Consideration is an integral part of a contract. The rules of consideration state that it is essential to have consideration for a contract. But there are some specific exceptions to the “No consideration no contract” rule. Let us take a look.
Can you make a legal agreement without consideration? No. As per Section 10 and Section 25 of the Indian Contract Act, 1872, consideration is essential in a valid contract. In simple words, no consideration no contract. Hence, you can enforce a contract only if there is a consideration.
While considerations are integral to a contract, the Indian Contract Act, 1872 has listed some exceptions whereby an agreement made without consideration will not be void.
Exceptions to the ‘No Consideration No Contract’ Rule
Section 25 also lists the exceptions under which the rule of no consideration no contract does not hold, as follows:
Natural Love and Affection
If an agreement is in writing and registered between two parties in close relation (like blood relatives or spouse), based on natural love and affection, then such an agreement is enforceable even without consideration.
Example, Peter and John are brothers. In his will, their father nominates Peter as the sole owner of his entire property after his death. John files a case against Peter to claim his right to the property but loses the case. Peter and John come to a mutual decision where Peter agrees to give half of the property to his brother and register a document regarding the same.
Eventually, Peter didn’t fulfil his promise and John 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 John had the right to recover his share.
Past Voluntary Services
If a person has done a voluntary service in the past and the beneficiary promises to pay at a later date, then the contract is binding provided:
- The service was rendered voluntarily in the past
- It was rendered to the promisor
- The promisor was in existence when the voluntary service was done (especially important when the promisor is an organization)
- The promisor showed his willingness to compensate the voluntary service
Example, Peter finds Johns wallet on the road and returns it to him. John is happy to find his lost wallet and promises to pay Peter Rs 2,000. In this case, too, the no consideration no contract rule does not apply. This contract is a valid contract.
Promise to pay a Time-Barred Debt
If a person makes a promise in writing signed by him or his authorized agent about paying a time-barred debt, then it is valid despite there being no consideration. The promise can be made to pay the debt wholly or in part.
Example, Peter owes Rs 100,000 to John. He had borrowed the money 5 years ago. However, he never paid a single rupee back. He signs a written promise to pay Rs 50,000 to John as a final settlement of the loan. In this case, ‘the no consideration no contract’ rule does not apply either. This is a valid contract.
Creation of an Agency
According to section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency.
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.
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.
If a person undertakes a liability on the promise of another to contribute to charity, then the contract is valid. In this case, the no consideration no contract rule does not apply.
Example, Peter 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 Peter their share of the amount once he enters into a contract for constructing the pond.
After raising half the amount, Peter hires contractors for building the pond. However, 10 people back out at the last moment. Peter files a suit against them for recovery. The Court ordered the 10 people to pay the amount to Peter 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.
Solved Example on ‘No Consideration No Contract’ rule
Q: On the eve of his marriage Rahul’s father gifted him a house. They went to register the documents, but such agreement was rejected as there was no consideration. Is this correct? Or can Rahul take legal action?
Ans: The rule of no consideration no contract does not apply to gifts. Also. Rahul’s father was gifting him the house of his natural love and affection. So this is an exception and the agreement can be registered even without consideration.