Law of Contract: Doctrine of Consideration

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The doctrine of consideration is one of the established doctrines within the common law of contract. It began its development in the early stages of the English contract law and has long been a part of the English legal system. Consideration is a benefit that is bargained for between the parties and is the essential ingredient of any valid contract. Consideration holds value and is paid to the party on performance or promise of performance of the contract.

Section 2(d), Indian Contract Act, 1872 defines consideration as under:-

“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 act or abstinence or promise is called a consideration for the promise.”

According to Sir Frederick Pollock, the doctrine implies that “an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is taken, and the promise, given for value is enforced”.

In essence, the doctrine of consideration says that for a promise to be applicable; the promisee must give or promise something in return for that promise made. Thus, consideration at its most basic level is the requirement that a promise is bargained for. The rationale behind the doctrine of consideration, therefore, appears to be the need for reciprocity in the formation of contractual obligations.

Once again, at its most basic level, the doctrine of consideration is used to make a distinction between everyday social agreements and legally enforceable contracts.

 Evolution of the Doctrine of Consideration

The origin of the Doctrine of Consideration can be traced back to the thirteenth-century English law. At that time, breach of contract was not recognized as a concept by English courts. They did, however, enforce legal rights that were similar to those arising under contracts today. In particular, the English courts allowed only two causes of action of a contractual nature: covenant and debt.

But none of them suffice the circumstance of no fulfilment of performance or promise of performance. Because of the shortcomings, the actions of covenant and debt were gradually replaced during the fifteenth and sixteenth centuries by a new form of action, called “assumpsit”.

Assumpsit eventually became the general remedy for breach of promise. Like most changes in the common law system, this one also came incrementally. In the fourteenth century, the English courts recognized the action for damages resulting from a wrongful act. The doctrine of consideration happened because plaintiffs in court proceedings weren’t allowed to bring assumpsit claims to court merely on the idea that the defendant promised to try to something. Therefore something had to be created for the plaintiff to have proof of their claim and be able to seek damages.

The decision in Pinnel’s case [1602] 5 Co. Rep. 117a [Pinnel’s case] 119 is key to the development of the law in this area. In this case, it was decided that the doctrine of consideration was to be the test not only for the valid formation of a contract but also for deciding whether or not a modification to a pre-existing agreement was legally binding.

Therefore, consideration was required for both actions for the enforcement of obligations which arose from the formation of a contract, but also, from the obligations which arose from the modification of a pre-existing agreement. This requirement, though much contested, 120is still a part of the modification of contracts today.

Salient features

  • Consideration to be given at the desire of the promisor: It is essential that the consideration must have been given at the desire of the promisor, and not voluntarily or at the provision of a third party.

Abram is going back home from factory. On his way back, he sees that his friend Noah’s house is on fire. He controls the fire by arranging the required equipment. Abram cannot claim any reward for his effort because it was a voluntary act and was not done at the desire of Noah (promisor).

  • Consideration may move from the promisee to any other person (privity of consideration): According to the Indian law, consideration may be given by the promisee or any other person. In India, there is a possibility that consideration for the promise can be given to the promisee but a third person, who is not a party to the contract.

In England, the position is different. There the rule is that consideration must be provided to the promisee and nobody else.

In Advertising Bureau v. C.T. Devaraj, the circus owner made a contract with the plaintiff for advertising about the circus. The advertiser did not make any contract with the financer of the circus. Also, the advertiser was not a party to the contract between financer and owner of the circus. Since there was no privity of contract between the advertiser and the financer, the suit was dismissed.

  • Consideration can be in the past, present, or future:
  • Past Consideration- Past consideration means that the consideration for any promise was given earlier and the promise is made after that. In this case, consideration is provided before the promise is made.

For example, Abram saves John’s dog at his desire. After a month, John promises to pay Rs 500 to Abram. This act of payment from John to Abram will be known as past consideration.

  • Present Consideration- In this case, consideration is provided simultaneously.

For example, John makes an offer to reward worth Rs 500 for whosoever finds his lost dog. Abram finds his dog and delivers the dog back to John. Now John is bound to pay Rs 500 for his lost dog to Abram. The consideration, in this case, is thus known as present or executed consideration.

  • Executor or Future Consideration- Under future or executor consideration, consideration is provided at a future date for the promise made.

For example, Abram promises to provide equipment to John, and John agrees to pay him on a future date.

Landmark judgements

In the case of Durga Prasad vs. Baldeo, the plaintiff on the order of the collector of the town on his own expense constructed some shops in the Bazaar. The defendants promised to pay commission on the items which will be sold on the construction of the shop. This agreement was considered as a void agreement because in this case the consideration was not moved at the desire of the promisee. This brings to light that consideration has to be given at the desire of the promisee.

In the case of Chinmaya v Ramayya, there was an old woman who gave some immovable properties to her daughter through a registered deed. She also gave directions to her daughter to pay some money annually to her aunt who is the sister of the old women She also directed her daughter to pay an annuity to Y – the old woman’s sister. On the same day, her daughter entered into an agreement with the aunt to pay her the amount. The Daughter failed to pay the money annually and a case was filed by the aunt. The daughter took a plea that the consideration did not move from the old lady to her Daughter and hence it is not a valid contract. The court, in this case, held that the word ‘the promisee or any other person’ proves that the consideration need not only move from the promisee and hence the aunt was entitled to maintain a suit for recovery.

In Dunlop Pneumatic Tyres Co. vs. Selfridge & Co. Ltd, Selfridge & Co. Ltd bought tyres from Dunlop and then sold them to a sub dealer. The sub-dealer agreed not to sell the tyres at a price which is less than the list price which has been given by Dunlop Tyres and for each tyre which will be sold below the list price Damages will be paid to Dunlop. It was held that Dunlop is a stranger to the Contract between the sub-dealer and Selfridge & Co. Ltd and hence the suit will not be considered as maintainable.

In the case of Mountford v. Scott, the plaintiff agreed to sell his house at a consideration which was equal to one dollar. The court, in this case, held that the consideration is deemed to be a good consideration and that mere existence of some consideration is sufficient.

Critical analysis

The first of the issues is the doctrine’s apparent lack of purpose and definition. The second of these issues is the over-complexity of the doctrine caused by the many exceptions which have been made to it; these exceptions are, for the most part, the result of judges attempting to avoid outcomes which could be considered unfair, immoral or against public policy. Thirdly, some have argued that the doctrine of consideration is used as a mask for the real reasons for judicial decisions and finally, others demonstrate the fact that the doctrine does not fit well with the current trend towards the harmonization of contract law, particularly in Europe. This list is by no means exhaustive and it is possible to find a great many more problems which are caused by the doctrine of consideration.

The doctrine of consideration in its classical form was originally defined as ‘some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other. 

Its function was thus, reciprocal and the main function of the doctrine of consideration was to distinguish between binding promises and those which are not. One of the arguments often raised by critics of the doctrine is that many exceptions have been made to the doctrine and that, as a result of these exceptions, the doctrine has become a complex web of rules which scarcely have any real meaning, especially as far as the modification of contracts is concerned.

One of the biggest concerns raised by the critics of consideration is the use of the doctrine as a way of disguising decisions made based on policy, morality, or fairness. Indeed, Atiyah argues that the English courts will endeavor to find consideration where “the moral appeal of the plaintiff’s case would be so great that any court would surely strive to uphold his claim” Professor Treitel argues that the courts have begun to ‘invent’ good consideration where they see fit even though neither party may have intended to provide it.

Thus the actions of the parties are being interpreted by the courts to mean something that they arguably do not. This problem is particularly prevalent in cases concerning the modification of pre-existing contracts as such agreements often involve economic hardship and changing circumstances.

Conclusion

In conclusion, it is undeniable that the doctrine of consideration has been and remains a fundamental requirement for the formation of all binding contracts. However, over the years, several judges promoted what they believed was fair over consensus the doctrine has seen its scope significantly expand, from the promotion of legal certainty to the occasional endorsement of the exact opposite, thus, giving rise to contradictory outcomes.

Truly, the doctrine’s initial inception was meant to accurately assess both of the contractual parties’ intentions to be legally bound, yet, its recent developments gave rise to cases where judges dismissed those intentions, hence, betraying the doctrine’s original functions and purpose.

These contradictions are deemed to have generated unpredictable outcomes and stripped contractual parties of all legal certainty and protection in the process of forming binding agreements.

Therefore, Lord Denning’s assertions about the immovability of the consideration doctrine remain valid to this day, but only to a moderate extent. Indeed, consideration is still a requirement, yet the requirements of a valid consideration have undergone significant change, thus, losing legitimacy in the eyes of judges and scholars.

Finally, a way of regaining that legitimacy, and more importantly, ensuring the respect of the intentions of the contractual parties to be legally bound, would be to look to other civil law systems which place the notion of consensus at the centre of the formation of binding contracts (such as the German civil law) as inspiration for a needed reform to the doctrine of consideration.

Authors: Nishtha Sinha from Symbiosis Law School, Hyderabad and Prachi Grover from Department of Law , Panjab University.

Editor: Yashika Gupta from Rajiv Gandhi National University of Law, Patiala.

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