Lawful Consideration in Contracts: An Insight from the Indian Contract Act, 1872

Every contract rests on a simple but powerful idea: you give something, you get something. That “something” is what the law calls consideration. Under the Indian Contract Act, 1872, consideration is not just a technicality – it is one of the fundamental pillars that separates a legally enforceable contract from a mere promise. Without it, most agreements simply cannot stand in a court of law. But not every form of consideration qualifies. The law requires it to be real, genuine, and above all, lawful. This post breaks down exactly what that means and why it matters.

What does Section 2(d) say? 🔗

Section 2(d) of the Indian Contract Act, 1872 defines consideration in precise terms. It states that 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 to abstain from doing something – such an act, abstinence, or promise is called a consideration for the promise.

In plain language, consideration is the price each party pays for the other’s promise. It is the mutual exchange that gives a contract its legal weight. The celebrated jurist Blackstone described it as “the recompense given by the party contracting to each other” – the value that flows between the parties to make the agreement binding.

A simple example: A agrees to deliver 10 kg of basmati rice to B, and B agrees to pay ₹500 on delivery. B’s promise to pay is the consideration for A’s promise to deliver, and A’s promise to deliver is the consideration for B’s payment. Both sides give something; both sides receive something.

Essential elements of valid consideration 🔗

It must move at the desire of the promisor 🔗

The act or abstinence must be done at the request of the person making the promise. If a person acts on their own initiative or at the direction of a third party without the promisor’s request, it does not count as valid consideration. This was firmly established in Durga Prasad v. Baldeo (1880), where the plaintiff constructed shops in a market but not at the defendant’s request. The court held that since no request came from the promisor, there was no valid consideration, and the subsequent promise was unenforceable.

It may move from the promisee or any other person 🔗

One area where Indian contract law takes a broader view than English law is on the question of who can furnish consideration. Under Section 2(d), consideration may come from the promisee or any other person – including a third party. English law insists that consideration must move only from the promisee, but Indian law accepts third-party consideration as valid. The case of Chinnaya v. Ramaya (1882) illustrates this: even though the consideration was provided by a third party, the contract was held valid under Indian law.

It may be past, present, or future 🔗

Section 2(d) recognises three temporal forms of consideration. Past consideration refers to an act already performed before the promise is made – for instance, A renders a service to B, and a month later B promises to compensate A for that service. This is valid consideration under Indian law, unlike under English law where past consideration is generally not recognised. Present (or executed) consideration happens simultaneously with the promise – such as paying cash in exchange for immediate delivery of goods. Future (or executory) consideration involves a promise to do or refrain from something at a future date, such as promising to pay next month for goods delivered today.

It must be real, not illusory 🔗

Consideration must have some actual value in the eyes of the law. A promise to do something physically impossible – like bringing a person back to life – cannot constitute valid consideration because it is illusory. Similarly, a promise to do something a person is already legally bound to do adds nothing new and does not qualify as good consideration. However, the courts do not examine whether consideration is adequate. As long as some real value exists, courts will not question whether the parties struck a fair bargain. Adequacy is for the parties to judge; legality and reality are what the law insists upon.

When does consideration become unlawful? 🔗

The real teeth of the law lie here. Section 10 of the Indian Contract Act makes it clear that all agreements are contracts only if made, among other things, for a lawful consideration. Section 23 then defines exactly when consideration becomes unlawful. According to this provision, the consideration or object of an agreement is unlawful if it:

• is forbidden by law – meaning it is prohibited by a statute or regulation currently in force;
• would defeat the provisions of any law if permitted – even if not explicitly prohibited, if the act undermines a legal provision, it is tainted;
• is fraudulent – any consideration that involves deception or misrepresentation renders the agreement void;
• involves injury to the person or property of another – any agreement that implies harm to a third party’s physical wellbeing or property is unlawful;
• is immoral or opposed to public policy – courts have the discretion to declare consideration unlawful if it conflicts with accepted standards of morality or the broader interests of society.

Section 23 creates a critical limitation on contractual freedom – it subjects private agreements to the overriding principles of public order and legal morality. Under this provision, every agreement whose object or consideration falls into any of the above categories is void. Courts will refuse to enforce it, and neither party can claim relief from such an agreement.

The role of public policy 🔗

The phrase “opposed to public policy” under Section 23 is deliberately broad and has been shaped significantly by judicial interpretation. The courts have applied it to agreements for obtaining public offices through bribery, contracts that restrain personal liberty, and agreements aimed at suppressing criminal prosecutions in exchange for money. In Newar Marble Industries Pvt. Ltd. v. Rajasthan State Electricity Board (1993), the Rajasthan High Court held that an agreement where a criminal prosecution was converted into a source of profit was directly opposed to public policy – and therefore void. The Latin maxim underlying this principle is ex turpi causa non oritur actio: no action can arise from a dishonourable cause.

Carlill v. Carbolic Smoke Ball Co. – consideration in action 🔗

No discussion of consideration is complete without examining the landmark case of Carlill v. Carbolic Smoke Ball Company (1893) 1 QB 256. Though an English case, it is consistently taught and applied in India because its principles align directly with the Indian Contract Act, particularly with Section 2(d).

The facts: The Carbolic Smoke Ball Company advertised in newspapers that it would pay £100 to any person who contracted influenza after using its product three times daily for two weeks. The company also deposited £1,000 in a bank to demonstrate good faith. Mrs. Louisa Carlill purchased and used the product as directed – and still contracted influenza. When she claimed the promised £100, the company refused to pay.

The Court of Appeal ruled in Mrs. Carlill’s favour. On the question of consideration, the court found that consideration existed in two forms: first, the purchase of the product (a direct financial benefit to the company) and second, the inconvenience Mrs. Carlill underwent in following the product’s instructions. Section 2(d) of the Indian Contract Act aligns with this reasoning – consideration includes acts of abstinence, effort, or detriment, not just monetary payments. Even a physical inconvenience willingly undergone by a promisee at the desire of the promisor can constitute valid and lawful consideration.

The case also reinforced that consideration need not be adequate in the conventional sense. The company’s reward was grossly disproportionate to the inconvenience of using the product – but that did not make the consideration invalid. It was real, it was lawful, and it was accepted. That was enough.

Agreements without consideration – are there exceptions? 🔗

The general rule under Indian law is captured in the Latin maxim nudum pactum – a naked agreement without consideration is no agreement. Section 25 of the Indian Contract Act, however, carves out three statutory exceptions where agreements without consideration may still be enforceable:

First, an agreement made on natural love and affection between parties in a near relation, provided it is in writing and registered. Second, a promise to compensate a person who has already voluntarily done something for the promisor – this effectively validates certain past consideration scenarios. Third, a written and signed promise to pay a time-barred debt, i.e., a debt that a creditor could have enforced but for the law of limitation. These exceptions are narrow and well-defined – they do not swallow the general rule but provide relief in specific situations recognised by the legislature.

Why lawfulness of consideration matters for co-operative and business transactions 🔗

In the context of co-operative organisations and commercial transactions, the lawfulness of consideration has direct practical implications. A co-operative society entering into a supply agreement, a loan transaction, or a service contract must ensure that what it offers and receives as consideration is entirely lawful. An agreement where a co-operative promises services in exchange for a payment that is routed through an unlawful mechanism – such as a bribe to a public official, or a kickback arrangement – would be void under Section 23, regardless of how the rest of the contract is structured. Unlawful consideration makes an agreement void from its very inception – a concept the law describes as void ab initio. No court will rescue such an agreement, and the parties are left without any legal remedy.

This is also why drafting contracts carefully matters. If even a single part of the consideration is tainted – say, one clause of a multi-part transaction involves an unlawful element – Section 24 of the Act provides that the entire agreement may be void. The unlawful portion does not get severed easily; it can corrupt the whole.

What do you think? If consideration does not need to be adequate – only real and lawful – does that leave room for exploitation in contracts where one party has significantly more bargaining power? And given that Indian law accepts past consideration as valid, where should courts draw the line between a voluntary act and one done in anticipation of a reward?

References

1. https://indiankanoon.org/doc/171398/
2. https://indiankanoon.org/doc/877630/
3. https://indiankanoon.org/doc/1625889/
4. https://www.mondaq.com/india/contracts-and-commercial-law/447438/section-23-of-indian-contract-act-lawful-considerations-and-objects
5. https://recordoflaw.in/carlill-v-carbolic-smoke-ball-company-1893/
6. https://www.barristery.in/2025/09/carlill-v-carbolic-smoke-ball.html
7. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5705882