F-109 Legal Environment of Business

Chapter 03:
Consideration

Course Instructors:
Md. Uzzal Hossain
Sumaiya Jahan
 Consideration
Learning Objectives

[Link] the concept and importance of consideration in contract

formation.

[Link] the essential elements and components of valid consideration.

[Link] the exceptions to the rule “No Consideration, No Contract”.

4. Understanding the concept of time –barred debt.

 Consideration

|| Benefit that each party receives or expects to receive,

when entering into a contract ||
 Consideration
● Consideration is one of the essential elements of a valid contract.
● It is an important element because it imports in a measure the safeguard of
deliberation.
● The fact of its existence serves to distinguish those promises by which the
promisor intends to be legally bound from those which are not seriously meant.
● A consideration is necessary to the forming of a contract.
● A nudum pactum, or agreement to do or pay something on one side without any
compensation on the other, will not at law support an action and a man cannot
be compelled to perform it.
● The law supplies no means nor affords any remedy to compel the performance
of an agreement made without consideration.
● If I promise a man ৳100 for nothing, he neither doing nor promising anything in
return to compensate me for my money, my promise has no force in law.
 Consideration
● The breach of a gratuitous promise cannot be redressed by legal remedies.
● It is only when a promise is made in return of ‘something’ from the promisee,
that such promise can be enforced by law.

● This ‘something’ in return is the consideration for the promise.

● In the language of purchase and sale Pollock has observed:

“consideration is the price for which the promise of the other is bought.”

● Thus, consideration is the very foundation of a contract.

● Except certain exceptions agreements without consideration are void.
 Consideration
● 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. An analysis of the above definition will show that it consists of the following four
components:

1. the act or abstinence or promise which forms the consideration must be done at the
desire of the promisor. (abstain from smoking/ drinking)

2. it must be done by the promisee or any other person.

3. it may have already executed or is in the process of being executed or may still be
executory

4. it must be something to which the law attaches a value

 Valid Consideration

1. Consideration must move at the desire of the promisor

2. Consideration may move from the promisee or any other person

3. Consideration may be past, present or future

4. Consideration must be ‘something’ of value

 Valid Consideration
1. Consideration must move at the desire of the promisor
● In order to create legal consideration, the act or abstinence forming the
consideration for the promise must be done at the desire or request of the
promisor.
● Thus, acts done or services rendered voluntarily or at the desire of third party
will not amount to valid consideration so as to support a contract.
● The logic for this may be found in the worry and expense to which every one
might be subjected, if he were obliged to pay for the services which he doesn't
need or require.
● It must be noted that this essential does not require that the consideration
must confer “some benefit’ on the promissory.
● It would be enough if the act or forbearance or promise constituting the
consideration was done or given at the promisor’s request, the benefit may
accrue to a third party.
 Valid Consideration
2. Consideration may move from the promisee or any other person

● The second essential of valid consideration is that consideration need not move
from the promisee alone but may proceed from a third person.

● Thus, as long as there is a consideration for a promise, it is immaterial who has

furnished it.

● It may move from the promisee or from any other person.

● This means that even a stranger to the consideration can sue on a contract,
provided he is a party to the contract. (Doctrine of Constructive Consideration)
 Valid Consideration
● A stranger to contract cannot sue.

● A person may be a stranger to the consideration but he should not be a stranger to the
contract because “privity of contract” is essential for enforcing any of the rights arising out
of the contract

● It being a fundamental principle of the law of contracts that a stranger to contract cannot
sue; only a person who is party to a contract can sue.

o Abrar mortgaged his property to Bodrul in consideration of

o Bodrul’s promise to Abrar to pay Abrar’s debt to Charles

o Charles cannot file a suit against Bodrul to enforce his promise Charles being no party to
the contract between Abrar and Bodrul.
 Valid Consideration
● Exceptions to the rule “a stranger to contract cannot sue”:

1. Where an expressed or implied trust is created

2. Family settlement

3. When the defendant constitutes himself, as the agent of the third part

4. In case of agency

5. Assignment of rights under a contract in favor of a third party

 Valid Consideration
● Exceptions to the rule “a stranger to contract cannot sue”:

1. Where an expressed or implied trust is created.

In ease of a trust, the beneficiary can sue in his own right to enforce his
rights under the trust, though he was not a party to the contract between
the settler and the trustees.

2. Family settlement.
Where a provision is made in a partition or family arrangement for
maintenance or marriage or expenses of female member; such members
(though not parties to the contract) can sue on the basis of this contract.
 Valid Consideration
3. When the defendant constitutes himself, as the agent of the third party.
Abrar receives money from Bodrul to be paid over Charles. Abrar is an agent of
Charles and must be paid.

4. In case of agency.
Where a contract is entered into by an agent, the principal can sue on it.

5. Assignment of rights under a contract in favor of a third party either voluntarily

or by operation of law, the assignee can enforce the benefits of the contract.
For example, the assignee of an insurance; or the official assignee on the
insolvency of a person can sue on the contract even if not parties to it.
 Valid Consideration
3. Consideration may be past, present or future

● The words, “has done or abstained from doing; or does or abstains from doing; or
promises to do or to abstain from doing,” used in the definition of consideration
clearly indicate that the consideration may consist of either something done or not
done in the past, or done or not done in the present or promised to be done or not
to be done in the future.

● Consideration may consist of either a positive act or an abstinence (negative act)

● To put it briefly in consideration may consist of a past, present or future

abstinence.
 Valid Consideration
● Past consideration
● When something is done or suffered before the date of the agreement, at the
desire of the promisor, it is called past consideration.
● For example, in March, Abrar teaches Bodrul at his dad’s request. In April, Dad
promises to pay BDT 500 for his service. (Past Consideration)
● It must be noted that past consideration is good consideration when:
● given by the promisee
● at the desire of the promisor
● For example, Abrar left Unicorn PLUS and started teaching Bodrul as requested by
his father Charles who, later on, promised to pay BDT 500 for his service. (Good
Past Consideration)
 Valid Consideration
● Present consideration

● Consideration which moves simultaneously with the promise is called ‘present

consideration’ or executed consideration.

● For example, A sells and delivers a book to B, upon B’s promise to pay for it at a
future date.

● The consideration moving from A is present or executed since A has done his act
of delivering simultaneously with the promise of B.

● Present / Executed consideration = executed + executory.

● Executed contract = executed + executed.

 Valid Consideration
● Future consideration

● When consideration at both side is to move at a future date, it is called ‘future

consideration’ or executory consideration.

● It consists of an exchange of promises and each promise is a consideration to

the other.

● Future / Executory consideration = executory + executory.

 Valid Consideration
4. Consideration must be ‘something of value’
● The fourth and last essential of valid consideration is that it must be ‘something‘
to which the law attaches a value.
● The consideration need not be adequate to the promise for the validity of an
agreement. (Chappell & co. Vs. Nestle Ltd.)
● The law only insists on the presence of consideration; not the adequacy.
● It leaves the people free to make their own bargain, however, if the
consideration be grossly or shockingly inadequate, and if the of the parties to
the contract alleges that consent was obtained by fraud, coercion or undue
influence, the court will declare the contract void on the basis of inadequacy of
the contract.
● Inadequacy of consideration being no bar to a valid contract unless it is an
evidence of unfree consent.
 Valid Consideration
Consideration must be real
● Though consideration need not be adequate, it must be of same value in the
eye of law i. e. it must be real and competent.
● Where consideration is physically impossible, illegal, uncertain, illusory or
unreal and therefore shall not be a valid consideration.
o Physically impossible
o A promise to do something which is physically impossible e. g., to make a
dead man alive or to run at a speed of 100 kilometres per hour, does not
form valid consideration.
o Legally impossible
o A promise to do something which is illegal e.g. selling unlicensed gun.
 Valid Consideration
o Uncertain consideration
o A promise to do something which is too vague and uncertain i.e. a promise
to pay such remuneration “as shall be deemed right”

o Illusory Consideration
o An illusory or deceptive consideration does not account as valid.
o Consideration is illusory if it is a promise to:
● perform public duty
● perform a contract already made with the promisor
 Valid Consideration
In the following cases consideration has been regarded as real and valid (Exceptions):

● Forbearance to sue

● Forbearance to sue, at the instance of the debtor, is sufficient consideration.

● A, has a right to sue his debtor B for BDT10,000 but forbears as B agreed to pay BDT 1000
more. Such forbearance is a valuable consideration for the promise, being in the nature of
abstinence, and A can later on sue B for BDT11,000.

● But in order that the forbearance should be a consideration there must be existing and
lawful liability.

● Compromise of a pending suit

● The compromise of a disputed or doubtful claim is a good consideration for the fresh
agreement of compromise.
 Exceptions to the rule
“No Consideration, No Contract”
 Exceptions to the rule “No Consideration, No Contract”
Valid 1. Agreement made on account of natural love and affection
agreements
without 2. Agreement to compensate for past voluntary service
consideration
3. Agreement to pay a time-barred debt

4. Completed gift

5. Contract of agency

6. Remission of performance of the promise by the promisee

7. Contribution to charity
 Exceptions to the rule “No Consideration, No Contract”
● Consideration being one of the essential elements of a valid contract, the general rule is
that “an agreement made without consideration is void.”
● But there are a few exceptions to the rule, where an agreement without consideration will
be perfectly valid and binding. These exceptions are as follows:
1. Agreement made on account of natural love and affection
● An agreement made without consideration is enforceable if, it is:
(i) expressed in writing
(ii) registered under the law for the time being in force
(iii) made on account of natural love and affection
(iv) between parties standing a near relation to each other.
● Thus, there are four essential requirements which must be complied with to enforce an
agreement made without consideration.
● It should, however, be noted that mere existence of near relation between the parties
does not necessarily import natural love and affection. (must be made out of natural love
and affection)
 Exceptions to the rule “No Consideration, No Contract”
2. Agreement to compensate for past voluntary service
● A promise made without consideration is also valid, if it is a promise to
compensate, a person who has already voluntarily done something for the
promise; or done something which the promisor was legally. compellable to
do.
 Exceptions to the rule “No Consideration, No Contract”
2. Agreement to compensate for past voluntary service
● In order to attract this exception, the following points should be meted:
(i) The service should have been rendered voluntarily for the promisor

(ii) The promisor must be in existence at the time the service was rendered

(iii) Promise must be to compensate a person having done something

(iv) The intention of the promisor ought to be to compensate the promise

(v) The promisor to whom the service has been rendered need not be
competent to contract at the time the service was rendered
(vi) The service rendered must also be legal
 Exceptions to the rule “No Consideration, No Contract”
2. Agreement to compensate for past voluntary service
(i) The service should have been rendered voluntarily for the promisor.
• If it is not voluntary but rendered in the desire of the promisor, then it is
under “past consideration” and not under this exception.

(ii) The promisor must be in existence at the time the service was
rendered.
● Thus, where services were rendered by a promoter for a company not
then in existence, a subsequent promise by the company to pay for them
could not be brought within the exception.
 Exceptions to the rule “No Consideration, No Contract”
2. Agreement to compensate for past voluntary service (cont.)
(iii) Promise must be to compensate a person having done something
● The promise must be to compensate a person who has himself done
something for the promisor and not to a person who has done nothing for
the promisor.
● Thus, where B treated A during his illness but refused to accept payment
from A; they being friends and A in gratitude promises to pay BDT10,000 to
B's son D, the agreement between A and D is void for want of
consideration as it is not covered under the exception.

(iv) The intention of the promisor ought to be to compensate the promisee.

● A promise given for ‘any motive’ other than the desire to compensate the
promisee would not fall within the exception.
 Exceptions to the rule “No Consideration, No Contract”
2. Agreement to compensate for past voluntary service (cont.)
(v) The promisor to whom the service has been rendered need not be competent to
contract at the time the service was rendered.
● Thus a promise made after attaining majority to pay for goods supplied voluntarily to
the promisor during his minority has been held valid and the promisee could enforce
it.
● It is important to note that this exception does not cover a promise by a person on
attaining majority to repay the money borrowed during his minority because such a
promise cannot be said a promise to compensate a person who has already
voluntarily (without any promise of compensation) done something for the promisor.
● Advancing money as a loan necessarily implies a promise to compensate (a promise
to repay the loan) on the part of the borrower.
● Thus a promise made by a minor after attaining majority to repay money advanced
during his minority has been held invalid.
 Exceptions to the rule “No Consideration, No Contract”
2. Agreement to compensate for past voluntary service (cont.)

(vi) The service rendered must also be legal.

● Thus, past cohabitation will not make a promise to pay for it enforceable under
this exception

3. Agreement to pay a time-barred debt

● Where there is an agreement, made in writing and signed by the debtor (or
agent) to pay wholly or in part a debt barred by the law of limitation, the
agreement is valid even though it is not supported by any consideration.
● A time barred debt cannot be recovered and therefore a promise to repay such
a debt is without consideration.
 Exceptions to the rule “No Consideration, No Contract”
● But before the exception can apply, it is necessary that:

(1) Creditor’s willingness to pay

(2) The promisor himself must be liable for the debt

(3) There must be an ‘express promise to pay’ a time barred debt

(4) The promise must be in writing and signed by the debtor or his
agent.
 Exceptions to the rule “No Consideration, No Contract”
● But before the exception can apply, it is necessary that:
(1) the debt must be such of which the creditor might have enforced payment but
the law for the limitation restricts.
(2) the promisor himself must be liable for the debt.
So, a promissory note executed by a widow in her personal capacity in payment
of time barred debt of her husband cannot be brought within the exception.
(3) there must be an ‘express promise to pay’ a time barred debt as distinguished
from a mere acknowledgment of a liability in respect of a debt.
Thus, a debtor’s letter to his creditor, “I owe you BDT 1,000 on account of my
time-barred promissory note is not a contract. (a mere acknowledgement of
liability)
(4) the promise must be in writing and signed by the debtor or his agent.
An oral promise to pay a time-barred debt is unenforceable.
The logic behind this exception is that by lapse of time the debt is not destroyed but only
the remedy is lost; the remedy is revived by a new promise under the exception.
 Exceptions to the rule “No Consideration, No Contract”
4. Completed gift
● A gift (which is not an agreement) does not require consideration in order to be valid.
● As between the donor and the donee, any gift actually made will be valid and binding
even though without consideration
● Condition: there need not be natural love and affection or near relationship
between the donor and donee.
● The gift must, however, be complete.
Type of Gift Gift Deed Required? Enforceable without
Deed?
Moveable Property No Yes, if delivered and
accepted
Immoveable Property Yes (Registered) No
 Exceptions to the rule “No Consideration, No Contract”
5. Contract of agency
● No consideration is necessary to create an agency.
● Mina authorized his friend Raju to sell his car to third party, without promising
any commission. This contract is enforceable.

6. Remission of performance of the promise by the promisee

● For compromising a due debt i.e. agreeing to accept less than what is due, no
consideration is necessary.
● Similarly, an agreement to extend time for performance of a contract need not
be supported by consideration.
 Exceptions to the rule “No Consideration, No Contract”
7. Contribution to charity
● A promise to contribute to charity, though gratuitous, would be
enforceable, if:
o on the faith of the promised subscription, the promisee takes definite
steps
o in furtherance of the object and undertakes a liability
o to the extent of liability incurred not exceeding the promised amount
of subscription.
 Exceptions to the rule “No Consideration, No Contract”
1. Agreement made on 2. Agreement to compensate 3. Agreement to pay a time-
account of natural love and for past voluntary service barred debt
affection
• voluntarily • law for the limitation
• writing • compensate doer • promisor himself
• registration • intention • express promise
• love & affection • existence • writing and signed
• near relation • legal

4. Completed gift 5. Remission of performance. 6. Contribution to charity.

• natural love and affection • compromising a due debt • steps taken
• near relationship • extend time • liable lower of cost incurred
• complete gift or promised subscription
 Time-barred debt
• No longer legally collectible because of statue of limitations (legal time to file a
lawsuit for collection) has expired.

• Time varies by the type of debt (typically 3 years from the date the debt became
due or the date of the last acknowledgment/payment)

• Applicable Law:
• Contract Act, 1872 – governs the agreement itself

• Limitation Act, 1908 – governs the time within which legal action must be taken

• Once the debt is time-barred the lender can still ask for repayment but cannot
sue the borrower to pay the money.
 Time-barred debt

March 01,
2020
Didar takes a March 01, March 01, March 01, March 01,
$50,000 loan 2021 2022 2023 2024
from Charles
(One year loan)
Time-barred debt

01, 2024
Thank You!! ☺