Question: Define Consideration. State the exceptions to the rule that contract of guarantee. [MPJS 2006]

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Answer

Consideration has been variously defined. The simplest definition is by Blackstone: “Consideration is the recompense given by the party contracting to the other.” In other words, it is the price of the promise. In the words of Pollock,

“Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

Section 2(d) of the Indian Contract Act, 1872 provides the definition of Consideration 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 to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

The Calcutta High Court in the case of Fazalalddin Mandal v. Vanchanan Das, AIR 1957 Cal 92 has observed that “consideration is the price of a promise, a return or quid pro quo, something of value received by the promisee as inducement of the promise.”

Thus, anything of value promised by one party to the other when making a contract can be treated as “consideration”: for example, if X signs a contract to buy a property from Y for 500,000, X’s consideration is the 500,000, and Y’s consideration is the property. According to Section 10 and Section 25 of the Indian Contract Act, 1872, consideration is an essential element that needs to be present in order to form a valid contract.

In simple words, “No consideration is No contract”.

Hence, you can legally enforce an agreement only if there is a consideration. However, there are certain exceptions to this rule as set out in section 25. But one more exception to it is the Contract of Guarantee.

CONTRACT OF GUARANTEE

The Halsbury’s Laws of England define a contract of guarantee as-

“An accessory contract, whereby the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist or be contemplated”

Section 126 of the Indian Contract Act says-

“Contract of guarantee is a contract to perform the promise or to discharge the liability, of a third person in case of his default.

The person who gives the guarantee is called the “Surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”.

Like every other contract, a contract of guarantee should also be supported by some consideration. A guarantee without consideration is void. But there need not be no direct consideration between the surety and the creditor.

Section 127 on consideration for guarantee states, “Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee”

Illustration: A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is sufficient consideration for C’s promise.

In the case of SBI v. Kusum Vallabhdas Thakkar, (1994) 1 GLH 62, forbearance on the part of the creditor in filing a suit against one of the debtors was held to be a good consideration for the guarantee.

To conclude, no court of common law has ever said that there should be a consideration directly between the persons giving and receiving the guarantee. It is enough if the person for whom the guarantor becomes surety receives a benefit, or the person to whom the guarantee is given suffers inconvenience, as an inducement to the surety to become a guarantor for the principal debtor [observed in Marely v. Boothby, (1825) 3 Bing 107]. Thus, a contract of guarantee acts as one of the exceptions to the rule of no consideration no contract.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X