[Intern Post] Consideration & Capacity in Contract by Arushi Drall | Law Notes



INTRODUCTION
A contract is an agreement enforceable by law. All agreements are not enforceable by law and, therefore all agreements are not contract.
For Example, an agreement by a shopkeeper to sell a specific product to the customer might be a contract but at the same time agreement to watch a movie together might not be a contract. Thus, for an agreement to be a contract all the essentials mentioned under section 10 of The Indian contract act, 1872 must be satisfied.
The conditions that must be satisfies according to section 10 of The Indian contract Act,1872 are as follows:
(a)   An agreement between two parties, i.e. offer by one party and its acceptance by the other party,
(b)   Agreement should be between the parties who are competent to contract,
(c)   There should be lawful consideration and lawful object in respect of that agreement,
(d)   There should be free consent of the parties, when they enter into the agreement,
(e)   The agreement must not be one, which has been expressly declared to be void.
So according to Section 10 of The Indian Contract Act,1872 one of the essential of a valid contract is LAWFUL CONSIDERATION.
The general rule of India is that “An agreement without consideration is void.”  But there are certain exceptions to the same.
The points covered further are:
  ·      Consideration- Definition, Kinds, Essentials, Privity of Contract
    ·         Capacity to Enter into a Contract
    ·         Minor’s Position
    ·         Nature / Effect of Minor’s Agreements
CONSIDERATION
Consideration means something in return for the promise. Section 2(d) of The Indian Contract Act, 1872 defines consideration as
“ When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains 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.”
Section 25 of The Indian Contract Act,1872 provides that, “An agreement made without consideration is void.” Thus, consideration is an essential element of a contract.
According to Salmond and Winfield, “A promise without consideration is gift; one made for consideration is a bargain.”
Illustration – A agrees to sell his house to B for Rs. 10,000. Here B’s promise to pay Rs.10,000 is consideration for A’s promise to sell the house, and A’s promise to sell the house is the consideration for B’s promise to pay Rs. 10,000.
The definition requires the following essentials to be satisfied in order that there is a valid consideration –
I.  Consideration to be given ‘at the desire of the promisor’
Section 2(c) of The Indian Contract Act, 1872 defines ‘Promisor’ as the person making the proposal. It is essential that the consideration must have been given at the desire of the promisor, rather than merely voluntarily or at the instance of some third party.
So, this essential means that some consideration must be there at the desire of the person who has made the proposal and no interference must be there from any other party.
In the case of Durga Prasad v. Baldeo, the plaintiff built at his own expense certain shops at a place on the order of the collector. The defendants (shopkeepers) made a promise to the plaintiff to pay him a commission on the articles sold. The plaintiff’s action to cover the commission was rejected because the plaintiff act was not the result of the defendant’s promise but of the Collector’s order.
I.                   Consideration by Promisee or any other person (PRIVITY OF CONTRACT)
According to Section 2 (d) of The Indian Contract Act, 1872 consideration for a contract can be made either by the promise himself or by any other person. Which means that it is not compulsory that only the promisee is bound to provide the promisor with consideration of the contract, any other person on his behalf can also make the consideration.
Illustration – A promises to give his watch to B for a consideration of Rs. 2000. But for this contract gives Rs. 2000 to A on behalf of B. This is a valid contract according to The Indian Contract Act, 1872.
Chinnaya v. Ramaya is a landmark case, in which A, an old lady, granted an estate to her daughter (the defendant) with a direction that the daughter should pay an annuity of Rs. 653 to A’s brother (the plaintiffs). On the same day, the defendants made a promise with the plaintiffs that she would pay the annuity as directed by A. The defendant failed to pay the stipulated sum. In an action against her by the plaintiffs she contended that since the plaintiffs themselves had furnished no consideration, they had no right of action. The Madras HC held that in this agreement, the consideration has been furnished by the defendant’s mother and that is enough consideration to enforce the promise between the plaintiff and the defendant.

PRIVITY OF CONTRACT
Meaning:
The doctrine of privity of contract means that only those persons who are parties to the contract can enforce the same. Which means that if a person who is not a party to a contract then in that case, he/she cannot provide other party with consideration.
This doctrine is not followed in India but it is followed in England. Both the countries have a different prospective regarding the doctrine.
POSITION OF DOCTRINE OF PRIVITY OF CONTRACT IN:

Case Laws:
(a)   England – Tweddle v. Atkinson
In this case the plaintiff, A married a girl, B. After this marriage there was contract in writing between A’s father and B’s father that each would pay a certain sum of money to A and that A will have the power to sue for such sums. After the death of the two fathers, A brought an action against the executors of B’s father to recover the promised amount. It was held that A could not sue for the same. In this case the plaintiff was both a stranger to the contract as well as stranger to consideration and he could not enforce the claim.
(b)  India – Jamna das v. Ram Avtar
In this case, A had mortgaged some property to X. A then sold this property to B, B having agreed to A to pay off the mortgage debt X. X brought an action against B to recover the mortgage money. It was held by the Privy Council that since there was no contract between X and B, X could not enforce the contract to recover the amount from B.
Exceptions to the doctrine:
(a)   Beneficiary under trust or charge
Where trust is created by a contract a beneficiary may enforce the rights which the trust so created has given him though not a party to the contract. Similarly, a beneficiary can enforce charge though not a party to the deed.
In the case of Dunlop Pneumatic tyre company v. Selfridge & co.  the exception of Beneficiary under trust or charge was first recognised under this case by Lord Haldane.

(b)  Marriage settlement, partition or other family arrangements
In case of family arrangement if a provision is made for the benefit of a person, he may enforce the agreement although he is not a party to it. In the case of Shuppu Ammal v. Subramaniam on partition of HUF, two brothers agreed to invest Rs.300 each for the maintenance of their mother. The mother was held entitled to sue to enforce the agreement though she was not a party to the contract.

(c)   Acknowledgement or estoppel
If a person is required under the terms of a contract, to pay certain sum of money to a third person and he acknowledges it to that person, he becomes bound to pay the money to the third person.
II.                Consideration may be Past, Present or future 
(i)                 Past consideration:
It basically means that when the act has already been done but the promise for the same is made afterwards.
For example, A asked B to help him with his work, then after the completion of the work A promised B that he will pay Rs. 100 to B for helping him with his work. In this situation, the act was already completed but the promise was made later on as well as the consideration is made after the completion of the act. Thus, this is known as past consideration.
In the case of Sindha Shri Ganpat v. Abraham, the plaintiff rendered services to the defendants at the desire of the defendant during defendant’s minority and continued those services after the majority. The defendant after attaining majority, promised to pay an annuity to the plaintiff for the service. The agreement was held to be enforceable.

(ii)              Present consideration:
Present consideration is also known as executed consideration. In the case of present consideration, the consideration is provided along with the making of the contract.
In the case of, India v. Chaman Lal Loona & Co.  a clear distinction between present and future consideration was made as follows: “An executed consideration consists of an act for promise. It is the act which forms the consideration. No contract is formed until and unless the act is performed, e.g. the payment for a railway ticket but the act stipulated for exhausts the consideration, so that any subsequent promise, without any further consideration is merely a nudum pactum. In an executed or present consideration, the liability is outstanding on one side only; it is present as opposed to a future consideration.”

(iii)            Future consideration:
Future consideration is also known as Executory consideration. In the case of future consideration, one person makes a promise in exchange for the promise by the other side.
Example – A agrees to supply certain goods to B and B agrees to pay for them on a future date, this is a case of executory consideration. In the case of Rajlucky Dabee v. Bhootnath Mookerjee,  it was held that near relationship covers blood relations or those related through marriage, but would not include those relations which are not near, but only remotely entitled to inherit.

(1)   Compensation for past voluntary service
When something has been done “At the desire of the promisor”, that constitutes a good consideration in respect of a subsequent promise to compensate for what has already been done.  The second exception of Section 25 covers where a person without the knowledge of the promisor, or otherwise than at his request, does the latter some service, and the promisor undertakes to recompense him for it.
Example – When A finds B’s purse and gives it to him and then B promises to pay A Rs.50, this is a contract.
(2)   Promise to pay a time barred debt
Section 25(3) requires the following essentials to be satisfied:
(i)                 The promise must be to pay wholly or in part a time barred debt, that is a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
(ii)              The promise must be in writing and signed by the person to be charged therewith, or his duly authorised agent.
It was established in England Long Back (1602), that a precedent debt is a good consideration for a subsequent promise to pay the same. This includes time barred debt also.
Thus, if an insolvent debtor has been discharged from the payment under the insolvency law, a subsequent promise by him to pay that debt cannot be enforced unless there is a fresh consideration for the same.


III.             There should be some act, abstinence or promise by the promise, which constitutes consideration for the promise.
This statement basically means that consideration must be of some value in the eyes of law. It means that if nothing is done in exchange for the promise, that is when there is no act, abstinence or promise, there is no consideration.


EXCEPTIONS WHEN AGREEMENT WIHTOUT CONSIDERATION IS VALID:
(3)   Promise due to natural love and affection
When the promise is made in favour of a near relation on account of natural love and affection, the same is valid even though there was no consideration for such a promise. The following requirements are to be satisfied:
(i)                 The parties to the agreement must be standing in a near relationship to each other
(ii)              The promise should be made by one party out of natural love and affection for the other
(iii)            The promise should be in writing and registered
CAPACITY TO ENTER INTO A CONTRACT
One of the most essential elements of a valid contract is the competence of the parties to make a contract. Section 11 of the Indian Contract Act, 1872, defines the capacity to contract of a person to be dependent on three aspects that is:
(i)                 Attaining the age of majority,
(ii)              Being of sound mind,
(iii)            Not disqualified from entering into a contract by any law that he is subject to.

(1)    Attaining the Age of Majority
According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years. For the purpose of entering into a contract, even a day less than this age disqualifies the person from being a party to the contract. Any person, domiciled in India, who has not attained the age of 18 years is termed as a minor. Thus, a Contract made with a Minor is Void
Since any person less than 18 years of age does not have the capacity to contract, any agreement made with a minor is void ab-initio.
Example – A is a boy of 17 years and 6 months old. He needs some money to go on vacation with his friends. He approached a moneylender and borrows Rs 25,000. As security, he signs some papers mortgaging his laptop and motorcycle. Six months later, when he attains the age of majority, he files a suit declaring that the mortgage executed by him when he was a minor is void and should be cancelled. The Court agrees and relieves A of all liability to repay the loan.
Also, if a minor enters into a contract, then he cannot ratify it even after he attains majority since the contract is void ab-initio. And, a void agreement cannot be ratified.

(2)   Person of Sound Mind
According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a contract, a person is said to be of sound mind if he is capable of understanding the contract and being able to assess its effects upon his interests.
If there is a person who is usually of an unsound mind, but occasionally of a sound mind, can enter a contract when he is of sound mind. No person can enter a contract when he is of unsound mind, even if he is so temporarily. A contract made by a person of an unsound mind is void.

(3)   Disqualified Persons
Apart from minors and people with unsound minds, there are other people who cannot enter into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc.

Nature of minor’s agreement:
·         An agreement with a minor is absolutely void.
·         The rule of estoppel does not apply against a minor.
·         A minor’s agreement cannot be ratified by him on attaining the age of majority.
·         A minor is liable for a tort which is not directly connected with a contract.
·         A minor can be admitted to the benefits of a partnership firm.
·         A minor can be appointed an agent.

The main case law related to this topic is, Mohiri Bibee v. Dharm Das Ghose.
Facts: Plaintiff – respondent, a minor, mortgaged his house in favour of a money lender to secure a loan of Rs.20,000 @ 12% interest. A part of this amount was actually advanced to the plaintiff. The money lender himself did not take part in the negotiation. On his behalf the negotiation was made by his attorney. While considering the proposed advance the attorney received information that the respondent was still a minor. On the day on which the mortgage was executed the attorney got the infant to sign a long declaration which he had prepared for him containing a statement that he has turned into a major a month back. Relying on this the moneylender agreed to advance to minor Rs.20,000. The attorney was fully aware at the time the mortgage was executed of the minority of the respondent. After sometime the minor If there is a person who is usually of an unsound mind, but occasionally of a sound mind, can enter a contract when he is of sound mind. No person can enter a contract when he is of unsound mind, even if he is so temporarily. A contract made by a person of an unsound mind is void.

(4)   Disqualified Persons
Apart from minors and people with unsound minds, there are other people who cannot enter into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can include, political status, legal status, etc. Some such persons are foreign sovereigns and ambassadors, alien enemy, convicts, insolvents, etc.

Nature of minor’s agreement:
·         An agreement with a minor is absolutely void.
·         The rule of estoppel does not apply against a minor.
·         A minor’s agreement cannot be ratified by him on attaining the age of majority.
·         A minor is liable for a tort which is not directly connected with a contract.
·         A minor can be admitted to the benefits of a partnership firm.
·         A minor can be appointed an agent.

The main case law related to this topic is, Mohiri Bibee v. Dharm Das Ghose.
Facts: Plaintiff – respondent, a minor, mortgaged his house in favour of a money lender to secure a loan of Rs.20,000 @ 12% interest. A part of this amount was actually advanced to the plaintiff. The money lender himself did not take part in the negotiation. On his behalf the negotiation was made by his attorney. While considering the proposed advance the attorney received information that the respondent was still a minor. On the day on which the mortgage was executed the attorney got the infant to sign a long declaration which he had prepared for him containing a statement that he has turned into a major a month back. Relying on this the moneylender agreed to advance to minor Rs.20,000. The attorney was fully aware at the time the mortgage was executed of the minority of the respondent. After sometime the minor


 Arushi Drall is a student of Jagannath Institute of Management Studies and presently interns with MyLawman. She can be reached at [email protected] alert-info

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