A promise, as such, is not legally enforceable. The first great question of contract law, therefore, is what kinds of promises should be enforced. The answer to that question traditionally has been subsumed under the heading "Consideration." Properly understood, that term merely stands for the set of general principles defining the conditions that make promises enforceable, and it might profitably be replaced by the more descriptive term "enforceability." Over the last hundred years or so, however, a more confined approach developed, under which consideration doctrine was made to turn on a bargain pivot, and was articulated through a set of highly particularized rules.

To achieve clear thinking about the principles that determine what kinds of promises the law should enforce, these principles must be based on the social desirability of enforcing various categories of promise taken at wholesale. Questions concerning the quality of individual promises-- questions relating to issues such as fraud, duress, mistake, or unconscionability should then be dealt with at retail, through case-by-case application of the principles that deal with those more differentiated issues. Putting the problem in the language of civil procedure, the principles that address the enforceability of promises should determine whether breach of a given type of promise gives rise to a legal complaint. Issues concerning the quality of individual promises should then be matters of defense. The axiomatic school, as reflected in the rules embodied in the first and second Restatements of Contracts, unfortunately takes a more restrictive approach, which turns on the so-called bargain theory of consideration. In the Restatement Second, this theory is embodied in section 71(1): Requirement of Exchange .... To constitute consideration, a performance or a return promise must be bargained for.4

The bargain theory of consideration produces two distortions. The first concerns terminology and style. Obviously, a number of conditions other than bargain should make a promise legally enforceable. The axiomatic school recognizes these conditions, as it must, but only under the topic heading "Contracts Without Consideration."'5 The unhappy result is that under the terminology of the axiomatic school, as reflected in the Restatement Second, a promise needs consideration to be enforceable unless it does not need consideration to be enforceable. The second and more serious distortion produced by the bargain theory of consideration is substantive. If consideration means the set of principles defining the conditions that make promises enforceable, the elements of consideration will be continually adjusted as it becomes socially desirable to add new or drop old conditions. In contrast, the bargain theory of consideration suggests a closed system in which non-bargain promises are presumptively unenforceable. 6 This closed-system approach does not necessarily restrict the Restatements themselves. 7 If taken seriously, however, such an approach not only tends to stifle judicial creativity and reconceptualization, but conduces to the formulation of particularized rules, rather than general principles, to govern non-bargain promises.8 The bargain theory of consideration is certainly not mandated by contract doctrine. On the contrary, the theory cannot account for such basic contract doctrines as promissory estoppels, past consideration, and waiver, except by clumsily relegating them to the purgatory of "Contracts

Without Consideration." 9 Nor is the theory mandated by judicial decisions. A number of courts have adopted the bargain theory, to be sure, but many others have continued to use the term "consideration" in its broader sense to embrace such elements as the seal, 0 reliance," and moral obligation based on past benefit conferred.' 2 It is time to discard the restrictive bargain theory of consideration in favor of an expansive conception that recognizes the enforceability of promises on the basis of various elements, and directs inquiry toward determining those elements while fashioning principles that reflect them in an appropriate way.THE ELEMENT OF BARGAIN The determination of whether any given type of promise is legally enforceable should turn on both substantive and administrative considerations. As a substantive matter, the state (speaking through the courts) may justifiably take the position that its compulsory processes will not be made available to redress the hurt caused by every broken promise, but only to remedy substantial injuries, prevent unjust enrichment, or further some independent social policy, such as promotion of the economy. As an administrative matter, the state may fairly take into account the extent to which enforcement of a certain type of promise would involve difficult problems of proof. Cutting .across both substantive and administrative categories is the question of whether the type of promise at issue is normally made in a deliberative manner, so as to accurately reflect the promisor's wants and resources. By these standards, bargain promises clearly should be enforceable. The injury to the promisee is typically substantial. Usually he will have relied upon the promise, and often he will have seen the promisor enriched as a result of that reliance. The state has an independent interest in the enforcement of such promises. Exchange creates surplus, because each party presumably values what he gets more highly than what he gives. A modern free-enterprise system depends heavily on private planning and on credit transactions that involve exchanges over time. The extent to which private actors will be ready to engage in exchange, and are able to make reliable plans, rests partly on the probability that bargain promises will be kept. Legal enforcement of such promises increases that probability. Other criteria for enforceability point in the same direction. For example, if the bargain has been half-completed, that a valuable performance has been rendered to an unrelated party helps satisfy the administrative concern for evidentiary security. Even if the transaction is wholly executory, bargains are not easy to fabricate from whole cloth. And because bargain promises are typically rooted in self-interest rather than altruism, they are likely to be finely calculated and deliberatively made. Ironically, however, the axiomatic school, having adopted the bargain theory of consideration, stopped short of giving the bargain element its full scope, and instead wrongly adopted rules that denied enforcement to several important classes of bargain promises. Among the most significant of these classes are promises given in bargains in- 1982] CORNELL LAW REVIEW volving either the performance of a legal duty or an illusory counterpromise. A. The Legal-Duoy Rule The legal-duty rule is articulated as follows in section 73 of the Restatement SecondPerformance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain. The rule as articulated covers both preexisting duties imposed by contract and duties arising out of an official position. These two types of duty raise very different issues, and in evaluating the role each type must be considered separately. 1. Preexisting Duties Imposed by Contract The rationale of the legal-duty rule as applied to preexisting contractual

duties is stated in Comment a to section 73 of the Restatement Second A claim that the performance of a legal duty furnishes consideration for a promise often raises a suspicion that the transaction was gratuitous or mistaken or unconscionable. If the performance was not in fact bargained for and given in exchange for the promise, the case is not within this Section: in such cases there is no consideration under the rule stated in Section 71(l). Mistake, misrepresentation, duress, undue influence, or public policy may invalidate the transaction even though there is consideration. . . . But the rule of this Section renders unnecessary any inquiry into the existence of such an invalidating cause, and denies enforcement to some promises which would otherwise be valid. Because of the likelihood that the promise was obtained by an express or implied threat to withhold performance of a legal duty, the promise does not have the presumptive social utility normally found in a bargain .... 13 Three propositions can be parsed from this Comment: (1) bargains involving the performance of a preexisting contractual duty are often gratuitous; (2) if not gratuitous, they are often mistaken; and (3) if neither gratuitous nor mistaken, they are often unconscionable. The proposition that bargains involving the performance of a preexisting contractual duty are often gratuitous is empirically farfetched. Perhaps a few such cases could be found, but I have never run across one. In any event, if such cases really do arise they neither need nor

The first principle of the law governing the enforceability of promises is that an unrelied-upon donative promise is normally unenforceable. This principle can be justified on several grounds, the most important of which is the low level of injury resulting from breach. 48 If, however, a donative promisee incurs demonstrable costs in reasonable reliance on the promise, the injury is significant and the promise should be enforced to the extent of those costs.

In the English legal system a contract must consist of an offer, acceptance, intentions to create legal relations, and consideration. If one of them is not available then a full contract has not been demonstrated. As part of contract law, consideration is one of the most important parts of a legal contract. This essay will be discussing what is consideration, look at the various types and reach into a conclusion.

The crucial part of consideration is its absence and its presence. Consideration is concerned with the bargain of the contract. A contract is based on an exchange of promises and a mutual agreement without any duress. Each part in a contract must have a promisor and or promisee. A promisor is the one who wants the product. A promisee is the one delivering the product for an exchange of benefit. Benefits do not have to be in monetary terms and thus it can be a benefit of the contract itself.

Wales (1997) defines Consideration as one of the most vital aspects of a contract. Consideration is an assurance being made by one party to another party by promising not to do something that has been agreed upon or to do something that has been agreed upon and showing that it has been

considered by the party. Therefore that assurance can help to create a legal bind between the two parties and that has been “considered or looked upon and pending to an agreement”. It must be a formal promise of assurance nominally or to show practically that the promise is going to be fulfilled in the time provided to the agreement. However, if it is written agreement there is no need to practically show that it has been considered by one party since it is sufficient enough that it is written and can prove whether if it is legally bound. The great philosopher Aristotle has cleared it already four hundred years ago BC by saying “Good laws, if they are not obeyed, do not constitute good governance”. As part of good governance and to clarify the law a contract is an agreement which is written or orally clarified. Written laws are not significant if they are not said orally which makes it difficult for us to differentiate at this stage so it makes it hard for us to either write it or orally mean it. These controversies amongst legal terminologies and doctrines sometimes may coincide or contradict each other. In the coming paragraphs this essay will explain and analyse by providing case law of the importance of consideration.

The case that brought into the definition of consideration is Currie v Misa (1875). In which Justice Lush defined consideration as, “A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. According to this definition consideration consists in some benefit to the promisor, or some detriment to the promise. That means even if one these is of the objectives of the contract then it can be sufficient enough to say it has been considered. One of the early definitions of consideration was given by Sir Fredrick Pollock and was approved by Lord Dunedin in Dunlop v Selfridge Ltd [1915], is as follows:

“An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

The British contract Act defines consideration as follows “when at the desire of the promisor, the promise or any other person has done or abstained from doing or does or abstains form doing, or promises to do or to abstain from doing, something, such act or abstinence or promise are called a consideration for the promise.” Consideration need not necessarily be in cash or kind. It may be an act or abstinence or promise to do or not to do something. It need not always be doing some act. It cannot be doing an act also.

In simple words, Consideration means 'something in return'.

Consideration is one of the essential element for an agreement to become a Contract. It is a requisite for

all contracts other than those made by deed.

Consideration is something that moves from the promisee to the promisor, at the implied or express request of the latter, in return for his promise. The item that moves can be a right, interest, profit, loss, responsibility given or suffered, forbearance or a benefit which is of some value in the eyes of law.

Under the Section 2(d) of Indian Contact Act 1950, Consideration is defined as to, “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 so or to abstain from doing something, such act or abstinence or promise is called consideration of the promise”

Consideration may be viewed as a sort of bargain, or price which one party pays to buy the promise or act of the other. When the promisor promises to do or to abstain from doing something, the promisee must pay a price for it. This price to be paid may be an act or abstinence or a price to perform a future act or abstinence.

Legal rules as to consideration:

1) Consideration must move at the desire of the promisor: the act done or loss suffered by the promise must have been done or suffered at the desire or request of the promisor. The act done at the desire of a third party or without the desire of the promisor cannot be a good consideration. It is not necessary that the promisor himself should be benefited by the acts of the promise. The benefit may be intended for a third party. But the desire or request of the promisor is essential.Example: A sees B’s house on fire and helps in extinguishing it. B did not ask for A’s help. A cannot demand payment for his service.

2) Consideration may more from the promisee or any other person: consideration can be given or supplied by the promise or any other person who is not a party to the contract. As long as there is a consideration it is not important who has given it. Therefore, a stranger to consideration can sue on a contract provided he is not a stranger to contract. This is known as the “doctrine of constructive consideration”.

3) Consideration may be past, present or future: consideration may be past, present or future. But according to English law, consideration may be present or future but never past.

4) Consideration need not be adequate: consideration need not be adequate to the promise, but it must be of some value in the eye of law. So long as consideration exists, the courts are not concerned as to its adequacy. Provided it is of some value. The adequacy of the consideration is of the parties to

consider at the time of making the agreement. However, the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given. This is because inadequacy may suggest fraud, mistake or coercion etc. Example: Ali agrees to sell a car worth $2,000 for $200. Ali’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of consideration.

5) Consideration must be real and not illusory: Although consideration need not be adequate, it must be real, competent and of some value in the eyes of the law. Real consideration is one which is not physically or legally impossible. If the consideration is physically impossible, vague or legally impossible, the contract cannot be enforced.

6) Consideration must be lawful. The consideration for an agreement must be lawful. An agreement is valid if it is based on unlawful consideration. Consideration is unlawful: a) if it s forbidden by law or b) if of such a natural that if permitted it would defeat the provisions of nay law, or c) is fraudulent, or d) involves injury to the person or property of another, e) court regards it as immoral or opposed to public policy Example: I ) A promises to maintain B’s child and B promises to A $ 2000 yearly for the purpose. Here, the promise of each party is the consideration for the promise of the other party. These are lawful considerations. II ) A promises to obtain for B, an employment in the public services, and B promises to pay $ 800 to A. the agreement is void as the consideration for it is unlawful.

7) Consideration may be an act or abstinence or promise: Consideration may be a promise to do something or not to do something. So it may be either positive or negative. Consideration need not always be doing some act. It can be not doing an act also.

8) Consideration must be something which the promisor is not already bound to do: a promise to do what one is already bound to do, either by general law or under an existing contract, is not a good consideration for a new promise. There will be no detriment to the promise or benefit to the promisor over and above their existing rights or obligations. Similarly, a promise to perform a public duty by a public servant is not a good consideration. Example: A promises to pay $ 200 to police officer for investigation into a crime. This promise is without consideration because the police officer is already bound to do so by law.

Exceptions when the Agreement is Valid without Consideration

English Law

In the English law a contact under seal is enforceable without consideration while the simple contracts need the presence of consideration. In the words of Anson: “English law recognizes only two kinds of contract, the contract made by deed that is under seal, which is called deed or specialty, and the simple contract.”1 A contract under seal means which is in writing and which id “signed, sealed and delivered.”

1 A.G. Guest, Principles of the Law of Contract, 22nd Ed. (1964), p. 65

The English law says that there is no liability upon a contract, unless the contract fulfils on of the two conditions, namely, either that it should be without “consideration’ or that it is a deed under seal.2

Indian Law

Section 25 of the Indian Contract Act, 1872, generally declares that an agreement without consideration is void. The Section, however, provides exceptions to the rule stated as under:

“25. An agreement made without consideration is void unless –

1. It is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing near relation to each other, or unless

2. It is promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor who legally compellable to do; or unless

3. It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced but for the law for the limitation of suits.

In any case of these cases, such an agreement is a contract.”

Promise due to natural love and affection

[Section 25(1)]

If a promise is made in favor of a person of a near relation on account of nearness, love or affection, the same is valid even though there is no consideration. The following conditions need to be satisfied in order to cover this exception:

1. The parties to the agreement must be standing in a near relationship to each other.2. The promise should be made to one party out of natural love and affection for the other.3. The promise should be in writing and registered.

The near relationship has not been defined by act or any judicial pronouncement. But, from the various decisions we can see that it covers blood relations3 and relations made through matrimony4, but would not include such relations which are not near, but remotely entitled to inherit. 5 But in a relation where there is no love and affection the exception does not apply. Like in Rajlucky Dabee v Boothnath Mookerjee,6 after a lot of quarrels and disagreements between the parties who were Hindu husband

2 Markby’s Elements of Law, 5th Ed., 1896, p. 3113 Bhiva v Shivram, (1899) 1 Bom. L.R. 4954 Gopal Saran v Sita Devi, (1932) 36 C.W.N. 3925 Jafar Ali v Amhad Ali, (1868) 5 B.H.C. 376 (1900) 4 C.W.N. 488

and wife decided to live apart. Later the husband executed a document giving the wife separate residence and maintenance. The agreement also included mention of the quarrels and disagreements between the two. It was held that the document was not executed because of love and affection but the absence of the same, therefore, the wife could not recover the sums mentioned in the document. It is also necessary for the document to be in writing and the writing be registered under the law relating to registration of documents.

Consideration for Past Voluntary Services

[Section25 (2)]

When something’s done at the desire of the promisor it constitutes a valid consideration in the same respect a subsequent promise to compensate for whatever has already been done is also good. In other words promise to pay for a past voluntary service is binding. In Sindha v Abraham7 the Bombay High Court said that “services rendered at the desire of the minor expressed during majority and continued at the same request after his majority form a good consideration for a subsequent express promise by him in favor of the person who rendered the services.”

Promise to Pay Time Barred Debt

In another condition if a party agrees to pay a time barred debt it is considered to be valid contract. Section 25(3) required the following essentials to be satisfied in such a case:

1. The promise must be to pay wholly or in part a time barred debt, i.e., a debt which the creditor might have enforced payment but for the law the limitation of suits.

2. The promise must be in writing and signed by the person to be charged therewith, or his duly authorized agent.

The English law on the point is also same. It was established in England as way back as 1601 8 that a precedent debt is good consideration for a subsequent promise. This also includes time barred debts.9

Wholly or in Part

7 (1895) 20 Bom. 7558 Slad’s case, (1602) 2 Co. Rep. 91a.9 Hyelling v Hastings, (1699) 1 Ld. Ray. 389, Also see Section 23(4) (English) Limitation Act, 1939

Section 25(3) permits a promisee to pay the time barred debt wholly or in part. If the person promises to pay only a part of the time barred debt then he cone only be made liable for the part promised and not the whole amount.10

There should be Express PromiseThe promise to pay a time barred debt must be an express one11 and cannot be held sufficient if the intention has to be gathered from large number of circumstances.12 In Tulsi Ram v Same Singh13 after three years of expiry period of a promissory note the defendant made the statement “I accept this pronote and it is valid for the next three years” (translated to English). Here the Delhi High Court held that the mere acknowledgment of presence of debt did not give the promise of payment and the defendant could not be made liable.

Admission to Pay in Court ProceedingsIn State Bank of India v Dilip Chandra Singh Deo14 it has been held that if the legal heir of deceased makes an admission in court indicting his willingness to pay the sum borrowed by the deceased, he can be held liable on the basis of his admission, even though the recovery for the same is barred by limitation.

Promise to Pay must be Unconditional

Promise to pay time barred debt within the meaning of clause (3) of Section 25must be expressed and unconditional. In K. Jeyaraman v M/s Sundaram Industries Ltd.,15 the appellant made a formal recognition of the fact that in a document he had agreed to pay the amount only after receiving the amount from the State Electricity Board. It was held by the Madras High Court that the document conveyed a conditional promise and was not covered by Section 23(3) as the cause of action of filing suit would only arise after amount was received from the State Electricity Board.

10 Govinda Niar v Achutan Niar, A.I.R. 1940 Mad. 678 at p. 67911 Bachu Kamalamma v Srinivasa Oil Mill, A.I.R. 1980 N.O.C. 41 (A.P.)12 Govinda Niar v Achutan Niar, A.I.R. 1940 Mad. 678 at p. 67913 A.I.R. 1981 Delhi 16514 A.I.R. 1998 Orissa 12915 A.I.R. 2008 (NOC) 2532 (Mad.)

Unreal Considerations: in the following cases, the consideration is not legal because of physical or legal impossibility or uncertainty. The following are not real considerations. 1) Physical impossibility: if a person agrees to perform an impossible act for a consideration, the promise is not enforceable. The promise is unreal. Discovering treasure by magic or making two parallel straight lines meet or putting life back into a dead body cannot be enforced as promises because of impossibility. 2) Legal impossibility: whenever the performance of a promise is legally impossible, consideration is not real. 3) Uncertain consideration: consideration is not real and is not enforceable if it is uncertain or ambiguous. Examples: A engages B for doing a certain work and promises to pay a “reasonable sum”. There is no recognized method of ascertaining the “reasonable” remuneration. The promise is not enforceable as it is uncertain. 4) Illusory consideration: an illusory consideration is not real and is unenforceable. Example: A promises to give B one ton of gold brought from the sun. the consideration is sham and illusory. 5) Pre-existing legal obligations: A promise to do what one is already bound to do, either by general law or under an existing contract, is not a good consideration for a new promise. Similarly, a promise to perform a public duty by a public servant is not a consideration.

One of the main elements of a contract is consideration. Lack of consideration in contract law can make a contract unenforceable when both parties do not receive a benefit from entering into an agreement.

What is Consideration?

There are essentially six elements that must be present for a contract to be enforceable. There must be an offer, acceptance of the offer, consideration, capacity, mutuality and the terms and conditions must be legal and not in violation of any laws or ordinances. Our focus in this lesson is on consideration, or the benefit each party to a contract receives by entering into a contract. In other words, when two parties enter into an agreement, both parties must exchange one thing of value for another.

Let's take a very simple example to demonstrate how consideration works. If Joe offers to sell his scooter to Bill for $50, Bill can accept the offer. Once the offer is accepted, Bill must fork up the 50 bucks in order to secure the scooter. Consideration can take on two forms:

A promise to do something one is not legally bound to do otherwise, or A promise not to do something

A promise to do something one is not legally bound to do is simply performing the acts, or following through on the promises made in a contract, like the exchange between Joe and Bill in the scooter sale. On the flip side, if there is a legal obligation to perform an act, one cannot view performing the act a contract condition. For instance, a reward for information that leads to the arrest and conviction of a criminal cannot be claimed by a police officer if the criminal is captured in the line of the officer's duty. After all, it is his obligation to catch a slippery criminal.

A promise not to do something could be a promise not to sue a party after restitution has been made. Let's revisit Joe and Bill. Once Bill took ownership of the scooter, he attempted to speed away. Bill did not realize that the scooter was in reverse. As Bill tried to stop the scooter, he ran into Joe's mailbox, knocking it to the ground. The mangled mailbox was in disrepair. Joe demanded $100 from Bill in exchange for waiving his right to sue in small claims court. Once Bill coughed up the cash, Joe could no longer sue for damages. The value of consideration must be determined objectively. Joe's mailbox has a specific value regardless of how sentimental he feels toward it. Lack of consideration in contract law means that one party to the contract had little or no imposing obligation to any terms of the agreement.

Lack of ConsiderationLack of consideration means that one of the parties to a contract is not obligated in any way, while the other party holds all obligation to act. Generally, courts will not interfere with parties to a contract. Adequacy of consideration is the doctrine of freedom in cutting a mutually beneficial deal and means that parties are free to negotiate any way they see fit. A bad negotiation, like paying too much for a car or hiring an inexperienced housepainter, is of no consequence. Bottom line: the buyer and seller have full authority to negotiate as they please. However, there are several instances when a court will declare a contract unenforceable because consideration was lacking:

When one party is already legally bound to perform, When consideration is more like a gift, When consideration is made as a result of a past event, or When consideration is based on an illusory promise

When a party seeks payment for an act that they are already obligated to perform, the contract is unenforceable. When Pugsley the Pit Bull went missing, his owners placed 'Reward for Lost Dog' signs all over the neighborhood. They offered a hefty reward of $45 for the return of their prodigal pooch. Richard, the local dogcatcher, noticed the sign and remembered picking up a canine with the same characteristics that very day. He dialed in to announce that he was in possession of Pugsley

and demanded the reward. Although a reward was posted for Pugsley's safe return, the owners are in no way obligated to pay Richard a dime. It is Richard's primary responsibility as city dogcatcher to locate and secure stray dogs.

It is the considered view of the Government that in the materialistic world in which we are living, gifts are not possible from non-relatives. In the past, frequently claims were successfully made  by individuals about receipt of  huge amounts as gifts from other individuals even though the donor and the donee were not related to each other but there was natural love and affection. Government has not accepted such situations.   We are also aware that recently Indian judiciary has recognized live-in relationships.  Such relations may be sometimes more intimate than recognized blood relations. But so far as income tax law is concerned, such relations would not be recognized and gifts in such relations  would also become taxable. Government has  started taxing gifts of sum of money. Then realizing the possible leakage in cases of gifts in kind now virtually in  every budget proposals Government has started thinking in terms of roping in more items in the list of  gifts in kind.Since October 2009 gifts of immovable properties and specified immovable properties have been brought within taxing purview. So far taxable entities for gifts were only individuals and HUFs. By Finance Act, 2010 first step has been taken to expand the scope of taxable entities also.Provisions of section 56(2) : Reg. popularly known as gifts :Section 56(2) of the Income Tax Act, 1961 inter alia deals with receipts without consideration. Since most of such receipts tantamount to gifts, the provisions are popularly known for gifts and deemed gifts. Till 30 09 2009 only sum of money received without consideration was gift if the recipient is either an individual or a HUF. By the Finance No.2 Act, 2009 with effect from 01 10 2009 the provisions were so much expanded that they even included cases of  immovable properties received for inadequate consideration as compared to stamp valuation. The expanded provisions also include receipt of specified movable properties either without consideration or at inadequate consideration as compared to fair market value.Pertinent to mention that even under expanded provisions, gifts from relatives and under specified exceptions continue to be beyond tax net.Provisions as contained in section 50C taxing sales of land or building or both operative since 01 04 2002 affecting the vendors of such properties continue.Provision for inadequate consideration to be deleted :While framing proposals in the Finance Act,  2010 it seems the Government realized negative effects on genuine transactions of purchases of immovable properties and wiser counsel prevailed. Therefore, the provision relating to inadequate consideration in transactions of immovable properties has been deleted. With the result that if an individual or HUF receives immovable property without consideration, the stamp valuation thereof would be taxed as income. But if consideration is there but inadequate, there would not be any taxation. However, as stated herein before, the seller would continue to be taxed on capital gains on the basis of stamp valuation or sale price  whichever is higher. Buyer will not be affected in view of the amendments carried out by the Finance Act, 2010.Enhanced cost of acquisition when sold as capital asset :In transactions of immovable property received without consideration or specified movable properties received without consideration or at inadequate consideration,  the provision continues that when the recipient of  immovable property was subjected to income tax on the basis of stamp valuation or receipt of

movable property was subjected to FMV, as the case may be,  then in future when he sells the same property, his cost of acquisition of such capital asset would be such valuation which was subjected to income tax earlier and indexation would also be available on such valuation being his deemed enhanced cost of acquisition.Relief provision with regard to  stamp valuation :If the recipient of the property claims before the income tax assessing officer that the stamp valuation is higher than the fair market value thereof, then he has remedy either to contest the stamp valuation before the concerned authorities or to request the assessing officer for valuation by valuation officer to be appointed by the income tax department.  In such a case, if income tax valuation comes equal to stamp valuation, then no case arises. But if the income tax valuation is lower than the stamp valuation then income tax valuation would be adopted. However, if the income tax valuation is determined higher than the stamp valuation, then stamp valuation is adopted and higher income tax valuation is disregarded. Therefore by seeking valuation by income tax department, the assessee cannot be worse off than what he is due to stamp valuation. Similar relief provisions are contained in section 50C for the vendor of the immovable property.Immovable Properties would mean and include :The immovable properties in this context means land or building or both. However, building should include part of the building and therefore flats, shops, galas etc. should get included. Further one may like to take a view that in a co-operative housing or premises society, what one is transferring is a share certificate and not an immovable property but one is not likely to succeed in such a view because the decisions under the stamp duty and registration laws as well as under the income tax laws are in one direction  having taken a view that in such a case share certificate is only in representative capacity and what one is really transferring is an immovable property represented by such share certificate.Specified Movable Properties :Provisions as inserted by the Finance (No. 2) Act, 2009  also cover receipts, either by way of purchase or otherwise,  of specified movable  properties namely  shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any  work of art. Now by the Finance Act, 2010 a new item has been added w.e.f. 01 06 2010 and that is “bullion”. Bullion would include gold, silver, platinum, or palladium, in the form of bars or ingots. Some central banks use bullion for settlement of international debt, and some investors purchase bullion as a hedge against inflation.In respect of such movable properties, it is provided that if  the aggregate fair market value of such movable properties received during the year without consideration exceeds Rs.50000/-, then such value is income in the hands of recipient. In a case one receives such properties by payment of their respective prices, but if the difference between the aggregate of prices so paid  and the aggregate of fair market values thereof exceeds Rs.50000/-, then such difference would be income in the hands of the recipient. For purposes of determination of fair market value, rules have already been framed effective from 01 10 2009.These provisions concerning movable properties as enacted by the Finance (No. 2) Act, 2009 were enacted in such a manner that even a purchaser of such movable properties in normal course of his business would have got affected if the purchase was found to be at less than the prescribed fair market value. To remove such hardship, the provisions have been amended by the Finance Act, 2010 so that these provisions with regard to movable properties would apply only when in the hands of the recipient individual or HUF such movable property is a capital asset and not as stock in trade.Gifts received from relatives :

Section 56(2) inter alia provides that sums received without consideration from following relatives are not income:(i) spouse of the individual;(ii) brother or sister of the individual;(iii) brother or sister of the spouse of the individual;(iv) brother or sister of either of the parents of the individual;(v) any lineal ascendant or descendant of the individual;(vi) any lineal ascendant or descendant of the spouse of the individual;(vii) spouse of the person referred to in clauses (ii) to (vi).Whether gifts received from relatives are not taxable ? :One cannot conclude like that Section 56(2) provides that gifts received from non- relatives are income but no where in the Income Tax Act,1961 it is provided that gifts received from relatives are not income and therefore tax free. Therefore, it is not a case that section 56(2) places the gift from relatives beyond taxing provisions. If gifts are received from specified relatives, the recipient will have to prove genuineness of such gifts with reference to identity of the donor, capacity of the donor, source of funds of the donor, etc.A company cannot receive a gift but can receive at inadequate consideration :Further, so far section 56(2) of the Income Tax Act,1961 treats receipts without consideration  as income if the recipient is an individual or HUF. Other categories of assesses including a company and a firm have been kept out of the taxing purview. Although  in my considered view, a company cannot receive gift under the general law as well as under the provisions of the Income Tax Act, 1961.A gift necessarily involves a contract because the gift to be valid and complete has to be accepted by the donee. Section 25 of the Indian Contract Act, 1872 lays down a very basic law that a contract without consideration is void ab initio. Relevant exception for the contract to be valid without consideration is for an agreement in writing, registered under the provisions of the Registration Act, 1908 and such an agreement is on account of natural love and affection. The section does not affect to the gift actually made by the donor to the donee.A claim of gift by a company cannot sustain as natural love and affection is not possible towards an artificial person. Further, as far as gift of the property is concerned section 122 of the Transfer of the Property Act, 1882  requires that transfer of property by way of gift must be accepted by the donee and inter alia such acceptance must be made during life time of the donor and before the donee dies. The provisions using the words like death of donee are logically in the context of an individual and not in the context of an artificial person. In such a view of the matter, it is not possible for a company to claim gift and therefore receipts of sums of money without consideration may not escape taxation in the hands of a company under other provisions of the Income Tax Act, 1961. Similarly, receipt of immovable property or movable properties without consideration also may not escape taxation in the hands of a company. However, if the company receives specified movable properties at a price less than fair market value, the new provisions concerning deemed undervaluation of properties would not cover such company and therefore taxation u/s. 56(2) would not be attracted. None the less, the new provisions of the receipt of specified movable properties for inadequate consideration do not cover a company or a firm.Firm and closely held company brought within purview :Finance Act, 2010 makes a starting point to tax a firm and a company in a specified situation. The Finance Act, 2010 has provided to tax a firm or a closely held company when it receives shares of a closely held company either without consideration or at a consideration less than the fair market value.

The provisions will not apply if such shares are received in the course of amalgamations, mergers, demergers and re-organisations. When afterwards such company or firm transfers such shares the valuation whereof either fully or partly subject to income tax, then at the time of subsequent transfer of such shares, the cost of acquisition would be the fair market value which was earlier taken into consideration for taxation u/s. 56(2).  It is pertinent to mention here that as far as this category is concerned, the Act does not distinguish between receipt as capital asset and receipt as stock in trade.Gifts received from non relatives in specified circumstances  :Gifts received from non relatives are generally taxable. However, there are certain exceptions under which gifts received from non relatives are also not taxable.Gifts received on the occasion of marriage of an individual even from non relatives are not an income.Further following receipts without consideration are also not income :i. under a Will or by way of inheritance;ii. in contemplation of death of payer;iii. from local authority as defined in Explanation to section 10(20);iv. educational or medical institution or fund etc. referred to u/s. 10(23C);v. trust or institution registered u/s. 12AA.Gift in contemplation of death :A gift is said to be made in contemplation of death when the donor is ill and he expects to die shortly out of such illness and delivers to another possession of the movable property to be kept by another person as gift in case a donor dies of that illness. A gift in contemplation of death can be made of any movable property which the donor could dispose off under a Will. It is possible for the donor to resume such a gift before he dies. Further in a case where donor recovers from the illness during which he made the gift then such a gift will not take effect. Further if the donor survives the person to whom such gift was made then also such gift does not take place.If such property instead of being given away in contemplation of death is made subject matter of the Will then the bequest under a Will would require executor’s assent to perfect the title of the legatee and will be subject to probate, when applicable.  Gifts in contemplation of death can be made only of a movable property.Sum or property received by HUF from members not taxableAs Provided in Finance Bill 2012.Under the existing provisions of clause (vii) of sub-section (2) of section 56 any sum or property received by an individual or HUF for inadequate consideration or without consideration is deemed as income and is taxed under the head “Income from other sources”.  However, in the case of an individual, receipts from relatives are excluded from the purview of this section and are therefore treated as not taxable. The definition of relative as given in this sub-clause is only in relation to an individual and not in relation to a HUF.It is therefore proposed to amend the provisions of section 56 so as to provide that any sum or property received without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation.This amendment will take effect retrospectively from the 1st day of October, 2009.Share premium in excess of the fair market value to be treated as incomeSection 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.

It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income- tax under the head “Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value—(i) as may be determined in accordance with the method as may be prescribed; or(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.- See more at: http://taxguru.in/income-tax/s56-pertaining-gifts-deemed-gifts-undervaluations.html#sthash.EIuBKkLh.dpuf

Evaluate the role and purpose of the doctrine of consideration in contract law. Particularly in light ofsection 25 of the Indian Contract Act which sets out the exceptions to the consideration requirement.Do the exceptions to consideration nullify the purpose and role of the consideration doctrine in contractlaw? Do you think that consideration should remain an essential part of contract law?Introduction:In simple words contract is an agreement or exchange of promises made between two or more parties,which is competent in the eyes of law. In contract a legal relationship plays an important role. Incontract the parties must have an intention to form a legal relationship. Suppose if there is no intentionto form a legal relationship, which agreement cannot be treated as a valid or a legal contract. Usually

there is no intention to form a legal relationship in social and domestic agreements like Invite someonefor dinner does not form a legal relationship. Some agreements and commitment between father andmother, father and son and husband and wife does not form a legal relationship. A contract is valid onlywhen the acts are legal. Prohibited works like killing someone for money, work like immoral for thatsociety does not agree or unlawful acts are cannot be treated as a valid agreement. So, illegitimateworks will not come under the contract act. “An agreement wherein it is clearly stated that "Thisagreement is not intended to create formal or legal agreement and shall not be subject to legaljurisdiction in the law of courts." cannot be treated as a contract and not valid.”“According to The Indian Contract Act, 1872 Contract is:Section 2(h), an agreement enforceable by law is a contract;Section 2(e), every promise and every set of promises, forming the consideration for each other, is anagreement;Section 2(b), when the person to whom the proposal is made signifies his assent thereto, the proposalis said to be accepted. A proposal, when accepted, becomes a promise.”“According to The Indian Contract Act, 1872 Consideration is:Section 2(d), when, at the desire of the promisor, the promise or any other person has done orabstained from doing, or does or abstain 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 2(f), promises which form the consideration or part of the consideration for each other, arecalled reciprocal promises.”“According to Sir Pollock; Consideration is the price for which the promise of the other is bought andthe promise thus given for value is enforceable.”‘Ex nudo pacto non oritio actio’ means an agreement without any consideration is null and void, thus, itcan’t be enforced by law.“Section 25 of Indian Contract Act: As per S. 25 of Indian Contract Act, an agreement without anyconsideration is declared to be void, but there are some exceptions in this rule, in which an agreementis enforceable even though they are made without consideration.There are following exception of this rule:Love and Affection. S.25(1): Where an agreement is expressed in writing and registered under the lawfor the time being in force for the registration of documents and is made on account of natural love andaffection between parties standing in a near relation to each other. It is enforceable even if there is no

consideration.Example: A for natural love and affection promises to give his son B Rs. 2000/-. A puts his promise to Binto writing and register it. This is a contract.Compensation for voluntary services. S.25(2): A promise to compensate wholly or in part, a personwho has already voluntarily done something for the promisor, is enforceable, even though withoutconsideration.Example: A says to B, at the risk of your life you saved me from a serious accident. I promise to payyou Rs. 10,000/-. There is a contract between A and B.Promise to pay a time barred debt. S.25(3): A promise by a debtor to pay a time barred is enforceableprovided. It is made in writing and is signed by the debtor or by his agent generally or speciallyauthorized in that behalf. The promise may be to pay the whole or any part of the debt of which thecreditor might have enforced payment but for the law for the limitation of suits.Example: A owes C Rs. 1500/- but the debt is barred by the limitation Act. A signs a written promise topay C Rs. 750/- on account of the debt. This is a contract.In any of these cases, such an agreement is a contract:Explanation 1: Nothing in this section shall affect the validity, as between the donor and the done, ofany gift actually made.Thus, the rule ‘agreement without consideration’ does not apply to completed gift.Explanation 2: An agreement to which the consent of the promisor is freely given is not void merelybecause the consideration is inadequate; but the inadequacy of the consideration may be take intoaccount by the Court in determining the question whether the consent of the promisor was freelygiven.”Importance of Consideration:Consideration is one of the most essential element of contract. Consideration is a technical term in thesense of ‘quid pro quo’ i.e. something in return. When a party to an agreement promises to do‘something’ he must get ‘something’ in return also. In short consideration is ‘something; which is ofsome value in the eyes of law. Suppose there an agreement without any consideration, the agreementis not a valid contract. Let’s take an example, suppose A’s uncle C is very rich. C promises to A that hewill give him a brand new luxury car with no strings attached. Now suddenly C changed his mind, now Acan’t force him for that. Because it was one-sided contract only and A has not done or promised to do

anything in exchange. Therefore, consideration is very necessary in contract. We can say that contractis legal when both parties to a contract give and take something from each other so this is called thecontract and it enforceable by law also.Role of Exception to Consideration:As I mentioned above also that in consideration some exceptions are there, but it has some conditionsto enforce the contract:It should be in writing.It should be register with the proper authority.All people who all are included in the contract must be near relatives.Here near relatives means related by blood or marriage or family members.In that contract, there should be natural love and affection.But sometimes natural love also overruled by external situations. For example:Natural love and affectionRajlukhy Dabee v. Bhootnath Mokerjee:In this case defendant Mr. Bhootnath had a fight with his wife, Mrs. Rajlukhy Dabee. After they signeda registered contract that he will pay her a certain sum of money for her maintenance. Later on hechanged his mind and he refused to give her money. The wife filed a case against his husband andclaimed the maintenance amount.It was held by Calcutta High Court that the agreement was void for want of consideration. Because atthat time there was no presence of love and affection to make the contract effective.Compensation for voluntary servicesIn this section for enforcement the act should be done voluntarily. If a person promise to pay aftergetting money for the act performed during his/her minority could be carried within this exception.The promisor’s survival must be necessary during the performance of the act. In the case of Jubilee S.& W Co. v Chhotalal , it was held that work done by the promoter of a company before itsincorporation cannot be regarded as the work done for the company.Time barred debt:The debt must be such “of which the creditor might have enforced but for the law of limitation of suits.”The promise made should be an expressed one. A person to be charge with is a term wide enough totake into account the promise made by the person who is willing to pay the debt of another.Conclusion:A contract in general never complete without the presence of consideration. In real, consideration is the

answer of these question “why are entering into this contract or what are you getting for being a partnerin this contract?”. Suppose if consideration is not a part of contract, then court can never judge thedecision. That’s why courts need acceptable proof in contract cases and that proof can come only ifcontract has a consideration. However, there are some exceptions in the Indian Contract Act 1872 anda contract can complete even without any consideration. According to my view these exceptions nevernullify the purpose and role of consideration in contract law, rather than they help in some cases. Likesome cases would have been proved void due to lack of consideration, in that exceptions like love andaffection help them to prove as valid contract. With the help of exceptions court can easily judge thecase and give their best decision. I think exceptions play a vital role in consideration and because ofexceptions somewhere consideration is most essential part in the contract.

Intro    In contract law consideration is concerned with the bargain of the contract. A contract is based on an exchange of promises. Each party to a contract must be both a promisor and a promisee. They must each receive a

benefit and each suffer a detriment. This benefit or detriment is referred to as consideration. Consideration must be something of value in the eyes of the law - (Thomas v Thomas) (1842) 2 QB 851. This excludes promises of love and affection, gaming and betting etc. A one sided promise which is not supported by consideration is a gift. The law does not enforce gifts unless they are made by deed.  Whilst the common law strictly adheres to the requirement of consideration (although in some instances the courts seem to go to some lengths to invent consideration eg Ward v Byham [1956] 1 WLR 496, Williams v Roffey Bros[1990] 2 WLR 1153) equity will, in some instances, uphold promises which are not supported by consideration through the doctrine of promissory estoppel.    Rules of consideration  There are various rules governing the law of consideration:

 

1. The consideration must not be past.  2. The consideration must be sufficient but need not be adequate.  3. The consideration must move from the promisee.  4. An existing public duty will not amount to valid consideration.  5. An existing contractual duty will not amount to valid consideration.  6. Part payment of a debt is not valid consideration for a promise to forego the balance. 

1. Consideration must not be past:Re McArdle (1951) Ch 669 Court of Appeal

Majorie McArdle carried out certain improvements and repairs on a bungalow. The bungalow formed part of the estate of her husband's father who had died leaving the property to his wife for life and then on trust for Majorie's husband and his four siblings. After the work had been carried out the brothers and sisters signed a document stating in consideration of you carrying out the repairs we agree that the executors pay you £480 from the proceeds of sale. However, the payment was never made.

Held:

The promise to make payment came after the consideration had been performed therefore the promise to make payment was not binding. Past consideration is not valid.

Past consideration may be valid where it was proceeded by a request:

Lampleigh v Braithwaite [1615] EWHC KB J17   Lampleigh v Braithwaite [1615] EWHC KB J17

The defendant had killed a man and was due to be hung for murder. He asked the claimant to do everything in his power to obtain a pardon from the King. The claimant went to great efforts and managed to get the pardon requested. The defendant then promised to pay him £100 for his efforts but never paid up.

Held:

Whilst the promise to make payment came after the performance and was thus past consideration, the consideration was proceeded by a request from the defendant which meant the consideration was valid. The defendant was obliged to pay the claimant £100. 

2. Consideration must be sufficient but need not be adequate:

There is no requirement that the consideration must be market value, providing something of value is given eg £1 given in exchange for a house would be valid. The courts are not concerned with whether the parties have made a good or bad bargain:

Chappell v Nestle [1960] AC 87Chappel v Nestle [1960] AC 87 House of Lords

Nestle ran a sales promotion whereby if persons sent in 3 chocolate bar wrappers and a postal order for 1 shilling 6d they would be sent a record. Chappel owned the copyright in one of the records offered and disputed the right of Nestle to offer the records and sought an injunction to prevent the sales of the records which normally retailed at 6 shillings 8d. Under s.8 of the Copyright Act 1956 retailers were protected from breach of copyright if they gave notice to the copyright holders of the ordinary retail selling price and paid them 6.25% of this. Nestle gave notice stating the ordinary selling price was the 1 shilling 6d and three chocolate bar wrappers. The question for the court was whether the chocolate bar wrappers formed part of the consideration. If they did it was impossible to ascertain the value they represented and therefore Nestle would not have complied with their obligation to give notice of the ordinary retail selling price. If the wrappers were a mere token or condition of sale rather than constituting consideration, then the notice would be valid and Nestle could sell the records.

Held:

The wrappers did form part of the consideration as the object was to increase sales and therefore provided value. The fact that the wrappers were simply to be thrown away did not detract from this. Therefore Chappel were granted the injunction and Nestle could not sell the records as they had not complied with the notice requirements under s.8.

 

3. Consideration must move from the promisee

If a person other than the promisee is to provide the consideration, the promisee can not enforce the agreement:Tweddle v Atkinson [1861] EWHC QB J57 Queen's Bench Division

A couple were getting married. The father of the bride entered an agreement with the father of the groom that they would each pay the couple a sum of money. The father of the bride died without having paid. The father of the son also died so was unable to sue on the agreement. The groom made a claim against the executor of the will.

Held:

The claim failed: The groom was not party to the agreement and the consideration did not move from him. Therefore he was not entitled to enforce the contract.

4. An existing public duty will not amount to valid consideration

Where a party has a public duty to act, this can not be used as consideration for a new promise:

Collins v Godefrey (1831) 1 B & Ad 950Collins v Godefrey (1831) 1 B & Ad 950 King's Bench Division

The claimant, Collins, had been subpoenaed to attend court as a witness in separate court case involving the defendant, Godefrey. Godefrey had sued his attorney for malpractice and Collins was required by the court to attend as an expert witness. In fact Collins

never gave evidence but was required to be on standby for six days in case he was called. After the trial Collins gave Godefrey an invoice to cover his time spent at court and demanded payment by the next day. Without giving him the full day to pay, Collins commenced an action to enforce payment.

Held:

Collins was under a public duty to attend court due to the subpoena. Where there exists an existing public duty this can not be used as consideration for a new promise. Godefrey was not required to pay him. Unless the promisor goes beyond their duty:Glasbrook Bros v Glamorgan County Council [1925] AC 270 House of Lords

The defendant owners of a colliery asked the police to provide protection during a miner's strike. The police provided the protection as requested and provided the man power as directed by the defendants although they disputed the level of protection required to keep the peace. At the end of the strike the police submitted an invoice to cover the extra costs of providing the protection. The defendants refused to pay arguing that the police were under an existing public duty to provide protection and keep the peace.

Held 3:2 decision:

In providing additional officers to that required, the police had gone beyond their existing duty. They were therefore entitled to payment.

Ward v Byham [1956] 1 WLR 496 Court of Appeal

An unmarried couple had a child together and lived together for five years. The father then turned the mother out of the house and sent the child to live with a neighbour and the father paid the neighbour £1 per week. The mother then got a job as a live in house keeper and wished to have the daughter live with her. The father agreed to

allow the daughter live with the mother and agreed to pay her £1 per week provided she ensured the child was well looked after and happy. The father made payments but then when the mother remarried he stopped making payments. The mother brought an action to enforce the agreement. The father argued that the Mother was under an existing legal duty to look after and maintain the child and therefore was not providing any consideration for the promise to make payment.

Held:

By promising to ensure the child was well looked after and happy she had gone beyond her existing legal duty and therefore had provided consideration. She was entitled to the payment. 

5. An existing contractual duty will not amount to valid consideration

 

If a party has an existing contractual duty to do an act, this act can not be used as consideration for a new promise:

Stilk v Myrrick [1809] EWHC KB J58 Stilk v Myrick [1809] EWHC KB J58 King's Bench Division

The claimant was a seaman on a voyage from London to the Baltic and back. He was to be paid £5 per month. During the voyage two of the 12 crew deserted. The captain promised the remaining crew members that if they worked the ship undermanned as it was back to London he would divide the wages due to the deserters between them. The claimant agreed. The captain never made the extra payment promised.

Held:

The claimant was under an existing duty to work the ship back to London and undertook to submit to all the emergencies that entailed. Therefore he had not provided any consideration for the promise for extra money. Consequently he was entitled to nothing.Unless the party goes beyond their existing duty:Hartley v Ponsonby [1857] 7 EB 872 

Half of a ship's crew deserted on a voyage. The captain promised the remaining crew members extra money if they worked the ship and completed the voyage. The captain then refused to pay up.

Held:

The crew were entitled to the extra payment promised on the grounds that either they had gone beyond their existing contractual duty or that the voyage had become too dangerous frustrating the original contract and leaving the crew free to negotiate a new contract.or if they confer a practical advantage:Williams v Roffey Bros [1990] 2 WLR 1153

The defendants were building contractors who entered an agreement with Shepherds Bush Housing Association to refurbish a block of 27 flats. This contract was subject to a liquidated damages clause if they did not complete the contract on time. The defendants engaged the claimant to do the carpentry work for an agreed price of £20,000. 6 months after commencing the work, the claimant realised he had priced the job too low and would be unable to complete at the originally agreed price. He approached the defendant who had recognised that the price was particularly low and was concerned about completing the contract on time. The defendant agreed to pay the claimant an additional £575 per flat. The claimant continued work on the flats for a further 6 weeks but only received an additional £500. He then ran out of money and refused to continue unless payment was made. The defendant engaged another carpenter to complete the contract and refused to pay the claimant the further sums promised arguing that the

claimant had not provided any consideration as he was already under an existing contractual duty to complete the work.

Held:

Consideration was provided by the claimant conferring a benefit on the defendant by helping them to avoid the penalty clause. Therefore the defendant was liable to make the extra payments promised.

If the existing contractual duty is owed to a 3rd party this may be used as valid consideration for a new promise: New Zealand Shipping v Satterthwaite [1975] AC 154 Privy Council

A contract for the carriage of a machine by ship to New Zealand provided that the owners of the goods could not sue the carriers or stevedores unless any claim was brought within one year of the action giving rise to the cause of action. The stevedores were independent contractors who were engaged to load and unload the ship by the ship owner. A stevedore damaged the machine whilst unloading it. The owner of the machine brought an action against the stevedore after the limitation period specified in the contract. The stevedore sought to rely upon the clause in order to escape liability. The owner of the machine argued that the stevedores could not rely on the clause as they were not privy to the contract and had not provided them with any consideration.

Held:

The stevedores had provided consideration in the form of services of unloading the machine. Relying on the case ofScotson v Pegg, there is nothing to prevent consideration owed to a 3rd party being valid consideration for a new promise to another party. Therefore the stevedores had protection from the limitation clause. The claimant's action was unsuccessful.

Scotson v Pegg [1861] EWHC Exch J2

A purchaser of some coal paid the defendant to carry and to unload the coal. The claimant was the supplier of the coal who had also paid the defendant to carry and unload the coal. The claimant brought an action to recover the money paid arguing the defendant was already under an existing duty to carry and unload the coal and thus provided no consideration.

Held: 

An existing contractual duty owed to a 3rd party to the contract can amount to valid consideration for a new promise. Consequently the claimant could not recover the sums paid and the defendant was entitled to get paid twice for doing the same thing.

6. Part payment of a DebtPinnel's Case 1602 5 Rep, 117  Court of Common Pleas

The claimant was owed £8 10 shillings. The defendant paid £5 2 shillings and 2p. The claimant sued for the amount outstanding.

Held:

The claimant was entitled to the full amount even if they agreed to accept less. Part payment of a debt is not valid consideration for a promise to forebear the balance unless at the promisor's request part payment is made either:

a). before the due date orb). with a chattel orc). to a different destination This rule from Pinnel's case was affirmed by the House of Lords in:Foakes v Beer (1883-84) LR 9 App Cas 605 House of Lords

Dr Foakes owed Mrs Beer £2,000 after she had obtained judgment

against him in an earlier case. Dr Foakes offered to pay £500 immediately and the rest by instalments, Mrs Beer agreed to this and agreed she would not seek enforcement of the payment provided he kept up the instalments. No mention was made in this agreement of interest although judgment debts generally incurred interest. Dr Foakes paid all the instalments as agreed and Mrs Beer then brought an action for the interest.

Held:

Dr Foakes was liable to pay the interest. The agreement reached amounted to part payment of a debt and under the rule in Pinnel's case this was not good consideration for a promise not to enforce the full amount due.

1. Where part payment is made by a third party: 

Hirachand Punamchand v Temple [1911] 2 KB 330 Court of Appeal

The claimants were money lenders in India. They lent money to the defendant Lieutenant Temple who was an army officer serving in India. The claimants sought return of the money from the claimant but were unable to get any response so they contacted his father. Some correspondence went between the claimant and the father's solicitors. The claimants asked how much the father would be prepared to pay to settle the son's accounts. An amount was agreed which was a substantial, amount although not the full amount due. The claimant promised to send the promissory note relating to the son's debt to the father once they received payment. The father paid, but the claimant retained the promissory note and sued the son to enforce the balance.

Held:

The payment made by the father was sufficient to discharge the full balance. Where the person making payment in return for discharging the debt owed by another this will amount to good consideration as the existing duty to make payment was not owed by them but a third party.

Part payment of a debt is not valid consideration for a promise to release the debt in full:

Every agreement to be enforceable at law must be supported by valid consideration. An agreement made without consideration is void and is unenforceable except in certain cases. Section 25 specifies the cases where an agreement though made without consideration will be valid. These are as follow:

1. Natural love and affection [Sec. 25(1)]           An agreement though made without consideration will be valid if it is in writing and registered and is made on account of natural love and affection between parties standing in a near relation to each other. An agreement without consideration will be valid provided-(a) it is expressed in writing;(b) it  is registered under the law for the time being in force;(c) it is made on account of natural love and affection;(d) it is between parties standing in a near relation to each other.  All these essentials must be present to enforce an

agreement made without consideration.

2. Compensation for services rendered [Sec. 25(2)]           An agreement made without consideration will be valid if it is a promise to compensate wholly or in a part a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do.To apply this rule, the following essentials must exist:(a) The act must have been done voluntarily;(b) for the promisor or it must be something which was the legal obligation of the promiser;(c) the promisor must be in existence at the time when the act was done;(d) the promisor must agree now to compensate the promisee.

3. Time-barred debt [Sec. 25(3)]           A promise to pay a time-barred debt is also enforceable. But the promise must be in writing and be signed by the promisor or his agent authorized in that behalf. The promise may be to pay the whole or part of the debt. An oral promise to pay a time-barred debt is unenforceable

4. Completed gifts [Exp. 1 to Sec. 25]           Explanation 1 to section 25 provides that the rule

'No consideration, No contract' shall not affect validity of any gifts actually made between the donor and the donee. Thus if a person gives certain properties to another according to the provision of the Transfer of Property Act, he cannot subsequently demand the property back on the ground that there was no consideration.

5. Agency (Sec. 185)           There is one more exception to the rule. IT is given in section 185 which says that no consideration is needed to create an agency.

6. Guarantee (Sec 127)           A contract of guarantee is made without consideration.

7. Remission (Sec 63)           No consideration is required for an agreement to receive less then what is du. This is called remission in the law. 

The general rule of law is "no consideration, no contract", i.e., in the absence of consideration there will be no contract. However, the law recognizes the following exceptions to the rule of consideration. The exceptions have been given in Sec. 25 of the Indian Contract Act. In these cases, agreements are enforceable even if these have been made without consideration.

1. A promise made out of material love and affection. [Sec. 25]:

An agreement expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection, between parties standing in a near relation to each other, is enforceable without consideration.

Example:

A agreed to pay Rs. 5000 to his younger brother out of natural love. This promise is in writing and registered. If A refuses to pay Rs. 5,000 to his younger brother, the latter can enforce the promise in the Court and A cannot refuse payment on the ground of absence of consideration. It should be noted that all the four conditions must be satisfied only then it will be valid without consideration, otherwise not.

Example:

An agreement was made between a husband and his wife after referring to quarrels to pay maintenance allowance. The court held that the agreement was not enforceable as it Was not made out of natural love and affection and hence it was void being without consideration. [Rejlukhy v. Bhoothnath]

It should be noted that nearness of relation does not necessarily mean that the agreement has been made out of natural love.

2. A promise made to compensate for voluntary services [Sec. 25]:

A promise to compensate, wholly or in part, a person who has voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable without consideration.

This rule, in fact, recognizes past consideration which was given without request or desire of the promisor.

Example:

A found B's purse and gave it to him. B promised to pay a reward of Rs. 50 to A. Later on, B cannot refuse payment on the ground that there was no consideration.

3. Written promise to pay a time-barred debt [Sec. 25(3)]:

A promise made in writing to pay a debt barred by the Law of Limitation is enforceable even without consideration.

Example:

A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written promise to pay B the sum of Rs. 1,000. This is a valid contract.

4. Gift, etc. actually made:

Explanation I to Section. 25 provides that any gift actually made is valid.

Example:

A gave a watch as a gift to B on his birthday. Later on, A cannot demand his watch (gift) back on the ground that there was no consideration (as A did not get anything in return for the watch).

5. To create agency:

Under Sec. 185, no consideration is necessary to create an agency. Actually speaking, consideration is there even in an agency in the sense that the principal has agreed to be bound by the acts of the agent. Thus he undertakes the responsibility of the agent. We have seen earlier in Currie v. Misa's case that suffering responsibility is a good consideration.

Section 25 of Indian Contract Act, 1872 deals with Agreement without consideration, void, unless it

is in writing and registered, or is a promise to compensate for something done, or is a promise to

pay a debt barred by limitation law..

Contents [hide]

1   From the Act

o 1.1   Illustrations

2   Notes

3   Recent Cases / Related Cases / Case Law

4   Related Sections from the Act

5   Related Acts

6   Related Topics

From the Act

An agreement made without consideration is void, unless-

(1) it is expressed in writing and registered under the law for the time being in force for the registration of

1*[documents], and is made on account of natural love and affection between parties standing in a, near

relation to each other ; or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something

for the promisor, or something which the promisor was legally compellable to do ; or unless

(3) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent

generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might

have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1.-Nothing in this section shall affect the validity, as between the donor and donee, of any gift

actually made.

Explanation 2.-An agreement to which the consent of the promisor is freely given is not void merely

because the consideration is inadequate ; but the inadequacy of the consideration may be taken into

account by the Court in determining the question whether the consent of the promisor was freely given.

Illustrations

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

(d) A supports B's infant son. B promises to pay A's expenses in so doing. This is a contract.

(e) 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 a contract.

(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to the agreement was freely given.

The agreement is a contract notwithstanding the inadequacy of the consideration.

(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was

freely given.

The inadequacy of the consideration is a fact which the Court should take into account in considering

whether or not A's consent was freely given.

Notes

Defines exceptions for Considerations

Section 25(1) - Natural Love and Affection

Section 25(2) - Compensation for past voluntary service

Section 25(3) - Agreement to pay time barred debt

Read more: http://www.lawnotes.in/Section_25_of_Indian_Contract_Act,_1872#ixzz3nE5I3tx2