Consideration in Contract Law -

Types of consideration and its exception
Consideration:
Something obtained by a promisor and received by a promisee is referred to as a promise. Real
or personal property, a return promise, a specific act, or a forbearance are all examples of
common sorts of consideration. A contract may only be formed if there is consideration or a
legitimate replacement. Contracts and company law are two topics that come to mind.
What is mean by consideration in business law?
1) A monetary payout or sum of money In contract law, consideration is a benefit that must be
negotiated for between the parties and serves as the primary motivation for one party to enter
into another contract with another party. The exchange of one consideration (the object
supplied) for another consideration is known as a contract.
2) Consideration is referred to be Present Consideration when it is received by the promisor at
the same time as his commitment is made. For example, if a customer purchases products
from a shopkeeper valued $ 10,000, the customer promptly gives the shopkeeper the money.
“Present” is taken into consideration.
3) Take, for example, A’s pledge to pay B $ 10,000 if B agrees to sell him his mobile phone.
When we state that consideration is abstention or forbearance, we are implying a negative
attitude toward the subject. It indicates that one party agrees not to do anything in exchange
for the other party’s pledge to perform under the terms of the contract.
What are the 4 types of consideration?
A technical phrase used in the context of a quid-pro-quo arrangement, consideration is defined as
(i.e.., some thing in return). Whenever one of the parties to an agreement commits to do
anything, he or she must get something in exchange. The term “consideration” refers to this
“something.” In order to support a contract, consideration is an important component.
Q-1 Essential of valid contract ?

Introduction :
Contracts are in every aspect of our everyday lives. When you rent a home, you have to abide by
the terms of a lease. If you have a mortgage on your home, you essentially have a contract with
your bank to pay back the money they lent you. When you go to work, the terms and conditions
of your employment are likely outlined in a written employment contract. You are under a
contract whenever you use your mobile phone or queue up your favorite show on your television
subscription service. By the end of today, you will probably enter into some more contracts. Did
you buy a coffee in the morning or grab some groceries? Work out at a gym? How about open up
your web browser to read the news? Have you done some online shopping? All of these activities
are governed by contracts.
Contract look like:
A contract is often in the form of a written agreement between parties. Contracts can also be in
the form of an oral agreement but oral agreements can be much harder to prove when a dispute
arises.
A typical form of a written contract contains information such as:
 the names of the parties to the contract;
 when and where the contract was made;
 terms and conditions that must be met by the parties;
 what service, product or good is provided;
 what is being exchanged (e.g., money) for the service, product or good that is provided;
 an acknowledgment that the parties agree to the terms in the contract; and
 the signature of the parties agreeing to the contract.
Laws applies to contracts:
The main source of law that applies to contracts is common law (judge-made law). The general
rules on agreements and contract theory comes from the decisions of judges in past contract
dispute cases, many of which come from England. While our body of knowledge in contract law
in Canada has its roots in English case law, it has evolved over the years in the Canadian courts
to suit our circumstances. In Canada, the Supreme Court of Canada has the ultimate authority in
making binding decisions that Canadian courts must follow in contract dispute cases.
There is some legislation (parliament or legislative assembly-made law) that applies to particular
types of contracts. However, the legislation is usually limited to setting out what the default rules
are for the particular type of contract. There are varying degrees on how far legislation goes in
setting out the “default rules” for a particular type of contract.
Essentials of a Contract:
What makes a valid contract? A valid contract is enforceable by law and if a contract is not valid it
may lead to obstruction of businesses and unlawful and insincere dealings. Let us learn about the
essential features of a valid contract..

Valid Contract Mean:
A valid contract, in the context of insurance, is a legally enforceable contract made between
insurers and policyholders as well as between insurers and reinsurers. It involves the transfer of
risk in exchange for a premium payment. The insured promises to pay a premium and the
insurance company promises to pay compensation if a specific object of insurance is damaged by
an insured peril.
An insurance policy contract is not unlike ones that may be entered into in the regular course of
one’s life (i.e., buying a home, leasing a car or taking out a loan) or in business (i.e., entering into
a contract with a vendor or customer). Contracts impose requirements upon all parties entering
into them, so careful consideration must be taken.
Contracts generally require five elements in order to be legally enforceable. However, since
insurance contracts are more sensitive in nature, valid insurance contracts generally require three
additional elements for enforceability.
For a contract to be valid, it must comprise the following five elements:
1. Offer and acceptable
2. Consideration
3. Legal intent
4. Competent parties
5. Legal form
A contract that lacks one of these elements is not valid, and therefore, legally
unenforceable. In many jurisdictions, insurance contracts also require three additional
elements to be enforceable:
 Insurable interest: Only those who would actually suffer a financial loss due to the loss
of insured property are entitled to benefit from an insurance contract or policy. For
example, one would not be able to purchase an insurance policy on another’s house
because that person would not be hurt financially from its loss. Similarly, a mortgage
lender would be able to purchase insurance on one’s home because they would be
affected financially if the property were to be lost. That is why most mortgage lenders
require that they be listed on home insurance as an additional insured, which grants them
an entitlement in any insurance monies paid out.
 Indemnity: This establishes the amount of entitlement insureds on the policy can get.

 Utmost good faith: This imposes a stricter requirement for honesty and fair dealing than
regular contracts. Because insurance contracts rely upon representations made by the
insured during the application process, insurance contracts require that both parties be
open, honest and comply with all policy terms and conditions. For the insured, they are
required to provide true information. For insurers, they are required to ensure the policy
is written clearly and that they handle claims promptly and fairly.
An insurance contract that lacks any of these eight elements would be considered void or
voidable.

Definition and Meaning of Essential of Valid Contract
According to the Indian Contract Act 1872, "Agreements are also contracts made by the consent
of parties, competent to contract to consider with a lawful object and are not hereby expressly
declared to be void”. Therefore, the contract or the agreement must carry essential aspects to
maintain the normal phase of duties by both parties.
Offer
An offer is a conditional proposal made by a buyer or seller to buy or sell an asset, which
becomes legally binding if accepted. An offer is also defined as the act of offering something for
sale, or the submission of a bid to buy something.
Acceptance
Acceptance is an agreement to the specific terms of an offer. Offers do not have to be accepted
through words; they can be accepted through conduct. If someone purports to accept an offer but
accepts on different terms than that of the original offer, that will constitute a counter-offer rather
than an acceptance.
Intention to Create Legal Relations
An agreement does not need to be worked out in meticulous detail to become a contract.
However, an agreement may be incomplete where the parties have agreed on essential matters of
detail but have not agreed on other important points.
Consideration
Consideration constitutes something of benefit to the person who has the obligation or who
makes a promise to do something (the promisor). It can also be something detrimental to the
person who wants to enforce the obligation, or who has the benefit of the promise (the promisee).
There is no need for an 'adequate' value: if some value is given for the promise, it would be
sufficient consideration.
Legality and Capacity
A contract is illegal if the agreement relates to an illegal purpose. For instance, a contract for
murder or a contract to defraud the Inland Revenue Department is both illegal and would
therefore void contracts that are unenforceable.

Certainty
A valid contract requires reasonable certainty for the essential terms. If the parties fail to reach
an agreement on the essential terms with reasonable certainty, then it may be contract void even
if all other essential elements are present.

Essential of valid contract
There are Ten essential of a valid contract:
1. Offer & Acceptance
2. Intention to create legal relation
3. Lawful Consideration
4. Capacity of parties
5. Free Consent
6. Lawful Object
7. Certainity of Meaning
8. Possibility of Performance
9. Not Declared to be Void
10. Legal Formalities
According to the Indian Contract Act 1872, "Agreements are also contracts made by the consent
of parties, competent to contract to consider with a lawful object and are not hereby expressly
declared to be void”. Therefore, the contract or the agreement must carry essential aspects to
maintain the normal phase of duties by both parties.
Example:
A and B underwent the contract, where A will purchase 10 bags of cement for Rs 1, 00,000. B
promises to supply the same in the given period and the quality mentioned. A promise to pay the
sum as per the mentioned method in the contract. In this case, both parties have to perform the
act as per the agreement signed.
1. Offer and acceptance:
When you propose to enter into a contract with another person, you have made an offer. Upon
acceptance of the offer, the parties enter a legally binding contract.
An offer is the first step towards creating a contract and is one of three vital components of a
legal contract. The other two elements that must be present for a contract to exist are acceptance
of an offer and consideration, which are the obligations that the parties have towards one
another.

In business law, you may come across the terms "offeror" and "offeree." The offeror is the
person who proposed the contract, and the offeree is the person that received the proposal.
The form that an offer takes can vary from contract to contract. For example, in some cases, you
may make an offer by stating that you have an interest in buying an asset. An offer may also
occur in some circumstances if you put something up for sale.
Example : : A gave a proposal to B to buy his property for Rs. 10 lakh. B accepts the offer. This
now becomes an agreement.
2. Intention to create Legal Intentions Relations :
Parties to a contract must intend to constitute legal relationship. It arises when the parties know
that if any one of them fails to fulfill his part of the promise, he would be liable for the failure of
the contract. If there is no intention to create legal relationship, there is no contract between
parties. Agreements of a social or domestic nature which do not contemplate a legal relationship
are not contracts.
Example:
3 . Lawful Consideration
Consideration is known as ‘something in return’. It is also essential for the validity of a contract.
A promise to do something or to give something without anything in return would not be
enforceable at law and, therefore, would not be valid.
Consideration need not be in cash or in kind. A contract without consideration is a ‘wagering
contract’ or ‘betting’. Besides, the consideration must also be lawful.
Example : A promises to obtain employment for B in a government organisation, for
which B promises to pay Rs. 100000 to A. Here consideration is unlawful as it amounts to a
bribe which is forbidden by law.
4. Capacity of parties
The parties to an agreement must be competent to contract. In other words, they must be capable
of entering into a contract.
According to Sec 11 of the Act, “Every person is competent to contract who is of the age of
majority according to the law to which he is subject to and who is of sound mind and is not
disqualified from contracting by any law to which he is subject.”

Thus, according to Section 11, every person with the exception of the following is competent to
enter into a contract:-
(i) A minor,
(ii) A person of unsound mind, and
(iii) A person expressly declared disqualified to enter into a contract under any Law.
5. Free Consent
Another essential of a valid contract is the consent of parties, which should be free.
Under Sec. 13, “Two or more parties are said to consent, when they agree upon the same
thing in the same sense.” Under Sec. 14, the consent is said to be free, when it is not
induced by any of the following:- (i) coercion, (ii) misrepresentation, (iii) fraud, (iv)
undue influence, or (v) mistake.
6. Lawfull object
According to Sec. 10, an agreement may become a valid-contract only, if it is for a lawful
consideration and lawful object. According to Sec. 23, the following considerations and
objects are not lawful:-
(i) If it is forbidden by law;
(ii) If it is against the provisions of any other law;
(iii) If it is fraudulent;
(iv) If it damages somebody’s person or property; or
(v) If it is in the opinion of court, immoral or against the public policy.
Thus, any agreement, if it is illegal, immoral, or against the public policy, cannot become
a valid contract.
Example: A hires a house from B to use it as a gambling place. Gambling being
an illegal act, the contract of hiring is void.

7. Certainity of Meaning
Section 29 of the Indian Contract Act states that the terms of a contract must be clear and
shall not be uncertain, vague, or indefinite.
8. Possibility of Performance
Agreements to form valid contracts must be certain, possible and they should not be
uncertain, vague or impossible. An agreement to do something impossible is void under Sec.
56.
9. . Not Declared to be Void
An agreement to become a contract should not be an agreement which has been expressly
declared void by any law in the country, as it would not be enforceable at law.
Under different sections of the Contract Act, 1872, the following agreements have been
said to be expressly void, viz :-
(i) Agreements made with the parties having no contractual capacity, e.g. minor and
person of unsound mind (Sec. 11).
(ii) Agreements made under a mutual mistake of fact (Sec. 20).
(iii) Agreements with unlawful consideration or object (Sec. 23).
(iv) Agreements, whose consideration or object is unlawful in part (Sec. 24).
(v) Agreements having no consideration (Sec 25).
(vi) Agreements in restraint of marriage (Sec. 26).
(vii) Agreements in restraint of trade (Sec. 27).
(viii) Agreements in restraint of legal proceedings (Sec. 28).
(ix) Agreements, the meaning of which is uncertain (Sec. 29).
(x) Agreements by way of wager (Sec. 30). and
(xi) Agreements to do impossible acts (Sec. 56).

10.Legal Formalities
The agreement may be oral or in writing. When the agreement is in writing it must
comply with all legal formalities as to attestation, registration. If the agreement does not
comply with the necessary legal formalities, it cannot be enforced by law.
Case law on essential of valid contract
Powell v. Lee (1908)
Specifics of the Case:
· Court: Kings Bench Division
· Case Number: 284
· Appellant: Mr. Powell
· Respondent: Mr. Lee
· Citation: (1908) 99 LT 284
A well-known case of offer and acceptance was the case of Powell v. Lee (1908) which involved
the plaintiff filing a suit against the defendant over breach of contract. The question that the
King’s Division Bench considered was whether a person who acted in an unauthorized capacity,
communicated an offer’s acceptance? Ruling that for an acceptance to be valid, the same should
be communicated, and the same should be carried out by the person offering in an authorized
capacity, the Court dismissed the plea of breach of contract between the plaintiff, and the
defendant.
Facts of the case:
Here Mr. Powell is referred to as the plaintiff. He was actually one of the candidates appear to be
in the position of headmaster of a school. The manager at that time referred his candidature to the
appointing authority, and the appointing authority, in return, release a resolution which sort of
appointing him to the said position. At this point, there was no formal acceptance directly to him,
and these were only internal dealings at that time. One board member heard the discussion from
a distance in which the other board members were discussing that they would finally appoint him
as the headmaster of the school. He then proceeded to inform Powell of the same. After getting
the intimation, Powell was quite happy that he was being appointed as the headmaster, but later
on, the members of the board cancelled his resolution of being appointed as the headmaster, and
because of this decision, Powell went on to file a suit for breach of contract against the
managers.
Issues
· The main contention that came to the court was whether there was an actual breach of
contract or not as stated by the plaintiff?
Laws Involved
· Section 2(a) of the Indian Contract Act, 1872
· Section 2(b) of the Indian Contract Act, 1872

Judgement
The court finally ruled that there was, in fact, no breach of contract, and the acceptance was
never formally conveyed to Powell. And because of this, he does not have any defence against
the manager’s decision of not appointing him to the post of headmaster. The court noted that- in
order to constitute a valid acceptance, there has to be some authorised person who conveys the
same to the plaintiff. In the absence of this, there cannot be a valid contract, and hence the court
noted that a contract was never formed in this case.
Analysis of the Judgement
“Acceptance subject to the contract is no acceptance.“
The main thing to note here is that the acceptance was never formally conveyed to Mr. Powell.
So technically, he shouldn’t be engaging in a suit of breach of contract as- to the law; he was
never conveyed anything. And when he was conveyed the final decision by the members of the
board, it was a rejection. This decision was the only and final decision as it was conveyed to him
by a formally authorised person in charge of doing the same. If we take this case in context to the
Indian contract act, we will see that the opening to the post of headmaster was only an invitation
to offer and when Mr. Powell applied for the same, he basically intimated his offer to be in place
of the headmaster. And now it was up to the board of members to either accept the offer and
convey their acceptance to him or reject the offer, which they actually did. So there is nothing
wrong, legally, with this whole situation, and the judgement of the court is, in fact, in the interest
of all the parties involved.
Reference
[1] (1908) 99 LT 284
[2] Indian Contract Act, 1872