Explaination, "No Consideration, No Contract" - Commercial Law

 

‘No consideration, No contract.’ Explain. 

Yes, it is true. An agreement made without consideration is void and does not enforceable by law. A valid consideration is needed for a valid contract. 

Meaning- Consideration means ‘something in return.’ Consideration is the essential component of a valid contract. Consideration is the price for the contract. Under it, both the parties give something to each other in return. Both the parties suffer and gain something from each other. Consideration does not include in payment of money only, but also goods. 

For example- A agree to sell his bike to B for Rs. 50,000. Here, A’s promise to sell his bike is a consideration for B and B accepted the offer and promise to pay Rs. 50,000. It is a consideration for A. 

No Consideration No Contract Exception 

Section 25 also lists the exceptions under which the rule of no consideration no contract does not hold. 

1. Natural love & Affection- An agreement without consideration is enforceable if it is (i) expressed in written. (ii) registered under the law for the time being in force for registration of documents and (iii) made on account of nature love & affection. (iv) It is between parties standing in a near relation to each other. 

For example- A promise to give his son B Rs.5000. A puts his promise to B in written. 

2. Compensation for service rendered- If a person has done voluntarily service in the past and beneficial promise to pay at a later date, then the contract is valid. The promiser showed his willingness to compensate the voluntary service. 

For example- A finds B’s wallets and return it to him. B is happy and promise to pay Rs. 2000 to A. This is a valid contract. 

3. Time barred debt- If a person makes a promise in writing for paying a time barred debt, then it is valid contract despite there is no consideration. 

For example- A borrow Rs. 10,000 to B. He had borrowed the money 1 years ago. He signs a written debt promise to pay Rs. 10,000 to B as a final settlement. 

4. Completed Gifts- The rule of no consideration, no contract does not apply in case of gift. Section 25 of Indian Contract Act 1872 shows that it is a valid contract. 

For example- A gifted a bike to his friend B. There is no consideration but a contract. 

5. Agency- No consideration is needed to create an agency. Thus, when a person is appointed as an agent, his appointment is valid even if there is no consideration. He also got his renumeration by way of commission for the service. But at the time of appointment no consideration is required. 

For example- A appointed B for rendering the services at that time there were no consideration for B. 

6. Guarantee- A contract of guarantee is made without consideration. The rule of no consideration no contract does not apply in case of guarantee. 

For example- A sell own to B and receive Rs. 500 for own. A give guarantee to B own to one year. 

7. Remission- No consideration is required for can agreement to receive less than what is due. This is called Remission in law. There is no consideration. 

For example- J borrowed Rs. 20,000 from K. He had borrowed money 5 years ago. He does not pay yet. So, J is agreed to pay Rs. 50,000 to K. There is nothing is return to J. But it is a contract. 

Conclusion-  

A contract can be valid even without consideration only in the cases of agency, gift, natural and love and affection. Remission, Guarantee, compensation for services rendered and time barred debts.