Importance of Consideration in an Agreement

In contract law, consideration is meant to be the exchange of one thing of value for another. It is one of the important elements that must be present for a contract to be legally enforceable. 

According to Section 2(d) of the Indian Contract Act, 1872 consideration is defined as: “When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called consideration for the promise”.

Under Section 10 of the Contact Act (am sure the situation would be the same in other countries too), a lawful consideration is included among other requirements to constitute a valid contract. In simple words, consideration means something in return of a promise which may either be benefit gained by one party or something lost by the other.

It broadly means what the parties are doing under an agreement on their part. For anything done by a party under the agreement, there is a corresponding benefit to the other party.

The agreement must clearly demarcate why the parties are getting into an agreement – which party is going to give / receive what benefit under the agreement.

If there is no consideration for each party, the agreement is void.

It is necessary to mention consideration to calculate the stamp duty payable on an agreement under Indian Stamp Act, 1899. Section 27 of this Act mandates that the consideration should be fully and truly set forth in an agreement.

In India, we have had the malaise of under-reporting the consideration particularly under property related agreements. This was to evade payment of stamp duty and registration fees and payment in unaccounted cash.

However, all this resulted in catastrophic consequences for the parties in cases of dispute. A party could claim the actual consideration in the event of default by the other party.

With the Government of India’s emphasis on better compliance, these practices are being reduced if not completely eliminated. It is now mandatory to make big payments only through cheques or digital modes. The stamp duty and registration charges are being reduced. The tax authorities can question any undervalued deals.

Further, not only there should be a consideration, the consideration should be valid under law. An Illegal or immoral consideration or one that is against established public policy may not be enforceable.

An agreement can contain the acknowledgement of receipt by way of a separate receipt in an annexure or in the body of the agreement itself.

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About the author:

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.