No Consideration No Contract’ - Exceptions To The Rule
Section 25 defines exceptions to rule an agreement without consideration is void-
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 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 authorised in that behalf, to pay wholly or in part 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.
The exceptions are explained in details below-
1. Agreement made on account of natural love and affection [Section 25 (2)]
An agreement made without consideration is enforceable if it is
a. Made on account of natural love and affection,
b. Between parties standing in a near relation to each other
c. Expressed in writing, and
d. Registered under the law .
For Example-
An elder brother, on account of natural love and affection, promised to pay the debts of his younger brother. Agreement was put to writing and registered. Held, agreement was valid.
A and B are brothers. In his will, their father nominates A as the sole owner of his entire property after his death. B files a case against A to claim his right to the property but loses the case. A and B come to a mutual decision where A agrees to give half of the property to his brother and register a document regarding the same.
Eventually, A didn’t fulfil his promise and B filed a suit for recovery of his share in the property. The Court held that since the agreement was made based on natural love and affection, the no consideration no contract rule didn't apply and B had the right to recover his share.
Rajlukhy Dabee Vs Bhootnath Mukharjee
A Hindu husband by a registered document, after referring to quarrels and disagreements between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence. Held that the promise was unenforceable since natural love and affection was missing.
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do.
A and B are brothers. In his will, their father nominates A as the sole owner of his entire property after his death. B files a case against A to claim his right to the property but loses the case. A and B come to a mutual decision where A agrees to give half of the property to his brother and register a document regarding the same.
Eventually, A didn’t fulfil his promise and B filed a suit for recovery of his share in the property. The Court held that since the agreement was made based on natural love and affection, the no consideration no contract rule didn't apply and B had the right to recover his share.
Rajlukhy Dabee Vs Bhootnath Mukharjee
A Hindu husband by a registered document, after referring to quarrels and disagreements between himself and his wife, promised to pay his wife a sum of money for her maintenance and separate residence. Held that the promise was unenforceable since natural love and affection was missing.
2. Agreement to compensate for past voluntary service [Section 25 (2)]
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do.
For example-
A finds B’s purse. B promises to give him Rs. 500/- This promise is enforceable.
A says to B, at the risk of your life you saved me from a serious accident. I promise to pay you Rs. 10,000/-. There is a contract between A and B.
Where there is an agreement,
1. Made in writing and
2. Signed by the debtor, or by his authorized agent,
3. 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.
4. A time-barred debt is one which remains unpaid or unclaimed for a period of 3 years, hence it cannot be recovered under the Indian Limitation Act and therefore a promise to repay such a debt is without consideration.
Example : A owes B Rs.10,000 but the debt is barred by Limitation Act. A signs a written promise to pay B Rs.8,000 on account of debt. This is a valid contract.
The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of the Indian Contract Act, 1872 states that the rule of an agreement without consideration being void does not apply to gifts made by a donor and accepted by a donee.
The gift actually made by a donor and accepted by the done will be valid even without the consideration. So in case of a gift actually made, consideration is not necessary.
For example- A gifts his car to B on his
birthday and B accepted the same. There is no consideration but then too the gift is valid.
Section 185 specifically states that no consideration is necessary to create an agency. Thus, when a person is appointed as an agent, his appointment is valid even if there is no consideration. Although, generally, an agent gets remuneration by way of commission for the services rendered, but no consideration is immediately necessary at the time of appointment.
For example- A appoints B as his agent. B's appointment is valid even though there is no consideration at the time of appointment. Although, he gets remuneration for his services.
Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one person to another for some purpose. This delivery is made upon a contract that post accomplishment of the purpose, the goods will either be returned or disposed of, according to the directions of the person delivering them. No consideration is required to effect a contract of bailment.
For example- A gives his novel to B for reading and says B to return it within a week. Although, no consideration is given by B here for the book but then too the bailment is valid.
If a person promises to contribute to charity and on this faith the promisee undertakes a liability to the extent not exceeding the promised subscription, the contract shall be valid.
Example: A is the trustee of his town’s charity organization. He wants to build a small pond in the town to enhance greenery and offer the residents a good place to walk around in the evenings. He raises a charity fund where he appeals to people to come ahead and contribute to the cause. Many people come forward as subscribers the fund and agree to pay him their share of the amount once he enters into a contract for constructing the pond.
After raising half the amount, he hires contractors for building the pond. However, 10 people back out at the last moment. A files a suit against them for recovery. The Court ordered the 10 people to pay the amount to A since he had undertaken a liability based on their promise to pay. Even though there was no consideration, the contract was valid and enforceable by law.
3. Agreement to pay a time barred debt [Sec. 25 (3)]
Where there is an agreement,
1. Made in writing and
2. Signed by the debtor, or by his authorized agent,
3. 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.
4. A time-barred debt is one which remains unpaid or unclaimed for a period of 3 years, hence it cannot be recovered under the Indian Limitation Act and therefore a promise to repay such a debt is without consideration.
Example : A owes B Rs.10,000 but the debt is barred by Limitation Act. A signs a written promise to pay B Rs.8,000 on account of debt. This is a valid contract.
4. Completed Gift
The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of the Indian Contract Act, 1872 states that the rule of an agreement without consideration being void does not apply to gifts made by a donor and accepted by a donee.
The gift actually made by a donor and accepted by the done will be valid even without the consideration. So in case of a gift actually made, consideration is not necessary.
For example- A gifts his car to B on his
birthday and B accepted the same. There is no consideration but then too the gift is valid.
5. Contract of Agency
Section 185 specifically states that no consideration is necessary to create an agency. Thus, when a person is appointed as an agent, his appointment is valid even if there is no consideration. Although, generally, an agent gets remuneration by way of commission for the services rendered, but no consideration is immediately necessary at the time of appointment.
For example- A appoints B as his agent. B's appointment is valid even though there is no consideration at the time of appointment. Although, he gets remuneration for his services.
6. Bailment
Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one person to another for some purpose. This delivery is made upon a contract that post accomplishment of the purpose, the goods will either be returned or disposed of, according to the directions of the person delivering them. No consideration is required to effect a contract of bailment.
For example- A gives his novel to B for reading and says B to return it within a week. Although, no consideration is given by B here for the book but then too the bailment is valid.
7. Charity
If a person promises to contribute to charity and on this faith the promisee undertakes a liability to the extent not exceeding the promised subscription, the contract shall be valid.
Example: A is the trustee of his town’s charity organization. He wants to build a small pond in the town to enhance greenery and offer the residents a good place to walk around in the evenings. He raises a charity fund where he appeals to people to come ahead and contribute to the cause. Many people come forward as subscribers the fund and agree to pay him their share of the amount once he enters into a contract for constructing the pond.
After raising half the amount, he hires contractors for building the pond. However, 10 people back out at the last moment. A files a suit against them for recovery. The Court ordered the 10 people to pay the amount to A since he had undertaken a liability based on their promise to pay. Even though there was no consideration, the contract was valid and enforceable by law.
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