This article has been written by Vibhuti Thakur, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution, and has been edited by Oishika Banerji (Team Lawsikho). 

It has been published by Rachit Garg.

Introduction

The case of Chinnaya vs. Ramayya (1882) that appeared before the Madras High Court deals with the concept of privity of consideration. Considered to be an English doctrine, privity of consideration says that consideration cannot be paid by a third party, who is not a party to the contract. Thus a stranger to the contract is completely barred from paying the consideration. However, in this landmark case, it was finally laid down that in India this rule is inapplicable and consideration may  move from a stranger to the contract. For example: ‘A’ goes to a car showroom to buy a car. But the consideration is to be moved by A’s father. Father being a stranger to the contract should not have the right to move consideration on behalf of A as per the rule of privity of consideration. But in India there is no bar to such a transaction. Father may move the consideration on behalf of the son. This article discusses the concept of privity of consideration in light to the case of Chinnaya vs. Ramayya (1882).

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Relevant provisions surrounding privity of consideration

In the Indian Contract Act, 1872, consideration is clearly defined under the interpretation clause (Section 2(d)). This section outrightly declares that consideration can be moved by “the promisee or any other person.” The express wordings of this section makes it clear that the intention of the legislature is to not follow the English doctrine of privity of consideration and that any stranger to the contract can pay the consideration in a contract.

One of the relevant examples of this transaction is, trust, under the Indian Trust Act, 1882, where one person creates a legal body called, trust, for the benefit of another person called the beneficiary. But the title of the property is with a third party called the trustee who works for the benefit of beneficiaries. Here the consideration is moved by the trust settlor to the trustee. But the benefit is received by a third party.

Development of privity of consideration before Chinnaya vs. Ramayya (1882)

Before delving into the case in hand, it is necessary to get an overview about the concept of privity of consideration by means of several landmark decisions that had appeared in this regard before the 1882 case had seen the daylight. 

Dutton vs. Poole (1688)

The facts of this case were that for the marriage of the daughter, the father was about to sell timber from a part of his estate.  But his son (brother of the soon to be bride) promised to bear the marriage expenses and suggested the father not to sell the timber. The father on this promise did not sell the timber and relied on the son to fulfil his promise. Later on the occasion of the marriage the son refused to pay the amount to the daughter. She filed a suit claiming the same.

The son contended that the agreement was between the father and the son, the daughter was neither a party to the suit nor she was paying any consideration to the son. Hence her suit cannot be maintained.

It was held that the daughter could maintain an action against the son on his promise to the father, though she was neither a party to the contract nor was she paying any consideration to the son. The consideration and promise to father could be extended to her. This judgement did not acknowledge the rule of privity of consideration. However, in 1861 another judgement came which gave the principle of privity of consideration. 

Tweedle vs. Atkinson (1861)

The facts of this case were that the fathers of the husband and wife contracted that both will pay a certain amount of money to the husband. And after the death of the parties the executors will pay the sum of money. In the terms of contract they added that the husband will have the power to sue for the amount if unpaid. During the lifetime of both the fathers no issue arose as to non payment of the decided sum. After the death of both the fathers the executors refused to pay the sum on grounds of privity of consideration. The husband sued  the executors for payment.

The court said that the husband’s contentions are not maintainable and gave the rule of privity of consideration which means that consideration cannot be moved by a third person who is a stranger to the contract.  It was held that there must be privity of contract as well as privity of consideration.

  • The decision in Dutton vs. Poole (1688) was overruled in this landmark judgement. It was vehemently said that there is privity of consideration as well as privity of contract.
  • This is a rule under English law only, but in India this rule is not followed. Rather Indian law allows the consideration to be moved from a stranger to contract. Therefore, the decision in Dutton vs. Poole (1688) is still followed in India.

Chinnaya vs. Ramayya (1882)

Facts of the case 

A woman gifted her property to her daughter (defendant) through a registered gift deed. The consideration being payment to Rs.653 /- every year to the woman’s sister (plaintiff). The property was gifted to the defendant and an agreement for the fulfilment of the payment of the annual amount was made and executed. But later the defendant refused to pay the agreed amount resulting in the plaintiff suing the defendant.

Contention raised by the parties

There were three parties in this whole transaction.

Plaintiff

The plaintiff contended that the defendant is not paying the agreed annual amount for which there was an agreement.

Defendant

The defendant took the defence that the plaintiff is not paying any consideration to the defendant so the agreement is void and unenforceable. The property gifted by a third party is not a consideration under the rule of privity of consideration.

Issue raised 

Whether the rule of privity of consideration applies in this case or not, i.e., whether the defendant is liable to pay an annual amount to the plaintiff against the gift of property by a third party?

Judgement delivered

The Hon’ble Court observed in this case that since the original contract was between the old lady and her daughter and the plaintiff is a stranger to this contract. But in this case the consideration was indirectly paid by the mother to the daughter through the gift of the property, the daughter is liable to pay the agreed annual sum of money to the sister of her mother. The Court followed the old English case Dutton vs. Poole (1688) and held that since in India there is no privity of consideration, strangers to the consideration can sue for the enforcement of contracts. The Court also interpreted the Section 2(d) of the Indian Contract Act,1872 which expressly declares that the consideration can be paid by the promisee or any other person. Hence, the defendant was directed to pay the annual sum to the plaintiff. The case was decided in favour of the plaintiff.

Criticism received by the judgement

Jurists like Pollock and Mulla gave two important criticism of this judgements:

  • They were of the view that this judgement sidelines the Sections 2(a), 2(b), 2(c) of the Indian Contract Act, 1872 and only gives importance to the Section 2(d) of the Act.
  • This rule gives a stranger to contract a right to sue. It can cause unnecessary implications in proper cases.
  • The contract cannot be enforced by the third party until the acceptance is made to the proposal.

Conclusion

This case laid down that India does not follow the rule of privity of consideration. Thus, consideration can only be paid by a person who is a party to the contract. Although the plaintiff had not paid any consideration to the defendant but since the consideration was indirectly moved by the defendant’s mother it is considered valid and the defendant is bound to perform her part of the contract. This case lays down that “consideration may be moved by a stranger to the contract”.  However, changes have been suggested in this rule by the Law Commission Report due to unnecessary interference of third parties who paid consideration. It is suggested that only such cases must be made maintainable where the third party’s interest is involved in the case.

References

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