CA > Foundation > Paper 2 – Skim Notes

Unit 2: Consideration

Overview

  • The concept of consideration is essential to contract validity.
  • Consideration has a double aspect—benefit to the promisor and detriment to the promisee.
  • Consideration can come from third parties, affecting contract validity.
  • Certain situations allow for contracts to be valid even without consideration.
  • The doctrine of privity suggests that only parties to a contract can sue, with notable exceptions.
  • Legal rules surrounding consideration define its scope and relevance in contracts.
  • Understanding various forms and types of consideration is crucial for proper contract formation.

Key Topics

Definition and Meaning of Consideration

  • Consideration is essentially the price paid by the promisee for the promisor’s obligations.
  • Defined in Section 2(d) of the Indian Contract Act as acts or abstentions at the desire of the promisor.
  • Consideration can take the form of an act (performance) or abstinence (foregoing an action).
  • According to Misa v. Currie, consideration can include rights, benefits, or forbearance from the promisee.
  • Examples demonstrate how consideration can be non-monetary but still valid in legal terms.

Deep Dive

  • Consideration must actually have value to ensure legal enforceability, even if it’s not equal in monetary terms.
  • Past consideration is accepted under specific conditions where it is performed at the request of the promisor.
  • Understanding the concept of executory vs executed consideration is key in contract discussions.

Legal Rules Regarding Consideration

  • Consideration must move at the desire of the promisor, maintaining the return component of agreements.
  • Both the promisee and third parties can provide consideration, making them integral to contract formation.
  • Consideration can be executed (performed) or executory (promised), impacting enforceability.
  • It is not required to be adequate; the legal system does not assess the value equivalence between the exchanged promises.
  • Consideration should be lawful, not illusory, and must not contravene public policy.

Deep Dive

  • Legal obligations cannot constitute valid consideration, highlighting why agreements pre-fulfilling legal duties are void.
  • Inadequate consideration doesn’t invalidate contracts unless it can be proven coercive or influencing consent.
  • Real vs. illusory consideration is crucial; promises of impossible feats are void.

Suit by a Third Party to a Contract

  • Under Indian law, only parties to a contract can generally sue, adhering to the doctrine of privity of contract.
  • Certain exceptions allow third parties to enforce contractual claims; trust law beneficiaries are a significant example.
  • Family arrangements can permit enforcement by parties not directly involved in the agreement.
  • Assignment of contracts may allow non-parties to seek enforcement if the contract’s benefit has been assigned.
  • Various scenarios—like agency contracts—can empower third-party claims if conditions are met.

Deep Dive

  • Understanding ‘stranger to a contract’ vs. ‘stranger to consideration’ greatly assists in legal interpretations.
  • Recognition of certain legal doctrines enables justice in family law situations, ensuring vulnerable parties can seek recourse.
  • Banks and financial institutions often navigate these exceptions during contract assignments.

Validity of Agreements Without Consideration

  • General rule states agreements without consideration are void under Section 25; however, exceptions exist.
  • Natural love and affection are legitimizing factors if adequately documented and registered.
  • Promises made for past voluntary services are binding under specific circumstances laid out in law.
  • Signed promises to pay debts barred by limitation are enforceable without consideration if documented.
  • Certain contexts like gifts, bailments, and charity allow for enforceability sans consideration, providing crucial exceptions.

Deep Dive

  • Section 25 encompasses exceptions based on emotional ties, exemplifying legal accommodation of personal relationships.
  • Law permits an agency without consideration, which highlights trust and responsibility in business dealings.
  • Understanding what constitutes completed gifts can prevent disputes over familial obligations and property transfers.

Summary

Consideration is a fundamental component of contract law, serving as the price for promises between parties. It must be valid and move at the desire of the promisor, can emanate from third parties, and can be executed or executory. While typically agreements without consideration are void, exceptions exist, particularly when agreements are based on natural love, past voluntary services, or are agency contracts. The doctrine of privity establishes that only parties to a contract can sue, though exceptions apply to beneficiaries and specific family-oriented agreements. Navigating these concepts ensures a thorough understanding of contract enforceability and legal obligations.