No Consideration, No Contract

Exceptions to the Rule, “No Consideration, No Contract”

Consideration being one of the essential elements of a valid contract the general rule is that “an agreement made without consideration is void. But there are a few exceptions to the rule, where an agreement without consideration will be perfectly valid and binding. These exceptions are as follows:

1. Agreement made on account of natural love and affection [Sec. 25 (1)]: An agreement made without consideration is enforce­able. If it is

(i)   Expressed in writing

(ii) Registered under the law for the time being in force for the registration of documents

(iii) Is made on account of natural love and affection

(iv) Between parties standing in a near relation to each other.

Thus there are four essential requirements which must be complied with to enforce an agreement made without consider­ation, as per Section 25 (1).

Let us now study some some illustrations in this behalf

(a)    A promises, for no consideration, to give to B Rs 1,000. This is a void agreement

(b)  A for natural love and affection, promises to give his son B, Rs 1,000. A puts his promise to B into writing and registers it This is a contract.

(c)   A registered agreement, whereby an elder brother, on account of natural love and affection, promised to a the debts of his younger brother, was held to be valid and binding an the younger brother cause the elder brother in the event of his not carrying out the agreement (Venkatasamy vs Rangasami)

It should, however, be noted that mere existence of a near relation between the parties does not necessarily import natural love and affection. Thus where a Hindu husband, after referring to quarrels and disagreement between him and his wife, executed a registered document in favour of his wife, agreeing to pay for separate residence and maintenance, it was held that the agreement was void for want of consideration because it was not merely out of natural love, and affection. (Rajlakhi Devi vs Bhootnath)

2.    Agreement to compensate for past voluntary service (Sec.25 (2)].

A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor,’ or done something which the promisor was legally compelled to do.

Illustrations

(a)   A finds B’s purse and gives it to him. B promises to give A Rs 50. This is a contract.

(b) A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract. (Note that B was legally bound to support his infant son).

(c)   A rescued B from drowning in the river, and B, appreciating the service that had been rendered, promises to pay Rs 1,000 to A. There is a contract between A and B.

In order to attract this exception, the following points should be noted:

(i)    The service should have been rendered voluntarily for the promisor. If it is not voluntary but rendered at the desire of the promisor, then it is covered under ‘past consideration’ [as per Sec. 2(d) and not under this exception].

(ii)   The promisor must be in existence at the time the service was, rendered. Thus where services were rendered by a promoter for a company not then in existence, a subsequent promise by the company to pay for them could not be brought within the exception. (Ahmedabad Jubilee Spinning Co. vs Chhotalal).

(iii) The promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor. Thus, where B treated A during his illness but refused to accept payment from A; they being friends; and A in gratitude promises to pay Rs 1,000 to B’s son D, the agreement between A and D is void for want. of consideration as it is not covered under the exception.

(iv)   The intention of the promisor ought to be to compensate the promisee. A promise given for any motive other than the desire to compensate the promisee would not fall within the exception. (Abdulla Khan vs Parshottam)

(v)   The promisor to whom the service has been rendered needed competence to contract at the time the service was rendered. Thus a promise- made after attaining majority to pay for goods supplied voluntarily to the promisor during his minority has been held valid and the promisee could enforce it ,(Karam Chand vs Basant Kaur). 

The court in that case ob-served that they failed to see how an agreement made by a person of full age to compensate wholly or in part a promisee, who had already voluntarily done something for the promisor, even at a time when the promisor was a minor, did not fall within the purview of Sec. 25(2) of the Contract Act. The reasoning of the court is, that at the time the thing was done the minor was unable to contract, and therefore the person who did. it for the minor must in law be taken to have done it voluntarily. In their opinion the ‘provisions of Sec. 25(2) applied equally to a contract by a major, as well as by a minor, to pay for past services. In this connection it is important to note that this exception does ‘not cover a promise by a person on attaining majority to repay the money borrowed during his minority because such a promise cannot be said to be a promise to compensate a person who has already voluntarily (without any promise of compensation) done something for the promisor. ‘Advancing money as a loan’ necessarily implies a promise to compensate (i.e., a promise to repay the loan) on the part of the borrower, Thus a promise made by a minor after attaining majority to repay money advanced during his minority has been held invalid and beyond the purview of Section 25(2) of the Contract Act (Indran Ramaswami vs Anthappa).

(vi) The service rendered must also be legal. Thus past cohabitation will not make a promise to pay for it enforceable under this exception (Sabava vs Yamanappa).

3.    Agreement to pay a time-barred debt (Sec. 25 (3)]. Where there is an agreement, made in writing and signed by the debtor or by his authorised agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even though It is not supported by any con­sideration. A time barred debt cannot be recovered and therefore a promise to repay such a debt is without consideration, hence the importance of the present exception.

But before the exception can apply, it is necessary that:

(i)    The debt must be such of which the creditor might’ have enforced payment but for the law for the limitation of suits.

(ii)    The promisor himself must be liable for the debt. So a promissory note executed by a widow in her personal capacity in payment of time-’ barred debt of her husband cannot be brought within the exception (Pestonji vs Maherbai28);

(iii) There must be an ‘express promise to pay’ a time barred debt as distinguished from a mere ‘acknowledgement of a liability’ in respect of a debt. Thus. a debtor’s letter to his creditor, “I owe you Rs. 1,000 on account of my time-barred promissory note” is not a contract. There must be a distinct promise to pay; and

(iv)   The promise must be in writing and signed by the debtor or his agent. An oral. promise to pay a time-barred debt is unenforceable.

The logic behind this exception is that by lapse of time the debt is not destroyed but only the remedy is” lost. The remedy is revived by a new promise under the exception.

Illustration. A owes B Rs 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs 500 on account of the debt. This is Ii contract (Appended to Sec. 25).

4.   Completed gift. A gift (which is not an agreement) does not require consideration in order to be valid “As between the donor and the done any lift actually made will be valid I and binding even though without consideration” [Explanation 1, to Section 25]. In order to attract this exception there need not be natural love and affection or nearness of relationship between the donor and done. The gift must, however, be complete.

5. Contract of agency. Section 185 of the Contract Act lays down that no consideration is necessary to create an agency.

6.     Remission by the promisee, of performance of the promise (Sec. 63). For compromising a due debt, i.e., agreeing to accept less than what is due, no consideration is necessary. In other words, a creditor can agree to give up a part of his claim and. there need be no consideration for such an agreement. Similarly, an agreement to extend time for performances of a contract need not be supported by consideration (Sec.63).

7.     Contribution to charities. A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promised subscription, the promisee takes definite steps in furtherance of the object and undertakes a liability, to the extent of liability incurred, not exceeding the promised amount of subscription. In Kedar Nath vs Ghorie Mohammad, the defendant had agreed to subscribe Rs 100 towards the construction of a Town Hall at Howrah. The plaintiff (secretary of the Town Hall) on the faith of the promise entrusted the work to a contractor and undertook liability to pay him. The defendant was held liable. But where the promisee had done nothing on the faith on the promise, a promised subscription is not legally recoverable. Accordingly, in Abdul Aziz vs Masum Ali, the defendant promised to subscribe Rs 500 to a fund started for building, a Mosque but steps had been take to carry out the repairs. The defendant was held not liable and the suit was dismissed.

Capacity to Contract: Persons Disqualified to enter into a Contract   Explain Consideration with examples  Types of Consideration  No Consideration, No Contract

What is Consideration?  Stranger to a Contract cannot sue

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