by The general rule in contract law is that an agreement without consideration is void. This means that for a contract to be valid, both parties must exchange something of value. However, the Indian Contract Act (Section 25) recognizes certain exceptions where a contract is valid even without consideration.
Exceptions to the Rule “No Consideration, No Contract” divided into different points
- Natural Love and Affection
According to Section 25(1) of the Indian Contract Act, an agreement made without consideration is valid if it is in writing, registered, and made out of natural love and affection between close relations. For example, a father promises to give property to his son, and this promise is in writing and registered; it will be valid even if the son does not provide anything in return. The key condition is that the relationship must be close (like husband and wife, parent and child) and there should be clear love and affection between them. Without these factors, the exception will not apply, and the promise may be considered void.
- Compensation for Past Voluntary Services
Under Section 25(2), if a person voluntarily does something for another without being asked, and the other later promises to compensate, such a promise is enforceable even without fresh consideration. For example, if A saves B’s goods from fire without being asked, and later B promises to pay A ₹10,000, this promise is valid. The important aspect is that the act was done voluntarily and not under any obligation. This exception encourages acts of kindness or help where the law later protects a promise of compensation, recognizing the value of past services.
- Promise to Pay Time-Barred Debt
Section 25(3) provides that a promise to pay a debt barred by the Limitation Act is enforceable, even though there is no consideration. For example, if A owes B ₹1,000, but the recovery is barred by the limitation period, and A later signs a written promise to pay B ₹500, this becomes enforceable. The agreement must be in writing and signed by the debtor. This exception is based on the principle of moral obligation, where the debtor acknowledges the old debt despite the legal barrier and voluntarily agrees to repay.
- Completed Gifts
The law recognizes that gifts, once completed, do not require consideration to be valid. Although a promise to make a gift in the future without consideration is not enforceable, if the gift has been transferred and accepted, the absence of consideration does not matter. For example, if A gives B a car as a gift, B’s ownership is valid even though B did not provide anything in exchange. This exception respects voluntary transfers and protects the recipient’s right once the gift has been delivered and accepted.
- Agency Agreements
According to Section 185 of the Indian Contract Act, no consideration is required to create an agency relationship. When a person (principal) appoints another (agent) to act on their behalf, the appointment is valid even if the agent is not paid or promised payment. For example, A appoints B as his agent to sell goods; even if B is not promised any commission, the agency is valid. This exception is important in business, where formal agreements of agency may arise without immediate or express monetary consideration.
- Charitable Subscriptions
Promises made for donations or charitable purposes can be enforced even without consideration if the promisee has taken action based on the promise. For example, if A promises ₹50,000 for building a school, and the trustees incur liabilities based on this promise, A is legally bound to pay. The courts recognize the moral and social obligation behind such promises, especially when others have relied on the promise and made commitments. However, if no action is taken by the promisee, the promise remains a mere moral obligation and may not be enforceable.
- Bailment Agreements
Under Section 148 of the Indian Contract Act, consideration is not required for a bailment contract. Bailment involves delivering goods by one person (the bailor) to another (the bailee) for a specific purpose, with or without reward. For example, leaving your coat at a cloakroom creates a bailment relationship, even if you do not pay. The law imposes duties on the bailee (like taking reasonable care) even without consideration. This exception is crucial in everyday transactions where goods are handed over for safekeeping or use.
- Contracts Under Seal (Formal Contracts)
In English law (though not under Indian law), contracts under seal or deeds do not require consideration. These are formal written agreements, sealed and delivered, which become binding purely by their formal execution. For example, if A signs a deed gifting property to B, the absence of consideration is irrelevant. The Indian Contract Act, however, does not follow this strict rule, but understanding it is helpful in comparative law. It shows how, in some legal systems, formality can replace consideration.
- Promissory Estoppel
Promissory estoppel is an equitable principle that prevents a party from going back on a promise made without consideration if the other party has relied on the promise and suffered detriment. For example, if A promises to allow B to use his land rent-free, and B invests in building a factory, A cannot later revoke the promise. Although this is not codified in the Indian Contract Act, Indian courts have applied promissory estoppel to ensure fairness, recognizing the binding nature of some promises without consideration.
- Remission of Performance (Section 63)
Section 63 of the Indian Contract Act allows the promisee to dispense with or remit, wholly or in part, the performance of the promise by the promisor without consideration. For example, if B owes A ₹10,000, and A agrees to accept ₹7,000 in full satisfaction, A’s promise is binding even without fresh consideration. This exception allows flexibility and settlement between parties, recognizing that sometimes the promisee may want to release the promisor partially or fully from obligations without needing extra consideration.
- Contract of Guarantee
In a contract of guarantee, the surety’s promise to pay the debt or perform the duty of a third person is valid without direct consideration flowing to the surety. According to Section 127, consideration received by the principal debtor is sufficient for the surety’s promise. For example, if C agrees to guarantee B’s loan from A, the consideration A gives to B (the loan) is enough to bind C, even if C does not receive any direct benefit. This exception facilitates credit and financial arrangements.
- Gratuitous Agency
An agent acting without expectation of reward (gratuitous agent) is still bound to carry out the agency duties and is protected by law. The agent is entitled to be indemnified by the principal for lawful acts done in the course of agency, even if no consideration was promised initially. This exception ensures that agents working out of goodwill or moral obligation are not left unprotected and that principals remain accountable for the acts done on their behalf, even if no financial consideration is involved.
- Court-Ordered Compromise Agreements
When courts order parties to enter into compromise or settlement agreements, the contracts arising from such court orders are binding even without consideration. For example, when parties settle a dispute in court, the mutual agreement to withdraw claims or actions becomes enforceable without the need for separate consideration. The reason behind this exception is to uphold the authority of the court and the finality of settlements, ensuring that legal disputes are conclusively resolved.
- Family Arrangements
Family settlements or arrangements, especially involving property or disputes, are enforceable even without formal consideration, provided they are made fairly and honestly to maintain family peace. For example, when siblings agree to divide ancestral property to avoid disputes, the absence of monetary exchange does not make the agreement void. Courts uphold such arrangements to protect family unity, avoid litigation, and promote fair distribution, recognizing the social and moral context behind family settlements.
- Moral Obligation
Although generally, moral obligations are not enforceable, in some cases, the law upholds promises based on moral duties, especially when formalized in writing. For example, a promise to support an aged parent, though not strictly enforceable for lack of consideration, may be upheld under social or legal obligations recognized by law. The courts, however, are cautious and do not enforce all moral obligations, but certain promises tied to moral duties can fall under exceptions, especially when fairness demands enforcement.
