According to Section 10 of the Indian Contract Act, 1872, agreements are considered a valid contract if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. This Section lays down the essentials of a valid contract. Thus, consideration is an integral part of the contract.
As per Sections 10 and 25 of the Indian Contract Act, the contract is void without consideration, hence the rule is “No consideration, no contract”. However, under Section 25 of the Contract Act, exceptions are mentioned whereby an agreement made without consideration will not be void.
Section 25 of the Act lays down a few exceptions where the contract without consideration is not void. According to Section 25, an agreement made without consideration is void unless:
Section 25(1) states that: “It is 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”.
The question that arises under this Section is what is meant by natural love and affection? The Contract Act provides no guidance regarding the ambiguous term, and neither the court nor anyone can decide its exact interpretation. Those who are related by blood or marriage would find some degree of instinctive love and affection between them. But this is not the same for all the circumstances. The existence of near relations between the parties does not mean that there is affection among them. Therefore, the term is subjective which cannot be appropriately defined, and therefore anyone can easily take advantage of it.
In Rajlukhy Dabee vs Bhootnath Mukerjee (1900), the Defendant, Plaintiff’s husband, promised to pay her sum of money every month for maintenance. This agreement was maintained under a registered document that also stated certain quarrels and disagreements between the two. The Calcutta High Court refused to treat the agreement as one of the exceptions of the said Section as no traces of love and affection were found between them due to the quarrels which compelled them to separate.
However, in Bhiwa vs Shivaram (1899), two brothers quarrelled over property, and one of them lost. However, Defendant agreed in writing to give one-half of the same property. Therefore, the present suit was brought to obtain one-half of the share. The Bombay High Court held that in order to reconcile with the brother, the Defendant was willing to give him a share of the property out of love and affection and thus attracted Section 25 of the Indian Contract Act.
In Manali Singhal vs Ravi Singhal (1998), a family settlement was entered into by the Defendant and the Plaintiff for providing maintenance to the wife. Defendant later backed out of it and held that it was without consideration. The Delhi High Court held that the settlement is enforceable because it was meant for deriving peace of mind from the family harmony by putting an end to the discord. Thus, it could be considered as consideration or as love and affection. The Court further observed that the term “family” should not be construed in a narrower sense of being a group of persons who are recognised in law as having a right of succession or having a claim to a share in the property in dispute etc, but consideration of such settlement is expected to result in establishing amity between persons bearing relationship with one and another.
In Radhakrishna Joshi vs Syndicate Bank (2006), the Plaintiff advanced a loan to the Defendant’s son, who died later. The Defendant executed the documents acknowledging to pay the loan even though he was not the guarantor. Here, the Karnataka High Court held that nature obliges the parents to provide for the children; therefore, the undertaking given by the father to pay the loan is a reasonable consideration.
Section 25(2) states that: “It is a promise to compensate for something that is done, 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”.
It means that the promise to pay for the past voluntary service is binding. Some essentials of the subsection include: the service provided should be voluntarily done in the past to attract the exception, the service rendered should be to the promisor, the promisor existed when the service was rendered, and the promisor willingly promises to compensate for the voluntary service.
In T.V. Krishna Iyer v. Official Liquidator of Cape Comorin general traffic Co. (1951), the Kerala High Court held that the payment of the bonus would not attract the exception under Section 25 because the employees render the services in exchange for wages which was not voluntary. Thus, extra compensation was not allowed on the grounds of past voluntary services.
In Karam Chand vs Basant Kaur (1911), the Court held that even though a promise by a minor is void if a person of majority age makes a promise to compensate for the obtained goods when he was minor, the promisee is held to be an exception that falls under the provision.
Similarly, in Sindha Shri Ganpat Singh Ji v. Abraham (1896), the Bombay High Court ruled that service rendered to the minor at his desire, and continued even after the minor attained the majority, it forms a good consideration for a subsequent express promise by the minor in favour of the person who rendered the services.
Section 25(3) states that: “It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised 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”.
A promise to pay a time-barred debt is enforceable. A time-barred debt is typically a debt that has passed the statute of limitation and cannot be collected. The person or his agent should sign the same. The intention to pay the debt should be expressed and not gathered from the surrounding circumstances. Even though the word “express” is not used in clause (3) of Section 25, it is essential that the promise to pay must be clear and expressed.
In Tulsi Ram vs Same Singh (1980), a brief note at the back of the promissory note was written by the promisor accepting that he has taken the loan. However, the promisor did not expressly mention his agreement to pay the debt on the expiry of the limitation period. It was held that the brief note acknowledging the debt unaccompanied by any words promising or undertaking to pay was not sufficient to attract Section 25.
In Daulat Ram v. Som Nath (1980), the landlord requested rent from the tenant including the time-barred rent. The tenant replied that the rent may be collected by cash or cheque or by draft. This was not regarded by the Delhi High Court as a promise to pay a time-barred debt. It was held that the reply does not indicate the promise to pay time-barred rents but only informs to receive rent which is legally recoverable rent. The amount of rent and the period for which the amount was agreed to be paid was not disclosed and hence does not attract Section 25.
In Umesh Chandra Chakravarty vs United Bank of India (1991), the Court discussed the difference between the acknowledgement of the liability under Section 18 of the Limitation Act, 1963, and the time-barred debt. It was held that the acknowledgement of debt is made before the expiration of the prescribed period of limitation. In contrast, the promise to pay the time-barred debt is after the expiry of the limitation period and will result in a new cause of action. Thus, in this case, it was held that the old debt by the plaintiff could not be revived; however, the promise to pay made after the expiration of the debt would be maintainable.
In State Bank Of India vs Dilip Chandra Singh Deo (1998), the debtor indicated that he was willing to pay the principal amount but not the interest incurred on the amount. The claim of the bank was accepted to the above extent. The debtor was made to realise the principal amount and interest of 6% per annum from the admission date.
In any of these cases, such an agreement is a contract.
Section 25: Explanation 1.—Nothing in this Section shall affect the validity, as between the donor and donee, of any gift actually made.
The rule of ‘no consideration, no contract’ does not apply to gifts. The validity of the movable gift once delivered and immovable gift perfected by the registration cannot be questioned on the ground of lack of consideration. However, it may be questioned on other grounds.
When a gift deed was made and attested by the two witnesses, the Bombay High Court did not allow the donor to question the witness on the ground that she was the victim of fraud which was not able to be established. (Vasant Rajaram Narvekar v Ankusha Rajaram Narvekar and Ors., 1994)
In K.Balakrishnan vs K.Kamalam. & Ors (2003), the question was raised whether the Appellant who was a minor during the execution of the gift deed could be held to have legally accepted the property. The minor son kept the property with the father who on his son’s behalf never repudiated the property. The son himself was sixteen years old and could understand the nature of beneficial interest conferred on him. Having the knowledge of the gift and not repudiating it even after attaining the majority age infers that he had impliedly accepted the gift. Thus, the gift deems to be accepted and becomes irrevocable.
In any of these cases, such an agreement is a contract.
Section 25: 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 of whether the consent of the promisor was freely given.
According to explanation 2, the inadequacy of the consideration should be taken by the court on account in determining whether the consent of the promisor was freely given. As long as the court is satisfied that a person has entered into an agreement through his free will and has adequate knowledge of its effects the agreement would stand valid notwithstanding the inadequacy of the consideration.
For example, B agrees to sell a horse worth Rs. 10,000 to C for Rs. 1,000. Considering that B’s consent was given freely then the agreement between the parties is a contract notwithstanding the inadequacy of the consideration. However, if B’s consent was claimed to not be freely given then the court would take into account the fact of the inadequacy of the consideration in determining whether or not B’s consent was freely given.
Section 10 of the Indian Contract Act talks about lawful consideration and Section 2(d) lays down the definition of consideration making it absolutely clear that consideration forms an important part of a valid and binding contract. Thus, most of the agreements entered into without consideration do not lead to the formation of a valid contract. However, under certain circumstances, even inadequacy of the consideration or its abstinence leads to the formation of a valid contract. These exceptions are mentioned under Section 25 of the Indian Contract Act. Other circumstances where the rule of ‘no consideration, no contract’ does not apply are during the creation of an agency under Section 185 of the Indian Contract Act; no consideration is required to create an agency. Under Section 148 of the Act, which defines bailment, when goods are delivered from one person to another for some purpose and after the accomplishment of that purpose, the goods will either be returned or disposed of, according to the directions of the person delivering them. Thus, no consideration is required to bring the contract of bailment into effect. Therefore, all these exceptions result in the easier implementation of the law in order to cover unusual circumstances and events.
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