc. The existence of a consideration implies that the parties have devoted some reflection to the matter, and seriously desire their promises to have legal consequences.

Contd….2. Consideration Must Move at the Desire of the Promisor

(Promissory Estoppels)Whatever is done must be done at the desire or request of the promisor and not voluntarily or at the desire of a third party. For instance, if A rushes to the rescue of B whose house has been trapped in fire, it is not a consideration but a voluntary act on the part of A. He cannot ask B to compensate him for the services rendered by him as B had never requested him to help. However, if A goes to B’s rescue at the latter’s express request, this will be regarded as consideration as A did not wish to do the act voluntarily.

Estoppel is a legal constraint. E.g A minor cannot be constrained or stopped from pleading minority.

Consideration At Desire Of Third Person Not Valid

• In Durga Prasad vs Baldeo, ‘D’ the plaintiff had constructed, at his own expense, a market at the instance of the Collector of the District. The occupants of the shops i.e., shopkeepers in the market promised to pay the plaintiff a commission on the articles sold through their shops. Subsequently the shopkeepers refused to pay any commission. ‘D’ sued the shopkeepers against their alleged default. It was held that there was no consideration because the plaintiff (the promisee) had constructed market not at the desire or request of the defendants (the promisors), but at the desire of a third person (i.e., the Collector) to oblige him and thus, the contract between D and the shopkeepers was void

Rules Governing Consideration3. Consideration May Move From the Promisee or Any Other

PersonThe second rule as to consideration as contained in the definition of Section 2 (d) is that the act, which is to constitute a consideration, may be done by ‘the promisee or any other person’. This means that as long as there is a consideration for the promise, it is immaterial who has furnished it. This is sometimes referred to as Doctrine of Constructive Consideration. It may proceed from the promisee, or if the promisor has no objection, from any other person who is not a party to the contract.

But the English Law on this point is different. In the United Kingdom a person to whom a promise was made can enforce it only if he himself provided the consideration for it. He cannot sue of the consideration for the promise moved from a third party.

Rules Governing Consideration

4. Consideration must have some Value Another notable feature of valid consideration is the idea of

reciprocity. ‘Something of value’ must be given for a promise in order to make it enforceable as a contract. An informal gratuitous promise therefore does not amount to a contract. A person or body to whom a promise of gift is made from purely charitable or sentimental motive gives nothing for the promise. Justice Patterson observed in Thomas vs Thomas - Consideration means something which is of some value in the eyes of the law. It may be some benefit to the plaintiff or some detriment to the defendant


• A bare promise (nudum pactum) is not binding. For example if A promises to gift a diamond ring to B, his fiancée, but subsequently changes his mind, B cannot sue him for breach of promise. B cannot show that she gave some advantage to A in return for the promise, which was bare.


Benefit and DetrimentLUSH J. in Currie V. Misa concentrated on the requirement that ‘something of value’ must be given, and accordingly stated that consideration is either some detriment to the promisee (in that he may give value) or some benefit to the promisor (in that he may receive value). Thus payment by a buyer is consideration for the seller’s promise to deliver and can be described as a detriment to the buyer or as a benefit to the seller. Conversely, delivery by a seller is consideration for the buyer’s promise to pay and can be described either as a detriment to the seller or as a benefit to the buyer. In a suit on a contract, the plaintiff must show that he give or promised to give some advantage to the defendant in return for his promise.


5. Past, Present or Future Consideration Depending upon the circumstances and facts of each case in India consideration may be in the past, present or future.

• Past Consideration In Section 2 (d), the expression, ‘has done or abstained from doing’ is recognition of the doctrine of past consideration. Past consideration means a past act or forbearance which took place and is complete (wholly executed) before the agreement is made. Past consideration may consist of services rendered at request but without any promise at the time or it may consist of voluntary services. Box 3.4 presents some examples of past consideration.


6. Consideration Need not be Adequate But It Must Be SufficientSufficiency of consideration is not the same thing as adequacy of consideration, at least in law. The word adequate in this context refers to fairly equal to the promise given. On the contrary, sufficiency is used here as a legal term, and it means that what is promised must be real, tangible and have some actual value. The courts do not exist to repair bad bargains (Haigh vs Brooks). Adequacy will be decided by the parties themselves.

7. Present or Executed Consideration : The expression in Section 2 (d) ‘does or abstains from doing’ refers to present or executed consideration. It is an act or forbearance, which moves simultaneously with the promise. In other words a consideration, which consists in the performance of an act or forbearance, is said to be executed at present. For instance A pays Rs 1000 to B, and B promises to deliver a certain quantity of wheat the following day. In this case, A pays the amount but B has merely made a promise. Therefore, the consideration paid by A is executed, whereas the consideration promised by B is executory. If A pays the price and B delivers the goods at the same time, consideration is said to be executed by both the parties



• Future or Executory Consideration : The expression ‘promises to do or to abstain from doing’ in Section 2 (d) refer to future. Here the bargain consists of mutual promises. An example is an agreement in which the seller promises to deliver goods next week, and the buyer agrees to pay for them on delivery. However, consideration on part of one party may be executed and in respect of the other executory. Consider the following illustration in this behalf.

8. Consideration must be Legal Consideration may not be adequate but must invariably be legal i.e., it must not involve an illegal act. For example, promising to pay money to a witness to turn hostile. An illegal consideration makes the whole contract invalid. It should be noted that attempting to enter into an illegal contract might itself give rise to criminal liability.Moreover, consideration should not be physically impossible or illusory. For example, promise to double the money by magic or to make a dead man alive, are impossible acts and therefore such promises constitute no consideration. Similarly, a son’s promise to ‘stop being a nuisance’, or an agreement to ‘perform an existing obligation made with the promisor being illusory with no considerations.


STRANGER TO A CONTRACT AND STRANGER TO CONSIDERATION

A stranger to a contract is one who is not a party to the contract. The rule that consideration ‘may move from the promisee or any other person’ implies that the consideration is permitted to be supplied by a third person (i.e., stranger) as well, thereby need not necessarily be supplied by the promisee himself. In other words, as long as there is a consideration in exchange of a promise, it is immaterial who has furnished it. Thus, a stranger to the consideration may maintain a suit. From this arises the doctrine of privity of contract, discussed below.Privity of ContractThe doctrine of Privity implies that, in general, a person who is not privy to a contract, that is a third party, can neither sue nor be sued on the contract. The rule prevents the burden of a contract being imposed on a third party. Therefore, a stranger to the consideration must be distinguished from a stranger to a contract. The instances in Box 3.5 will help understand the concept better.

1. A is indebted to B. A sells his property to C who undertakes to discharge his debt vis-à-vis B. In case C fails to keep his promise, B has no right to sue C because of privity of contract between B and C. C is a stranger to the contract (between A and B) the example is based on Jamna Das vs Ram Autar.

2. In the famous English case of Tweedle vs Atkinson, A promised B to pay a certain amount to B’s son C on C’s marriage to A’s daughter, as the young man was to take up the new responsibilities of marital life. After the demise of both the contracting parties, ‘C’ sued the executors of A (his father-in-law) upon the agreement between A and his father. It was held that ‘C’ could not maintain the suit against the defendant being stranger to the contract.

Examples on Strangers to Contracts

VALIDITY OF AGREEMENTS WITHOUT CONSIDERATION

The Indian Contract Act contains certain exceptions, which make a promise without consideration valid and binding, stated as under.Natural Love and Affection

• An agreement without consideration is valid if it is • made in writing, • registered, • made out of natural love and affection, and• between the parties standing in near relation to each other [Section 25 (1)]

• In Rangaswamy an elder brother, on account of natural love and affection, promised to pay off the debts of his younger brother. The agreement was put into writing and was registered. The court held the agreement as valid and binding.Promise to Compensate for Past Voluntary Services As per Section 25 (2) a promise to compensate, wholly or in part, a person who has already done something voluntarily for the promisor, or something, which the promisor was legally compellable to do, is enforceable.


Illustrations: Compensation for Past Voluntary Services Example 1 A finds B’s purse and, gives it to him. B promises to give A Rs 50. This is a valid contract.Example 2A supports B’s infant son. B promises to pay A’s expenses in doing so. This is a valid contract.

Promise to Pay Time-barred DebtA promise made in writing and signed by the person to be charged therewith, or by his agent to pay a debt (wholly or in part) barred by the law of limitation is valid without consideration [S 25 (3)].


Completed GiftIn case of completed gifts (i.e., gifts actually made), the rule no consideration no contract does not apply. Here nearness of relation between the parties is immaterial and even if it, there may not be any natural love and affection between them. AgencyAs per Section 185 of the Indian Contract Act, no consideration is required to create an agency.GuaranteeIn a contract of guarantee there is no consideration between the creditor and the surety [Section 127].

Contract act ch 1 legal aspect of business law

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