8 Consideration and Capacity to Contract

Learning Objectives

You will be able to:

Define consideration and identify the essentials a valid consideration must satisfy.
Explain the rule that an agreement without consideration is void, and recall the exceptions the Act allows.
Distinguish privity of consideration from privity of contract, and explain why Indian law treats the two differently.
Identify who is competent to contract, and state the effect of an agreement made by a minor, by a person of unsound mind, or by a person disqualified by law.
Apply the rules of consideration and capacity to a set of commercial promises and determine which of them a court will enforce.

8.1 Introduction

Chapter 7 established when a bargain comes into existence. This chapter asks two further questions the law puts before it will enforce that bargain: was anything given in return, and were the parties legally capable of giving it.

Both questions sound technical and both decide real money. A supplier who accepts a lower sum in full settlement of a larger debt, a company that promises a bonus for work already completed, a lender who takes a guarantee from someone who turns out to have been seventeen, and a firm that contracts with an entity acting beyond its own powers are all in the territory of this chapter (K. R. Bulchandani, 2021). In each case the promise looks perfectly ordinary in commercial terms, and in some of them the law will not lift a finger to enforce it.

The Act’s position is stated plainly: an agreement made without consideration is void, subject to stated exceptions, and only a person competent to contract can make an enforceable agreement at all (Government of India, 1872).

flowchart TD
    P["<b>A promise has been made</b>"] --> C{"Is there<br>consideration?"}
    C -->|"Yes"| K{"Are the parties<br>competent?"}
    C -->|"No"| X{"Does it fall in a<br>statutory exception?"}
    X -->|"Yes"| K
    X -->|"No"| V["<b>Void</b><br>no agreement to enforce"]
    K -->|"Yes"| E["<b>Enforceable</b><br>subject to free consent<br>and lawful object"]
    K -->|"Minor"| M["<b>Void ab initio</b><br>no ratification,<br>no estoppel"]
    K -->|"Unsound mind or<br>disqualified"| V
    style P fill:#e3f2fd,stroke:#1976D2
    style E fill:#e8f5e9,stroke:#388E3C
    style V fill:#ffebee,stroke:#C62828
    style M fill:#fff8e1,stroke:#F9A825
    style X fill:#ede7f6,stroke:#7E57C2

8.2 Consideration

Consideration is what each party gives in exchange for what it gets. The Act defines it as an act, an abstinence, or a promise, done or given at the desire of the promisor, by the promisee or by any other person (Government of India, 1872). It is often described in older writing as the price for which the promise of the other is bought.

The requirement exists because the law distinguishes a bargain from a gift. A bargain is a transaction the courts will enforce, because both sides have committed something. A bare promise to confer a benefit, however sincerely meant, is not a transaction, and the law leaves it to the promisor’s conscience.

8.2.1 Essentials of a Valid Consideration

What Makes Consideration Valid

Requirement	What it means in practice
It must move at the desire of the promisor	An act done voluntarily, or at a third party’s request, is not consideration, however much the promisor benefits from it
It may move from the promisee or any other person	Indian law does not require that consideration come from the promisee, which is where it departs from English law
It may be past, executed or executory	A promise given in return for something already done at the promisor’s desire is good consideration in India
It need not be adequate, but must be real	The law does not weigh the bargain, but consideration that is physically or legally impossible, or wholly illusory, is no consideration
It must be lawful	Consideration forbidden by law, defeating a statute, fraudulent, injurious, or opposed to public policy makes the agreement void
It must be something the promisor is not already bound to do	A promise to perform an existing legal or contractual duty adds nothing and is not consideration

Two of these repay attention because they are where Indian law differs from the English tradition the subject grew out of.

Consideration may move from a stranger. Where a promise is made to A in return for something given by B, A may still enforce the promise. This is privity of consideration, and India rejects the English requirement that consideration move from the promisee.

Past consideration is good consideration. Where a service is rendered at the promisor’s desire and a promise to pay follows, the earlier service supports the later promise. The condition is that the act must have been done at the promisor’s desire; a service rendered voluntarily and rewarded afterwards is not past consideration but a bare promise, which is dealt with separately under the exceptions.

Common Misconception: The Consideration Must Be Worth What Is Promised

Courts do not ask whether a bargain was a good one. Explanation to the Act’s provision on free consent makes the point directly: an agreement is not void merely because the consideration is inadequate, though inadequacy may be evidence to be considered when deciding whether consent was freely given.

The commercial consequence is that a nominal sum can support a substantial obligation, which is why option agreements, transfers between group companies and standstill arrangements are often drafted around a token payment. The consequence in the other direction is that a party cannot escape a bad bargain by arguing that it received too little. What inadequacy can do is raise a question about coercion or undue influence, which Chapter 9 takes up.

8.2.2 No Consideration, No Contract, and Its Exceptions

The rule is that an agreement made without consideration is void. The Act then lists the situations in which a promise binds even though nothing was given in return.

Exception	What it requires
Natural love and affection	A promise between parties standing in a near relation to each other, made out of natural love and affection, expressed in writing and registered
Compensation for past voluntary service	A promise to compensate a person who has already voluntarily done something for the promisor, or done something the promisor was legally compellable to do
Promise to pay a time-barred debt	A written promise, signed by the debtor or an authorised agent, to pay a debt the creditor could no longer recover by suit because of limitation

Three further situations sit outside that list but produce the same result. No consideration is necessary to create an agency. A completed gift is valid between the parties even though nothing moved the other way, since the rule applies to agreements and not to gifts already made. And under the Act’s provision on remission, a promisee may dispense with or remit the performance owed to them, wholly or in part, or accept any satisfaction they think fit, without any fresh consideration.

Practitioner Insight: Settling for Less Is Binding in India

Where a customer owes eighty lakh rupees and the supplier agrees in writing to accept fifty in full and final settlement, the supplier cannot later sue for the balance. Under the Act’s remission provision the promisee may accept whatever satisfaction they think fit, and no separate consideration is required to make that acceptance binding. English law reached the opposite result for a long period, which is why textbooks written in that tradition give a different answer, and why a manager who learned the rule elsewhere may misjudge an Indian settlement.

Two practical points follow. Record the settlement in writing and state expressly that it is accepted in full and final satisfaction of the whole claim, because the dispute that follows is usually about what was settled rather than whether it was. And a party planning to pay less should understand that once the creditor has accepted, the concession cannot be withdrawn because the market turned.

8.2.3 Privity of Contract

Privity of consideration and privity of contract are different rules, and confusing them is common. Indian law rejects the first and accepts the second: consideration may come from a stranger, but a stranger to the contract cannot sue on it. Only a party to the agreement acquires rights under it, however clearly the agreement was meant to benefit someone else.

The rule is heavily qualified in practice, and the qualifications are the part a manager needs.

Exception to privity	How it operates
Trust or charge	Where a contract creates a trust or a charge in favour of a third party, that party may enforce it
Family arrangement	A provision made for a person under a family settlement or a marriage arrangement may be enforced by that person
Acknowledgement or estoppel	Where a party acknowledges liability to a third person, whether expressly or by conduct, that person may sue
Assignment	An assignee of a contractual benefit may enforce it, subject to the terms of the contract
Agency	A principal may sue on a contract made by an agent, disclosed or undisclosed
Covenants running with land	Obligations attaching to land may bind and benefit successors

The commercial application is direct. A parent company that wants the right to enforce a supplier’s warranty given to its subsidiary should be made a party to that contract, or the contract should assign or create rights in its favour expressly. Relying on the evident intention that the group should benefit is not enough.

8.3 Capacity to Contract

The Act provides that every person is competent to contract who is of the age of majority according to the law to which he is subject, who is of sound mind, and who is not disqualified from contracting by any law to which he is subject (Government of India, 1872). Each of the three limbs is a separate question.

8.3.1 Minors

The age of majority in India is eighteen years (Government of India, 1875). An agreement with a person below that age is not merely unenforceable against them: it is void from the beginning. The consequences follow from that single proposition and are worth learning as a set, because they surprise people.

The Consequences of a Minor’s Agreement Being Void

Consequence	Explanation
No ratification on attaining majority	Nothing existed to be ratified, so a promise made after turning eighteen requires fresh consideration to bind
No estoppel	A minor who misrepresented their age may still plead minority, because the law will not use estoppel to give effect to a void agreement
Restitution is limited	Where a minor obtained property by misrepresenting age, a court may order restoration of what is still traceable, but will not order repayment of money spent, because that would enforce the void agreement indirectly
A minor may be a beneficiary	A minor may hold the benefit of a contract, take delivery under it, and enforce a promise made in their favour
Liability for necessaries	A person who supplies necessaries suited to a minor’s condition in life may be reimbursed from the minor’s property, not from the minor personally
A minor may be an agent	A minor can act as an agent and bind the principal, while incurring no personal liability
A minor and partnership	A minor cannot be a partner, but may with the consent of all partners be admitted to the benefits of a partnership (Government of India, 1932)
The guardian’s contract	A contract made by a lawful guardian for the minor’s benefit, and within the guardian’s authority, may bind the minor

Common Misconception: A Minor Who Lies About Age Is Bound

Commercial intuition says that a person who obtains goods or credit by falsely stating their age should be held to the bargain. Indian law does not accept that reasoning, because the incapacity exists for the minor’s protection and would be defeated if a misstatement could remove it. Estoppel does not run against a minor.

What remains available is restitution rather than enforcement. If the goods or property obtained are still identifiable in the minor’s hands, a court may order them restored. If the money has been spent, there is nothing to restore, and the supplier bears the loss. The operational answer is verification before the transaction, not litigation after it, which is why lending, subscription and hire-purchase businesses treat age verification as a control rather than a formality.

8.3.2 Persons of Unsound Mind

A person is of sound mind for the purpose of contracting if, at the time of making the contract, they are capable of understanding it and of forming a rational judgement as to its effect upon their interests (Government of India, 1872). The test is applied at the moment of contracting, not generally, which produces two rules that follow from each other: a person who is usually of unsound mind may contract during an interval of sound mind, and a person usually of sound mind may not contract while unable to understand, whether through illness or intoxication.

The burden of proof follows the ordinary state of the person. Where someone is generally of sound mind, a party alleging incapacity at the moment of contracting must prove it.

8.3.3 Persons Disqualified by Law

The third limb catches disqualifications imposed by other statutes and by status.

Alien enemies. Contracts with a person of a country at war with India are suspended or dissolved, and new ones cannot be made without government sanction.
Foreign sovereigns and diplomatic representatives. They may contract and may sue, but cannot be sued without sanction.
Insolvents. A person adjudged insolvent loses the power to deal with property that has vested in the receiver.
Convicts. A person undergoing a sentence of imprisonment is under a disability while it lasts.
Corporations. A company is an artificial person and its capacity is limited by the statute creating it and by its own objects (Government of India, 2013). An act beyond those objects is beyond the company’s powers.

Practitioner Insight: Verify Capacity and Authority as Two Separate Checks

Capacity asks whether the party is legally able to contract at all. Authority asks whether the individual signing is entitled to bind that party. They fail in different ways and are verified by different documents. Capacity is checked through the certificate of incorporation, the objects in the constitutional documents, and the entity’s current status. Authority is checked through the board resolution, the power of attorney, or the delegation of financial powers.

A contract signed by a manager who lacked authority may still bind the company where the counterparty reasonably relied on an apparent authority the company allowed to exist. A contract beyond the entity’s capacity binds nobody. That is the reason to run the two checks separately, and the reason a signature block should always be supported by a document naming the signatory.

8.4 Case Studies

8.4.1 Case Study 1: The Minor’s Mortgage

In Mohori Bibee v. Dharmodas Ghose, a minor mortgaged his property to a moneylender and received a sum of money. The lender’s attorney knew of the minority. When the lender sought to enforce the mortgage, the minor pleaded that he had been under age.

The Privy Council held that the agreement was void from the beginning rather than voidable at the minor’s option, and it therefore could not be enforced. The lender’s further request, that the minor be required to refund the money as a condition of relief, was refused, since ordering repayment would in substance enforce an agreement the law treated as never having existed.

Discussion questions

Why does it matter whether a minor’s agreement is void or voidable?
The lender knew of the minority. Would the outcome differ if the minor had concealed his age, and what remedy would then be available?
What controls should a lender put in place so that this question never reaches a court?

8.4.2 Case Study 2: Consideration From a Stranger

In Chinnaya v. Ramayya, a woman gifted land to her daughter by a registered deed, on the condition that the daughter pay an annuity to the woman’s sister. The daughter executed a document in the sister’s favour agreeing to pay, and later stopped paying, arguing that the sister had given nothing in return.

The court held that the sister could enforce the promise. The consideration for the daughter’s promise was the gift of land, which had moved from the mother rather than from the sister, and Indian law permits consideration to move from any person. The definition in the Act says so in terms.

Discussion questions

Distinguish this outcome from the rule that a stranger to a contract cannot sue. Why is the sister not a stranger to the contract here?
What would have happened if the daughter had made no separate promise to the sister?
How would you structure a group company arrangement so that the intended beneficiary can enforce it?

8.4.3 Case Study 3: The Settlement That Was Reopened (illustrative)

The following situation is constructed rather than reported, in order to bring the chapter’s rules together in a commercial sequence.

A packaging supplier is owed eighty lakh rupees by a retail chain whose sales have fallen. After negotiation, the supplier’s director signs a letter agreeing to accept fifty lakh rupees “in full and final settlement of all dues”, and the retailer pays it. Separately, the supplier’s sales head has promised a two lakh rupee bonus to a logistics contractor for a difficult delivery the contractor completed the previous month at the supplier’s request, and has promised a further one lakh rupee payment to a neighbouring business that voluntarily helped move stock during a flood, without being asked. Six months later the retail chain recovers, and the supplier sues for the thirty lakh rupee balance while refusing both smaller payments.

The analysis runs as follows. The settlement binds the supplier, because a promisee may remit part of what is owed and accept such satisfaction as they think fit, and no fresh consideration is needed. The bonus to the logistics contractor is enforceable, because the delivery was made at the supplier’s desire and past consideration is good consideration in India. The promise to the neighbouring business is the difficult one: the help was voluntary rather than requested, so it is not past consideration, and the promise binds only if it falls within the exception for compensating a person who has voluntarily done something for the promisor.

Discussion questions

What would the supplier have had to do differently to preserve its claim to the thirty lakh rupee balance?
Why does the law treat the logistics contractor and the neighbouring business differently when both conferred a real benefit?
Which of the three promises would you advise the supplier to honour on commercial grounds regardless of the legal position, and why?

8.5 Applying the Chapter

Exercise: Which of These Promises Will a Court Enforce

A mid-sized engineering firm in Pune has made the following commitments in one quarter.

A. It promised its distributor an additional two per cent margin for the coming year, in return for the distributor’s agreement to continue performing the delivery obligations already written into their existing three-year contract.
B. Its managing director signed a letter accepting sixty lakh rupees from a debtor in full and final settlement of a ninety lakh rupee invoice. The debtor paid.
C. It promised a retired employee, in writing but not registered, a monthly payment in recognition of long service, out of regard for him.
D. It agreed to buy a used lathe from a supplier’s proprietor for one lakh rupees, a price the firm now believes is four times the machine’s worth.
E. It took a personal guarantee for a distributor’s credit limit from the distributor’s son, who was seventeen at signing and turned eighteen two months later. The son has since sent an e-mail confirming that he stands by the guarantee.
F. It signed a supply contract with a customer, and the contract states that the customer’s parent company shall be entitled to enforce the warranty. The parent company is not a party to the contract.

Working in a group, analyse and resolve each commitment.

Classify each promise as enforceable, void, or enforceable only if a further condition is met. State which rule of consideration or capacity decides it.
For each promise you classify as void or doubtful, state precisely what the firm would have had to do differently at the time, in one sentence.
Take E further. Explain the effect of the confirmation e-mail sent after the son turned eighteen, and state what the firm must do now if it still wants a binding guarantee from him.
Take F further. State whether the parent company can sue on the warranty as drafted, and draft a one-sentence alternative that would achieve the intended result.
Recommend controls. Propose three checks the firm should build into its contracting process, covering consideration, capacity and authority, and name the function that should own each.

Present the analysis as a table of commitment, classification, governing rule and remedy, followed by a half-page note to the managing director on the three controls.

8.6 Summary

Chapter Summary

Consideration is what each side gives in exchange for what it gets, and it is the feature that separates a bargain the courts will enforce from a gift they will not (K. R. Bulchandani, 2021; Government of India, 1872). It must move at the desire of the promisor, must be real and lawful, and must be more than the performance of an existing duty, but it need not be adequate. Indian law departs from the English tradition on two points that matter commercially: consideration may move from a person other than the promisee, and past consideration given at the promisor’s desire is good consideration.

An agreement without consideration is void, subject to exceptions: a registered written promise between near relations made out of natural love and affection, a promise to compensate someone for a past voluntary service, and a written signed promise to pay a time-barred debt. Outside that list, no consideration is needed to create an agency, a completed gift stands, and a promisee may remit part of what is owed and accept whatever satisfaction they think fit. That last rule is why a settlement accepted in full and final satisfaction binds in India even though less than the debt was paid.

Privity of consideration and privity of contract are separate rules. India rejects the first and accepts the second, so a stranger to the contract cannot sue on it, subject to established exceptions for trusts and charges, family arrangements, acknowledgement, assignment, agency and covenants running with land.

Capacity has three limbs: majority, soundness of mind, and the absence of a disqualification. The age of majority is eighteen (Government of India, 1875), and a minor’s agreement is void from the beginning, which is why it cannot be ratified, why estoppel does not run against a minor who misstated their age, and why a supplier’s remedy is restitution of what remains traceable rather than payment. A minor may still be a beneficiary, an agent, and a person admitted to the benefits of a partnership (Government of India, 1932), and necessaries supplied to a minor are reimbursable from the minor’s property. Soundness of mind is tested at the moment of contracting. Disqualification catches alien enemies, foreign sovereigns, insolvents and convicts, and a company’s capacity is bounded by the statute and objects under which it exists (Government of India, 2013).

Key Terms

Consideration · At the desire of the promisor · Executed and executory consideration · Past consideration · Adequacy of consideration · Existing duty · Unlawful consideration · No consideration, no contract · Natural love and affection · Compensation for voluntary service · Time-barred debt · Remission · Full and final settlement · Privity of consideration · Privity of contract · Assignment · Capacity to contract · Age of majority · Void ab initio · No ratification · No estoppel against a minor · Restitution · Necessaries · Sound mind · Disqualified persons · Beyond the powers of the company

Summary

Concept	Description
What Consideration Is
Consideration	An act, abstinence or promise given at the promisor's desire, which is the price of the other's promise
At the desire of the promisor	The requirement that the act be done at the promisor's request, not voluntarily or at a third party's asking
Consideration from a stranger	The Indian rule that consideration may move from the promisee or from any other person
Past consideration	A promise supported by something already done at the promisor's desire, which is good consideration in India
Adequacy of consideration	The rule that courts do not weigh a bargain, though inadequacy may bear on whether consent was free
Existing duty	The rule that performing a duty already owed adds nothing and cannot be consideration
Unlawful consideration	Consideration forbidden by law, fraudulent, injurious or against public policy, which makes the agreement void
The Rule and Its Exceptions
No consideration, no contract	The general rule that an agreement without consideration is void, subject to stated exceptions
Natural love and affection	The exception for a registered written promise between parties in a near relation
Compensation for voluntary service	The exception for a promise to compensate someone who has already voluntarily acted for the promisor
Time-barred debt	The exception for a written signed promise to pay a debt barred by limitation
Agency without consideration	The rule that no consideration is necessary to create an agency
Remission	The promisee's power to dispense with or remit performance, wholly or in part, without fresh consideration
Full and final settlement	A settlement accepted in satisfaction of the whole claim, binding in India even though less was paid
Privity
Privity of consideration	The rule India rejects, that consideration must move from the promisee
Privity of contract	The rule India accepts, that only a party to a contract may sue on it
Exceptions to privity	Trust or charge, family arrangement, acknowledgement, assignment, agency, and covenants running with land
Capacity and Minors
Capacity to contract	The requirement that a party be of majority, of sound mind, and not disqualified by law
Age of majority	Eighteen years under the Indian Majority Act, below which a person cannot contract
Void ab initio	The status of a minor's agreement: it never existed, rather than being voidable at the minor's option
No ratification	The consequence that a promise made after attaining majority needs fresh consideration to bind
No estoppel against a minor	The rule that a minor who misstated their age may still plead minority
Restitution of traceable property	The limited remedy of recovering property still identifiable in the minor's hands, but not money spent
Necessaries	Goods and services suited to a minor's condition in life, reimbursable from the minor's property
Minor as beneficiary or agent	The capacities a minor retains: holding the benefit of a contract, and binding a principal as agent
Other Incapacities
Sound mind at the time of contracting	The test of understanding and rational judgement applied at the moment of contracting, not generally
Disqualified persons	Alien enemies, foreign sovereigns, insolvents and convicts, plus a company bounded by its own objects
Capacity and authority as separate checks	The discipline of verifying that the entity can contract and that the signatory can bind it