No Consideration, No Contract : Exceptions and FAQs

For a contract to qualify as a valid contract, consideration is an essential element in the contract. Without consideration, no single promise can be enforceable. It is a term that is based on the maxim ‘quid pro quo’; i.e., something in return. Consideration is the price that is agreed to be paid by the promisee for the act done by the promisor. Section 2(d) of the Indian Contract Act, 1872 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 abstain from doing something, such an act or abstinence or promise is called a Consideration for the Promise“.

Geeky Takeaways:

• Consideration is an act of doing something.
• Consideration is an act of abstaining from doing something.
• Consideration must be made at the will of the promisor.
• Consideration might not necessarily take place between promisee and promisor, rather it can move from promisee to third party.
• Consideration may be either past, present, or future.

Exception to the Rule “No Consideration, No Contract”

The general rule provided in Section 25 of the Indian Contract Act is that if an agreement is made without consideration then it will be void. For every contract to be valid, the presence of consideration is very important as a contract is only enforceable when consideration is there. However, the Indian Contract Act, 1872 has established certain exceptions to this rule. Following are the cases when even though the agreement is made without consideration, it will be considered valid and enforceable. The exceptions to the rule are as follows:

1. Agreement made on Account of Natural Love and Affection

• Section 25(1) states that natural love and affection means the emotional bond between family members, such as parents and children, siblings, and spouses; i.e., it is a case when the parties stand in near relationship with each other.
• When a contract is entered based on natural love and affection, it will be considered a valid contract even if no consideration is presented in the contract.
• However, a contract based on natural love and affection is only valid when it is in writing and it is registered by law, so there is proper evidence of an agreement to avoid dispute.
• Indian Contract Act has not specified agreement made on account of natural love and affection is an exception to the principle “No Consideration, No Contract”, rather it is made by several judgements of the court.

For example, Aamir out of natural love and affection agrees to gift her newlywed daughter a flat worth ₹1 crore. Aamir made this promise in writing and the same was registered. Even though the promise is without any consideration the same shall be valid as it is made out of natural love and affection.

2. Agreement to Compensate for Past Voluntary Service

• Section 25(2) mentions Past Voluntary Services as the services that were performed voluntarily and gratuitously either out of gratitude or otherwise in the past and for such services compensation was promised subsequently.
• When a contract is entered based on past voluntary services the contract is considered as valid, even though the consideration was not passed on by the promisee to the promisor.
• For a contract of past voluntary services to be valid, it must be made in writing and it should also be registered by the law.
• The Indian Contract Act has not established agreements to compensate for past voluntary services as an exception to this case; however, the exception is made out of several judgements of the court.

For example, Akshay left for Canada for a year, and Kapil a neighbor of Akshay voluntarily agrees to take care of the garden of Akshay. Akshay subsequently promises to pay a sum of money as compensation to Kapil for taking care of the garden. The promise was made in writing and registered by law. Although no consideration exists at the time of rendering services, the contract is valid as there is a promise to pay for past service.

3. Agreement to Pay a Time-Barred Debt

• Section 25(3) states that time-barred debts are those debts that have passed the statute of limitation which is laid down in the Limitation Act of 1963 and as it has passed, the statute of limitation can not be brought to legal action.
• However, in the case, when the debtor agrees to pay the debt which was considered as a time-barred debt, either wholly or in part, such contract is enforceable.

For example, Kangana purchased a flat from Hrithik at a price of ₹1 crore, however, 10 years have passed and she didn’t make any payment towards the flat to Hrithik. The debt became time-barred and cannot be brought to legal action. However, after 10 years Kangana writes a promise to pay ₹20 lakh for the flat in the final settlement of the debt. Even though the contract is made without consideration it shall be enforceable and valid but only to the extent of ₹20 lakh.

4. Completed Gift

• A gift is a voluntary transfer of property from the donor to a donee without any consideration. When a person gives a gift, he does it for free and does not receive anything in return. Even though a gift is made without consideration it creates a valid contract.
• However, for a gift to be enforceable, it must be given voluntarily and there should be no coercion or undue influence. There must be an intention to make a gift by the donor, and the gift must be accepted by or on behalf of the donee.
• Under the Indian Contract Act 1872, gifts are not considered as contracts but it is considered as a transfer of property and are governed by the Indian Transfer of Property Act, 1882. Once the gift is gifted, the donor can’t demand back the gift once the donee has taken possession of the gift.

For example, Phil gifts his wife Clair, a car worth ₹10 lakh on her birthday. Although the transfer of property is made without consideration, however, this will be enforceable as it is gifted voluntarily by the donor to donee as a gift.

5. Contract of Agency

• An agency is a relationship between two parties in which one party; i.e., the principal authorizes another party; i.e., the agent, to act on his behalf.
• In an agreement of agency, the agent is appointed to perform the act on behalf of the principal, and the principal is bound by the actions of the agent which he has done on behalf of the agent and he had done within the authority.
• For a contract of agency to be valid and enforceable, it shall be made in writing and registered in law.

For example, Salman; the principal, appoints Arbaaz; the agent, to sell his property. Even though there is no consideration when the agency agreement is made, the contract is still binding because the agent is authorized to act on behalf of the principal, and the principal is bound by the actions of the agent taken on behalf of the principal.

6. Contribution to Charity

• Charity refers to an act of giving money, goods, or services to an organisation or individual who seeks help and is in need.
• Charity is made without receiving anything in return and charity is made freely without receiving any consideration from the person to whom the charity is made.
• Even though there is no consideration, a charitable donation will be considered a valid contract. For a charitable donation to be valid and enforceable, it must be made voluntarily and it shall be free from coercion or undue influence.

For example, Aishwarya promises to donate an amount of ₹1 lakh to an organization named ‘Being Good Human’. While relying on the promise of Aishwarya, the organization incurs expenses on manufacturing new shirts for people in need. Although the promise was made without consideration it will be considered as a valid contract.

7. Remission of Contract

• As per Section 63 of the Indian Contract Act, no consideration is required for an agreement to receive less than what is due. This is known as Remission in the Law.

For Example, Rachel took an interior contract from Ross. Rachel agrees to accept ₹50,000 from Ross in satisfaction of the debt of ₹1,00,000. Rachel subsequently cannot claim the amount of ₹50,000 which she has rescinded.

Conclusion

For a contract to qualify as a valid contract, consideration is an essential element in the contract. Without consideration, no single promise can be enforceable. It is a term that is based on the maxim ‘quid pro quo’; i.e., something in return. Consideration is the price that is agreed to be paid by the promisee for the act done by the promisor. Consideration can be understood as the price agreed to be paid by the promisee for the obligation of the promisor. Section 2(d) of the Indian Contract Act, 1872 has specified the definition of Consideration. The general rule provided in Section 25 of the Indian Contract Act is, that if an agreement is made without consideration, then it will be void. For every contract to be valid, the presence of consideration is very important as a contract is only enforceable when consideration is there. However, the Indian Contract Act, 1872 has established certain exceptions to this rule which are agreements made on account of natural love and affection, agreements to compensate for past voluntary service, agreements to pay a time-barred debt, completed gift, contract of agency, remission, and contribution to charity.

Frequently Asked Questions (FAQs)

1. What is the definition of Consideration?

Answer:

Section 2(d) of the Indian Contract Act, 1872 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 abstain from doing something, such an act or abstinence or promise is called a Consideration for the Promise”.

2. What are the characteristics of Consideration?

Answer:

• Consideration is an act of doing something.
• Consideration is an act of abstaining from doing something.
• Consideration must be made at the will of the promisor.
• Consideration might not necessarily take place between promisee and promisor, rather it can move from promisee to third party.
• Consideration may be either past, present, or future.

3. What are the exceptions to the rule of “No Consideration, No Contract”?

Answer:

“No Consideration, No Contract” has certain exceptions to this rule which are agreements made on account of natural love and affection, agreements to compensate for past voluntary service, agreements to pay a time-barred debt, completed gift, contract of agency, remission, and contribution to charity.

4. What are time barred debts?

Answer:

Time-barred Debts are those debts that have passed the statute of limitation which is laid down in the Limitation Act, 1963, and as it has passed the statute of limitation, they can not be brought to legal action.

5. Can past service rendered without consideration be considered as a valid contract?

Answer:

Yes, if the promise was made in writing and registered by law. Even though no consideration exists at the time of rendering services, the contract is valid as there is a promise to pay for past service.