EXCEPTION TO THE RULE, "NO CONSIDERATION, NO CONTRACT"

 

Seven exceptions to the rule when an agreement without consideration will be perfectly valid and binding

Consideration being one of the essential elements of a valid contract, the general rule is that “an agreement made without consideration is void.” But there are a few exceptions to the rule, where an agreement without consideration will be perfectly valid and binding. These exceptions are as follows:

1. Agreement made on account of natural love and affection [Sec. 25(1)]:

An agreement made without consideration is enforceable if, it is (i) expressed in writing, and (ii) registered under the law for the time being in force for the registration of documents, and is (iii) made on account of natural love and affection, (iv) between parties standing in a near relation to each other. Thus there are four essential requirements which must be complied with to enforce an agreement made without consideration, as per Section 25(1).

Illustrations:(a) A promises, for no consideration, to give to B Rs 1,000. This is a void agreement.

(b) A for natural love and affection, promises to give his son B, Rs 1,000. A puts his promise to B into writing and registers it. This is a contract.12It should, however, be noted that mere existence of a near relation between the parties does not necessarily import natural love and affection.

2. Agreement to compensate for past voluntary service: [Sec. 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.

Illustrations:(a) A finds B’s purse and gives it to him. B promises to give A Rs 50. This is a contract.

(b) A rescued B from drowning in the river, and B, appreciating the service that has been rendered, promises to pay Rs 1,000 to A. There is a contract between A and B.

3. Agreement to pay a time-barred debt: [Sec. 25(3)]

Where there is an agreement, made in writing and signed by the debtor or by his authorised agent, 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.

A time barred debt cannot be recovered and therefore a promise to repay such a debt is without consideration, hence the importance of the present exception.

Illustration: A owes Rs 1,000, but the debt is barred by the Limitation Act. A signs written promises to pay B Rs 500 on account of the debt. This is a contract (Appended to Sec. 25).

 

4. Completed gift:

A gift (which is not an agreement) does not require consideration in order to be valid. “As between the donor and the done, any gift actually made will be valid and binding even though without consideration” [Explanation 1, to Section 25].

In order to attract this exception, there need not be natural love and affection or nearness of relationship between the donor and done. The gift must, however, be complete.

5. Contract of agency:

Section 185 of the Contract Act lies down that no consideration is necessary to create an agency.

6. Remission by the promisee, of performance of the promise:

For compromising a due debt, i.e., agreeing to accept less than what is due, no consideration is necessary. In other words, a creditor can agree to give up a part of his claim and there need be no consideration for such an agreement. Similarly, an agreement to extend time for performance of a contract need not be supported by consideration. (Sec.63)

7. Contribution to charity:

A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promised subscription, the promisee takes definite steps in furtherance of the object and undertakes a liability, to the extent of liability incurred, not exceeding the promised amount of subscription.

In Kedar Nath vs Gorie Mohammad, the defendant had agreed to subscribe Rs 100 towards the construction of a Town Hall at Howarh. The plaintiff (secretary of the Town Hall) on the faith of the promise entrusted the work to a contractor and undertook liability to pay him.

The defendant was held liable. But where the promisee had done nothing on the faith of the promise, a promised subscription is not legally recoverable.