This article has been written by Tarun Sharma, pursuing a 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.
Table of Contents
Under Section 10 of the Indian Contract Act, 1872, one of the essentials of a valid contract is ‘lawful consideration’. Now, someone can have a confusion about what actually constitutes a consideration?
Section 2(d) of the Act of 1872 talks about ‘consideration’ as follows:- “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”.
In simple words, the term ‘consideration’ can be understood as ‘a favour granted in return for something’. In legal terminology, consideration is termed as ‘Quid-Pro-Quo’ which means when two parties exchange something with each other in order to form a valid contract.
Let’s take an example. Rohan offers his house to Rohit for 20 Lakhs rupees and Rohit accepts his offer & agrees to pay Rohan an amount of Rs 20 Lakhs. So, in this agreement between Rohan & Rohit, the consideration for Rohit is that house and for Rohan, the consideration is Rs 20 Lakhs. But what if a stranger to a contract moves consideration on behalf of a party to a contract? Will that consideration be considered valid? Today I am going to discuss a very landmark case in which the same question was raised: Whether a consideration could be moved from/furnished by a third person on behalf of a party to a contract? The rule of consideration under the law of contract was emphasised by the Madras High Court in the landmark judgement of Chinnaya vs. Ramayya (1876). This article aims to discuss the same in detail.
Privity of consideration under the Indian Contract Act, 1872
The case of Chinnaya vs. Ramayya (1876) deals with the concept of privity of consideration, an idea about which is necessary to gather prior to detailed analysis of the case in hand. It is necessary to understand that under the contract law, privity of contract is a necessity. The concept can be understood as an elementary principle of English law that signifies the application of rights and duties of the parties to a contract, to themselves only. This is also a concept that serves as the distinction between the law of contract and the law of property. In contrast to the concept of privity of contract, stands the concept of privity of consideration, which is not a requirement for a valid contract.
The definition of consideration that has been provided, under Section 2(d) of the Indian Contract Act, 1872, makes room for consideration in a contract to flow from a third party. 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 act or abstinence or promise is called a consideration for the promise”. In simpler terms, in order for a contract to be in existence, the necessity that the consideration for the contract must arise from the parties to such a contract, does not arise. It was the Delhi High Court that had observed in the case of Paam Antibiotics Ltd. v. Sudesh Madhok (2011) that in India, while privity of contract stands mandatory for creating a legal relationship, necessity of privity of consideration is a choice as consideration may flow to a contracting party from any third party, provided the same is done at the instance of the other contracting party.
Facts of the case
There was an old lady who had some property in her name. In her final days, she decided to transfer her whole property to her daughter Venkata Ramayya Garu (respondent in the case) by means of ‘Gift Deed’ on the condition that Ramayya would pay an amount of Rs 653 every year to that old lady’s sister Venkata Chinnaya Rau (appellant in the case). The old lady called her daughter to her house and told her daughter about her last wish. The daughter (Ramayya) accepted that condition and agreed to pay her aunt (Chinnaya) the said annuity amount. Ramayya & Chinnaya entered into a formal contract. But after the death of that old lady & getting the possession of her property, her daughter (Ramayya) refused to pay her aunt Chinnaya the said annuity amount. Chinnaya thereafter approached the Court to get that contract enforced.
Issues raised in the case
Whether a stranger to consideration in a contract can sue and recover a subsequent amount?
Arguments submitted by the parties
In the Court, Ramayya (respondent) contended that she is not liable to pay any annuity amount to her aunt Chinnaya (appellant) even if there is a contract between them because she (respondent) didn’t get anything as consideration from her aunt (appellant) and according to Section 10 of the Indian Contract Act, 1872, there must be valid consideration in a contract.
The appellant, then, contended that her sister (the old lady) gifted her whole property as consideration to the respondent. After that, the respondent submitted the argument that the gifted property cannot be considered as a valid consideration because that gifted property was not the appellant’s property and the appellant was totally stranger to that gifted property. Therefore, the contract between both of them (the appellant & the respondent) was not valid at all because there was no valid consideration from the appellant.
Judgement in the case
In this case, it was decided by the Court that for a consideration to be valid one, it doesn’t necessarily need to come from a party to the contract. By citing the words ‘promisee or any other person’ as given under Section 2(d) of the Indian Contract Act, 1872, Innes J. held that a third party can move the consideration on behalf of a person who is totally strange to that consideration. Therefore, the appellant who is totally strange to that gifted property and the same was not gifted by her to the respondent, even then it would be considered as a valid consideration because that property was gifted as consideration by that old lady (third person) on behalf of her sister Chinnaya (appellant).
Kindersley J. also with the same opinion held that the gifted property & respondent’s promise to pay the annuity of Rs 653 can be treated as elements of the equitable agreement. Hence, the promise made by the respondent to pay Rs 653 as annuity to the appellant & later after the death of the old lady, the refusal to pay the same would be considered as breach of contract & this gives appellant a legal right to file a case against the respondent & sue her in order to recover the promised sum.
Therefore, the contract between Chinnaya (appellant) & Ramayya (respondent) was held valid & enforceable and the respondent was directed to pay the annuity amount to the appellant. So, the two rules, which were taken into account by the Hon’ble Court while deciding the matter, are:-
- Strangers to a contract cannot file a case or sue.
- But a stranger to consideration can file a suit if she/he is a beneficiary in a contract and can also recover the subsequent amount.
In this case, the importance of the ‘privity of consideration’ was explained under the provisions of Indian Contract Act, 1872. The meaning of valid consideration was interpreted under the ambit of Section 2(d) of the Indian Contract Act, 1872, according to which a consideration will always be valid even if it is furnished by a third party/stranger to the contract on behalf of a person who is actually a party to that contract. So, as per Indian Contract Act, 1872, a stranger to consideration can sue and recover a subsequent amount. This case also shows progressiveness & non-conventional approach of the Indian law to deal with the matters involving strangers to consideration.
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