Consideration and Capacity to Contract notes — Unit 2

The Latin maxim 'Nudum Pactum' means a bare promise (a promise without consideration). Under Indian law, an agreement without consideration is totally void (Section 25).

⇒1.1 Key Elements of the Definition

• At the desire of the promisor: The act must be done strictly at the request of the promisor. Voluntary acts done at the request of a third party do not constitute valid consideration (Durga Prasad v. Baldeo).
• By the promisee or any other person: This implies that consideration can move from a third party. As long as consideration exists, it doesn't matter who pays it (Chinnaya v. Ramayya).
• Has done (Past), Does (Present), Promises to do (Future): Indian law recognizes past, present, and future consideration. (Note: English law does NOT recognize past consideration).

For consideration to be legally valid, it must satisfy certain jurisprudential rules.

Section 25 lays down the general rule that an agreement without consideration is void. However, it also provides three major exceptions where a contract is valid even without consideration.

• 1. Natural Love and Affection (Sec 25(1)): An agreement made without consideration is valid if it is:
  - Made out of natural love and affection,
  - Between parties standing in a near relation to each other (e.g., father and son),
  - Expressed in writing, AND
  - Registered under the law.
• 2. Past Voluntary Service (Sec 25(2)): A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor. (e.g., A finds B's lost purse and gives it to him. B promises to give A Rs. 500. This is a valid contract).
• 3. Time-Barred Debt (Sec 25(3)): Under the Limitation Act, a debt cannot be legally recovered after 3 years. However, if the debtor gives a written and signed promise to pay a time-barred debt, it becomes a valid contract without any fresh consideration.

Note: A completed Gift does not require consideration to be valid. Similarly, no consideration is needed to create an Agency (Section 185).

The general rule of law is that only the parties who are part of the contract can sue on it. A stranger to a contract cannot sue, even if the contract was made for their benefit.

⇒4.1 Privity of Consideration vs Privity of Contract

In India, the law is slightly different.
- Privity of Consideration is NOT required: A stranger to consideration can sue (as seen in Chinnaya v. Ramayya where the sister sued the daughter, even though the mother paid the consideration).
- Privity of Contract IS required: A stranger to the contract still cannot sue, subject to certain exceptions.

Courts have evolved several exceptions to the rigid doctrine of privity in the interest of justice.

Section 11 states that every person is competent to contract who:
1. Is of the age of majority according to the law to which he is subject.
2. Is of sound mind.
3. Is not disqualified from contracting by any law.

⇒6.1 Nature of a Minor's Agreement

Under the Indian Majority Act, 1875, a minor is a person under 18 years of age (or 21 if a guardian is appointed by the court). The Indian Contract Act does not expressly state whether a minor's contract is void or voidable. This created massive confusion until a landmark Privy Council ruling.

Because a minor's agreement is void ab initio, several legal consequences follow:

• No Ratification: A minor cannot validate (ratify) a contract upon turning 18. A void agreement cannot be brought to life. A fresh contract must be made with fresh consideration.
• No Estoppel against a Minor: Even if a minor lies about their age to secure a loan, they can still plead minority in court to escape liability.
• Minor as a Beneficiary: While a minor cannot be bound by a contract, nothing prevents a minor from being a beneficiary. A promissory note executed in favor of a minor is perfectly valid.
• Minor as a Partner/Agent: A minor cannot be a full partner in a firm, but can be admitted to the benefits of partnership (Section 30 of Partnership Act). A minor can act as an agent, binding the principal, but avoiding personal liability.

⇒7.1 Liability for 'Necessaries' (Section 68)

If a person is incapable of entering into a contract (minor or lunatic), and someone supplies them with 'necessaries' suited to their condition in life, the supplier is entitled to be reimbursed from the property of such incapable person.

• Rule: The minor is never personally liable. Only the minor's estate/property is liable.
• What are Necessaries? It includes basic food, clothing, shelter, education, and medical care. It does not include luxury items like a diamond ring or a sports car.

⇒8.1 Persons of Unsound Mind (Section 12)

A person is of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

• Usually unsound, occasionally sound: A patient in a lunatic asylum who has lucid intervals can make a contract during those lucid intervals.
• Usually sound, occasionally unsound: A sane man who is delirious from fever or highly intoxicated cannot make a contract while in that state.
• Burden of Proof: Lies on the person alleging the unsoundness of mind.

⇒8.2 Persons Disqualified by Law

Certain categories of people are legally barred from entering into contracts due to their political, professional, or legal status:

• Alien Enemies: Cannot contract during a war without government permission.
• Foreign Sovereigns & Ambassadors: They can enter into contracts and sue Indian citizens, but Indian citizens cannot sue them in Indian courts without prior sanction of the Central Government.
• Convicts: A person undergoing imprisonment cannot enter into a contract.
• Insolvents: An adjudged insolvent cannot deal with his property (it vests in the Official Receiver).

⇒Summary of Key Takeaways

• Consideration is the 'quid pro quo'. It must move at the desire of the promisor but can come from a third party.
• Inadequacy of consideration does not void a contract, but pre-existing duties do not count as consideration.
• Exceptions to consideration: Natural love and affection, past voluntary service, time-barred debt (Sec 25).
• Privity of Contract prevents strangers from suing (Dunlop Tyre). India allows strangers to consideration to sue (Chinnaya v. Ramayya).
• A minor's agreement is void ab initio (Mohori Bibee). Minors are only liable for necessaries out of their property (Sec 68).

⇒University Exam Tips for this Unit

• 'A stranger to consideration can sue, but a stranger to contract cannot'. This is a guaranteed exam question. You must explain both concepts separately. Use Chinnaya v. Ramayya to prove the first part, and Dunlop to prove the second.
• Minor's Liability: If a problem states a minor took a loan for a luxury item, immediately cite Mohori Bibee and state that the contract is void ab initio and no restitution is possible. If it's for school fees, cite Section 68 (Necessaries).
• Section 25 Exceptions: Often asked as 'Are there any circumstances where a contract without consideration is valid?'. List the 3 exceptions with their strict statutory conditions (e.g., love and affection must be registered and in writing).