VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATION & SUIT BY A THIRD PARTY TO A CONTRACT

Written by :- Shivangi Choudhary (Amity Law School)

VALIDITY OF AN AGREEMENT WITHOUT CONSIDERATION

The general rule is that an agreement made without consideration is void (Section 25). In every valid contract, consideration is very important. A contract may only be enforceable when consideration is there. However, the Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable.

  • Natural Love and Affection :- Conditions to be fulfilled under section 25(1)
    • It must be made out of natural love and affection between the parties.
    • Parties must stand in near relationship to each other.
    • It must be in writing.
    • It must also be registered under the law.

A written and registered agreement based on natural love and affection between the parties standing in near relation (e.g., husband and wife) to each other is enforceable even without consideration.

Example: A husband, by a registered agreement promised to pay his earnings to his wife. Held the agreement though without consideration, was valid.

  • COMPENSATION FOR PAST VOLUNTARY SERVICES:- A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable under Section 25(2). In order that a promise to pay for the past voluntary services be binding, the following essential factors must exist:-
    • The services should have been rendered voluntarily.
    • The services must have been rendered for the promisor.
    • The promisor must be in existence at the time when services were rendered.
    • The promisor must have intended to compensate the promisee.

Example: P finds R’s purse and gives it to him. R promises to give P `10,000. This is a valid contract.

  • PROMISE TO PAY TIME BARRED DEBT:

Where a promise in writing signed by the person making it or by his authorised agent, is made to pay a debt barred by limitation it is valid without consideration [Section25(3)].

Example: A is indebted to C for `60,000 but the debt is barred by the Limitation Act. A signs a written promise now to pay `50,000 in final settlement of the debt. This is a contract without consideration, but enforceable.

  • AGENCY: According to Section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.
  • COMPLETED GIFT: In case of completed gifts, the rule no consideration no contract does not apply. Explanation (1) to Section 25 states “nothing in this section shall affect the validity as between the donor and done, of any gift actually made.” Thus, gifts do not require any consideration.
  • BAILMENT: No consideration is required to effect the contract of bailment (Section 148).
  • CHARITY: If a promisee undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid. (Kadarnath v. Gorie Mohammad)

SUIT BY A THIRD PARTY TO A CONTRACT

Though under the Indian Contract Act, 1872, the consideration for an agreement may proceed from a third party, the third party cannot sue on contract. Only a person who is party to a contract can sue on it.

Thus, the concept of stranger to consideration is a valid and is different from stranger to a contract. Example: P who is indebted to Q, sells his property to R and R promises to pay o‑ the debt amount to Q. If R fails to pay, then in such situation Q has no right to sue, as R is a stranger to contract. The aforesaid rule, that stranger to a contract cannot sue is known as a “doctrine of privity of contract”, is however, subject to certain exceptions.

In other words, even a stranger to a contract may enforce a claim in the following cases:

  1. In the case of trust, a bene­ficiary can enforce his right under the trust, though he was not a party to the contract between the settler and the trustee.
  2. In the case of a family settlement, if the terms of the settlement are reduced into writing, the members of family who originally had not been parties to the settlement may enforce the agreement.
  3. In the case of certain marriage contracts/arrangements, a provision may be made for the bene­t of a person, he may ­le the suit though he is not a party to the agreement.
  4. In the case of assignment of a contract, when the bene­t under a contract has been assigned, the assignee can enforce the contract.
  5. Acknowledgement or estoppel – where the promisor by his conduct acknowledges himself as an agent of the third party, it would result into a binding obligation towards third party. For example, if L gives to M `20,000 to be given to N, and M informs N that he is holding the money for him, but afterwards M refuses to pay the money. N will be entitled to recover the same from the former i.e. M.
  6. In the case of covenant running with the land, the person who purchases land with notice that the owner of land is bound by certain duties affecting land, the covenant affecting the land may be enforced by the successor of the seller.
  7. Contracts entered into through an agent: The principal can enforce the contracts entered by his agent where the agent has acted within the scope of his authority and in the name of the principal.