PROF.

SWASTI
GUPTA
Law of
Contracts I
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CONSIDERATION

Section 2(d)
“When at the desire of the promisor, the promisee or any other person
has done or abstain from doing or does or abstains from doing or
promises to do or abstains from doing something, such act or
abstinence or promise is called a consideration for the promise.”

“When at the desire of the promisor, the promisee or any other person
has done or abstain from doing or does or abstains from doing or
promises to do or abstains from doing something, such act or
abstinence or promise is called a consideration for the promise.”
Currie v. Misa, 1875 L.R. 10 Ex., 162 per Lush J.
A valuable consideration in the sense of the law may consist either in
some right, profit or benefit accruing to one party or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the
other.
A quid pro quo: promise for a promise (something in return)

Examples:
(i) ‘P’ agrees to sell his car to ‘Q’ for Rs.50,000 Here ‘Q’s Promise to pay Rs 50,000 is the consideration
for P’s promise and ‘P’s promise to sell the car is the consideration for ‘Q’s promise to pay Rs.50,000.

(ii) ‘A’ promises his debtor ‘B’ not to file a suit against him for one year on ‘A’ agreeing to pay him
Rs.10,000 more. Here the abstinence of ‘A’ is the consideration for ‘B’s Promise to pay.
 RULES FOR A VALID CONSIDERATION

1. Consideration must move at the desire of the promisor.

Eg: D constructed a market at the instance of the District collector. The Occupants of shops to be set up in the
market promised to pay D a commission on articles sold through their shops. Pursuant to the construction, the
occupants refused and D sued them for breach of contract.
- Held, there was no consideration because money was not spent by Plaintiff at the request of the Defendants,
but at instance of a third person viz. the Collector and, thus the contract was void. (Durga Prasad v. Baldeo,
1880)

2. Consideration to move from the promisee or or any other person who is

not a party to the contract. (Privity to contract)
3. Consideration may be past, present or future:
(a) has done or abstained from doing , or [Past consideration done at the desire of the promisor
prior to the making of the promise]
 Usually moral activities – A finds B’s pet injured on the road and takes it to the vet. B promises to
pay INR 5000 in return to A. [Read with 25.2]
 Under English law, past consideration is not valid. B can refuse, if she makes the payment it will
be considered mere show of gratitude.
 Past act at the request of one party is valid consideration (Lampleigh v Brathwaite)
Eg: I request you to find my lost phone and you do it.

(b) does or abstains from doing, or [Present consideration aka executed consideration ]
 Cash sale
(c) promises to do or abstain from doing something [Future consideration aka executory
consideration] such act or abstinence or promise is called a consideration for the promise.
 A Promises to B to deliver 100 bags of sugar at a future date. B promise to pay on delivery.
4. Does consideration need to be adequate?
Example: A agreed to sell his rolex watch for Rs. 100, A’s consent to the agreement was freely
given.
 The consideration, though inadequate will not affect the validity of the contract. However, the
inadequacy of the consideration can be considered in order to know whether the consent of
the promisor was free or not .
 A contract is not void merely because of the fact that the consideration is inadequate. The law
simply requires that contract should be supported by consideration. So long as consideration
exists and it is of some value, courts are not required to consider its adequacy. (S. 25,
Explanation II)

What if A agreed to sell his rolex for a smile?

 There has to be some economic value, consideration of no value is no consideration

Thus, Consideration must be sufficient but need not be adequate (Chappel & Co V Nestle [1960 AC]
87)
5. Consideration must not be unlawful, immoral or opposed to public policy. (Refer to
Section 23)

6. The performance of an act what one is legally bound to perform is not consideration
for the contract – for valid consideration there should be something other than the
promisor’s existing obligation.

7. Consideration cannot be illusory i.e. vague, uncertain or impossible in fulfilment of

a pre-existing obligation.
- Eg: M agrees to pay 50k to V if they are able to find a hidden treasure using magic.
8. Example: S and M jointly promise P that they will give him Rs 10,000/-
if P prepares and compiles all case-notes for Contract law. P prepares the
compilation and gives it to M. However, M goes absconding (perhaps flees
from Sonipat to Goa) before making the payment in favour of P.

P can sue S (joint Promisor), even though S has not received any direct
consideration from P.

Joint Promisors – it is sufficient if the consideration has been received
by any one of the Joint Promisors.
 Section 2(e)

“Every promise and every set of promises, forming the consideration for each other, is an agreement.”

MUTUAL CONSIDERATION (promise for a promise) -> AGREEMENT

AGREEMENT + ENFORCEABLE BY LAW -> VALID CONTRACT

S.10 What agreements are contracts: All agreements are contracts if they are made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void.

No consideration = Void Agreement = No contract

HOWEVER certain exceptions exist - Section 25
 Written and registered agreements arising out of love and affection:- [25 (1)]
1. Expressed in writing
2. Registration of document under the Registration Act
3. Natural love and affection
4. Between parties standing in a near relation to each other (The term ‘near relation’
not defined in the Act, however, generally includes parties related by blood or
marriage)
Example:- An elder brother, on account of natural love and affection, promised to pay
the debts of his younger brother. Agreement was put to writing and registered. Held,
agreement was valid.
 An arrangement between a husband and wife who quarrel often?
 Rajlukhy Dabee Vs Bhootnath Mukharjee (1900)
 Promise to compensate [25(2)]
1. Promise to compensate wholly or in part
2. Who has already voluntarily done something for the promisor or

Example:- A finds B’s wallet and gives to her. B promises to give A Rs.5000. This is a valid contract.

Past consideration v. Promise to compensate for a past voluntary act

 A finds B’s pet injured on the road and takes it to the vet. Subsequently, B promises to pay INR 5000 in return to A.
 B has lost her pet and puts out a flyer. A finds B’s pet injured on the road and takes it to the vet. Subsequently, B
promises to pay INR 5000 in return to A.
 B has lost her pet Coco and puts out a flyer saying ‘anyone who finds Coco will be rewarded with INR 5000. A
finds Coco and returns it to B.

3. or something which the promisor was legally compellable to do

A has a 5 year old child. One weekend A has to pull night shifts at work. B, A’s neighbour offers to take care of A’s
child that weekend. Later A promises to pay B for the same.
3. Consideration may be past, present or future:
(a) has done or abstained from doing , or [Past consideration done at the desire of
the promisor prior to the making of the promise]
 Usually moral activities – A finds B’s pet injured on the road and takes it to the
vet. B promises to pay INR 5000 in return to A. [Read with 25.2]
 Under English law, past consideration is not valid. B can refuse, if she makes the
payment it will be considered mere show of gratitude.
 Past act at the request of one party is valid consideration (Lampleigh v
Brathwaite)
Eg: I request you to find my lost phone and you do it. Later I promise to pay you a
reward for this.
 Promise to pay a time barred debt [25(3)] wherein it is considered a valid contract when a person to be
charged or his agent, makes a promise to the creditor, in writing, to pay the debt partly or wholly, of which
the creditor might have enforced payment, but the debt has become barred due to the law for the limitation
of suits.

Time barred Debt: Debt which is barred by limitation law.

S. 25 – Not valid considerations per se, but good considerations hence considered valid. This section is an exception to valid
considerations per S. 2(d)

 EXPLANATION I: Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.
- Gift deeds are valid. Gifts are always without consideration

 EXPLANATION II: Adequacy of Consideration

An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but
the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the
promisor was freely given.
EXERCISE:
 The Innovation Education Trust manages a law school named Bindal Global University. Mr.
Kumar, a parent of the student in the law school suggested to the trust that the students can
benefit from the construction of a legal incubator centre where the students will get support
for their innovate ideas for start-ups. He offered to bear a part of the cost for this construction.
The trust liked this suggestion and started the construction of the centre in March 2023.
 In the financial year 2022-23 Mr. Kumar suffered a loss in his business and his Accounts team
decided to cut down expenses. Consequently, he refused to pay for the construction of the
centre.
 IET sued Mr. Kumar. Mr. Kumar alleged that this was merely a unilateral contract and lacked
mutual consideration.

 Is Mr. Kumar liable to pay?

 PROMISSORY ESTOPPEL
 It is an equitable doctrine that estops the promisor to retract from his promise in case while acting on the
promise of the promisor, the promisee alters his/ her position.

 It is based upon principles of justice, fair play, and good conscience. 

 Estoppel: Refers to conduct of a party which serves as a bar to go back on one’s word. Thus, promises based on
which parties undertake certain actions thereby holding the promisor to his promise are called promissory
estoppel.

 Caselaws:
 Applied in India : Kedar Nath v. Gaurie Mohammad (1866)
Defendant promised to pay an amount towards the construction of town hall and later refused payment after the
construction of the building was started.
Held: Liable to pay owing to doctrine of promissory estoppel.
Hughes v Metropolitan Railway - A landlord gave a tenant 6 months notice to
carry out repairs failure to do so would result in forfeiture of the lease. The
landlord and tenant then entered into negotiations for the tenant to purchase the
freehold of the property. It was thought by both parties that a conveyance of the
property would take place. The tenant had not carried out the repairs as they
believed they would be purchasing the freehold and the repairs required by the
landlord were not essential to his use of the property. At the last minute
negotiations broke down and the Landlord gave the tenant notice to quit for
failure to carry out the repairs.
INTENTION TO CREATE LEGAL RELATIONS

 Essential Elements for a Valid Contract: Offer, Acceptance, Communication and

Intention to be legally bound.

 Not all agreements are binding contracts: even if the other essential elements of a
contract are present the transaction may fail because the parties do not have the
necessary intention to create legal relationships.

 Whether there is an intention to create legal relations or not is a matter for the
court to ascertain objectively by reference to what the parties said, did or wrote
(evidence).
 BALFOUR V. BALFOUR
 The defendant, Mr. Balfour, who worked in Ceylon, came to England with his wife, Mrs Balfour on holiday. He later
returned to Ceylon alone for work, the wife remaining in England for health reasons. The defendant promised to pay
the plaintiff £30 per month as maintenance. At first the maintenance was paid, however eventually their relationship
became strained, and Mr. Balfour failed to keep up the payments when the marriage broke up. The wife sued.

 It was held that the wife could not succeed because:

(1) she had provided no consideration for the promise to pay £30; and

(2) agreements between husbands and wives are not contracts because the parties do not intend them to be legally
binding. These are mere domestic or social agreements. There was no intention to create a legal relationship when the
agreement was made between the couple.

Lord Atkins: “the ordinary example is where two people agree to walk together, or where there is an offer and
acceptance of hospitality. Nobody would suggest in ordinary circumstances that those agreements result in what we
know as a contract.”
 29. Agreements void for uncertainty.—Agreements, the meaning of which is not certain, or
capable of being made certain, are void.

(a) A agrees to sell to B “a hundred tons of oil”. There is nothing whatever to show what kind of
oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified description, known as an article
of commerce.
(c) A agrees to sell to B “my white horse for rupees five hundred or rupees one thousand”.
Exercise I
 A landlord gave his tenant six months notice to undertake repairs in the property with the condition
that in the event of failure to repair, the lease would be forfeited.
 During these months, the landlord also opened negotiations with the tenant for the sale of the lease
of the property. The negotiations were going in the direction of leading the tenant to believe that
the lease would be secured. During this period, the tenant did not carry out any repairs believing
them to be of no use.
 Shortly after, the negotiations broke down, At the end of the 6 months notice period the landlord
sued the tenant for breach of contract and claimed forfeit of the lease owing to failure of tenant to
repair.
Hughes v Metropolitan Railways (1877)

 If a promise is implied in negotiations and one party relies on that promise then it is inequitable
to allow the other party to act as though the promise does not exist.
 The landlord had by his conduct led the tenant to suppose that the landlord would not enforce
forfeiture at the end of the notice period (a promise).
 The defendants relied on this promise, and therefore it would be unfair to make them liable in
this case. The implied promise is enough to allow promissory estoppel to apply.
 This six month notice period would begin to run again from the date of the breakdown of
negotiations.
 Promissory Estoppel arises out of a promise for a future conduct or intention

 This case laid down the foundation of the doctrine of promissory estoppel under English Law.

 Applied in Central London Property Trust v High Trees House (1957)

A landlord agreed to accept half the ground rent from the tenants owing to conditions of war. Post
the period of war, the landlord demanded full rent. Tenants sued for breach of contract.
> Estoppel would cease when the conditions to which representation applied came to an end.
> Doctrine to be used as a shield for defence and not a sword to bring a cause of action as it does
not dispense with the requirement of consideration in the formation of contracts.
Exercise II
 Government of UP announced to give tax exemption from sales tax for three years to all new
industrial units of the state.
 Mr. M, wrote to the Director of Industries regarding the confirmation of the sales tax
exemption and expressed his desire to set up a plant for the manufacturing of Vanaspati. This
was confirmed by the Director of Industries, and also a similar response was received from the
Chief Secretary, Govt. of Uttar Pradesh.
 1968: Receiving the affirmations from both, Mr. M borrowed money from financial
institutions, brought plant and machinery and set up a new plant in UP.
 January 1970: State govt. went back upon this assurance and instead now promised to give
partial concession to which plaintiff consented and started production.
 August 1970: State govt. went back even on this promise denying any concession to be given.
 Plaintiff sued the government on account of promissory estoppel.
M.P. Sugar Mills v State of UP (1979)
 The Government gave assurance to the Petitioner therein that it will be entitled to exemption from sales tax for
three years from date of commencement of production and based on the assurance the Petitioner set-up a
vanaspati plant after taking finance from various financial institutions.

 The Supreme Court enforced the assurance given by the Government by invoking the doctrine of promissory
estoppel against the Government.

 Though in English law, promissory Estoppel ‘can only be a shield and not a sword’ (High Trees case) i.e.
plaintiff can’t have a cause of action solely on grounds of Promissory Estoppel in Indian context such a
limitation of application of doctrine doesn’t apply.
 It relies on the rule of equity and the rule has to be flexible enough to accommodate independent cause of action.

 Law must be constantly developing and changing according to changing social concepts and values, if equity
demands promises to be enforced to promote justice, honesty and good faith,
Promissory Estoppel against the
Government
 Where the government makes a promise, even in sovereign, administrative or governmental
capacity, knowing or intending that it would be acted on by the promisee and, in fact,
promisee, acting in reliance on it, alters his position, the Government will be abstained to go
back on its promise if it will be inequitable to do so.

 Circumstances under which the doctrine of estoppel cannot be applied against the
Government.

1. Doctrine of promissory estoppel cannot be applied to aid to compel Government to carry

out a representation or promise which is contrary to law.
2. Public interest prevails over promissory estoppel.
Exercise III

 A ship was sailing on the sea between London and the Baltics with 10 sailors and
one Captain.
 While undertaking the return voyage two of the crew abandoned the ship. The
seamen were due to receive wages of £5 per month during the voyage.
 The captain offered the remaining crew an equally divided share of the deserted
seamen’s salary if they could return sail the ship to London with reduced crew.
 The ship was returned to London by the remaining seamen however, the
additional payment was not made.
Stilk v Myrick (1809)
 Held:
 Captain’s promise not binding.
 The crew had given no new consideration as they were anyway bound to meet the forseeable
emergencies of the voyage and work the ship home.

 Pre-existing duty Rule

 Performance of an existing contractual duty owed to the promisor is not sufficient consideration.
 Critique?
 The sailors did not demand additional payment, it was offered to the crew in recognition that they
would be required to work harder to achieve the same result. This could also be construed as a greater
benefit to the captain that the ship was returned to London as opposed to being docked overseas.
 Williams V Roffey Brothers (1909)
Roffey Bros, were builders who were contracted to refurbish 27 flats belonging to a housing corporation. The contract had a
penalty clause for late completion. RB subcontracted some work to Williams, a carpenter. When Williams fell behind with his
work RB offered him bonus payment to finish on time. Williams finished the refurbishing work on time however RB declined
payment of bonus. He sued them for breach of contract.

Held:
 RB were liable. If:
(1) A enters into a contract with B for the supply of goods or services in return for payment by B; and
(2) Prior to completion B has reason to doubt whether A will complete; and
(3) B then promise A additional payment in return for B promising to perform on time; and
(4) As a result of this promise B obtains a benefit or obviates a disbenefit [eg, liability to third party]; and
(5) B’s promise is not given as a result of A’s economic duress or fraud
Then (6) The benefit to B (or obviation of dis-benefit) is capable of being good consideration for B’s promise

 Introduced a qualification to Stilk V Myrick

 If performance of the existing contractual duty confers a practical benefit on the other party, it can constitute valid
consideration.
Exercise IV
 The defendant Gauri Dutt’s Nephew had absconded and was nowhere to be found. After the
defendant became aware of the same, Dutt had sent all the servants in search of the missing
nephew. The plaintiff Lalman Shukla was one of the servants who had gone out in search of the
nephew.
 When Lalman Shukla had left the house to leave for Haridwar from Kanpur he was handed
some money for his railway fare and other expenses. As soon as Lalman Shukla had left the
house, the defendant announced a reward of Rs. 501 for whosoever found Dutt’s nephew.
Shukla had no idea that such an announcement was made.
 The plaintiff found the missing nephew and brought him back to his home in Kanpur.
 Six months after the said incident occurred, Dutt sacked the plaintiff. 
 After being removed from the job, the plaintiff claimed the reward money from the defendant
and the latter denied to pay the said remuneration.
 Lalman Shukla vs Gauri Dutt (1913)
 In order to enter into a contract, three critical aspects should be considered,
 The offer or proposal
 Acceptance of the offer
 Communication can only be complete when it comes to the knowledge of the person to whom it is
made. 

- As the plaintiff had no knowledge and hadn’t given his approval or accepted the proposal there did not
exist a valid contract between the two. 
- At the time when the plaintiff was searching for the boy, his obligations and duties were as a servant.
Therefore the plaintiff Lalman Shukla was not entitled to get the award.
Third-Party Consideration & Privity
 When two people are parties to a contract, they are said to be in privity of contract.
 Courts have struggled to decide what rights or duties a third party might have under the contract.
 Two separate questions:
 1: Can the consideration for a promise flow from a third party, rather than from the promisee? (Privity
of Consideration)
 2: Can a third party sue to enforce the promises made in a contract? (Privity of Contract)
 Three English cases establish the background for this issue.
 1: Dutton v. Poole (1677).
 2: Tweddle v. Atkinson (1861).
 3. Dunlop v Selfridges (1961).
Dutton v Poole (1677)

Promise not to cut

timber on estate

Sir Edward Poole Sir Edward’s Eldest Son

Promise to pay Grisel
£1,000 once she is
mrried

Sir Edward Poole

passed away Can Grisel sue to
before Grisel was enforce the
married. At the contract between
Sir Edward’s Daughter: Sir Edward and
time of her
Grisel Dutton his son?
marriage, the son
refused to pay.
Third-Party Consideration

 Dutton v Poole (1677)

 The court held that Grisel could sue to enforce her father’s promise, even though
 A) she was not a party to the contract, and
 B) she had not provided any consideration.
 C) owing to the family relationship between the father and the daughter, the daughter shall become a
party to the agreement entered into by the father with his son.
Tweddle v Atkinson (1861)

We’ll pay Tweddle after

the wedding.
The Atkinsons, the
Tweddle’s parents parents of Tweddle’s
Wife
We’ll pay Tweddle after
the wedding.

Can Tweddle sue

to enforce the
contract between
Tweddle his parents and the
Atkinsons?
Third-Party Consideration

 Tweddle v Atkinson (1861)

 Main Argument: The intention of the agreement between the fathers was for the couple to
derive a benefit from the payment of the money. (Relying on Dutton v. Poole
Held:
 The court overturns Dutton v. Poole.
 Tweddle has no right to sue because:
 A) He was not a party to the agreement, and
 B) He did not furnish any consideration for the Atkinsons’ promise.

*The case laid the foundation of the rule – Privity of Contract i.e., a stranger to contract cannot
enforce the contract.
* Under English Law consideration must move from the promisor
Doctrine of Privity of Contract

 A person who is not privy to a contract, that is, a third party, can neither sue not be
sued on that contract.

 “A contract is a contract between the parties only and no third person (stranger)
can sue upon it even if it is made for his benefit” (Tweddle v. Atkinson)
Dunlop Pneumatic Tyre Co. v. Selfridge
Co. Ltd (1951)
 Dunlop, wholesale distributors of tyres, sold tyres to Dew and Co. at a discounted price on
the condition that they would not resell the tyres at less than the listed price and that any
reseller who wanted to buy them from Dew had to agree not to sell at the lower price either.
Dew sold some tyres to Selfridge Co. Ltd. who retailed them below the list price. Dunlop
sued Selfridge for injunction and damages.

 Is it lawful for Dunlop to sue Selfridge even though no contractual relationship exists

between them?

Held: There was no contract between Dunlop and Selfridge and therefore Dunlop cannot sue.
Relied on Tweddle v. Atkinson (1861)
Few significant considerations underpinning this decision:
 Privity of contract - it states that only a party to a contract can sue in breach of the contract.
 Privity of consideration - it would require Dunlop to give consideration to Selfridge for the
contract to be completed.
 Exception of Agency - a principal ,not named in a contract, can be sued if he acts through
an agent who enters into a contract with the third party on behalf of the principal (who is
privy to the contract).
 Dew was not acting as an agent for Dunlop, therefore this does not apply in this case. If
Dew were Dunlop's agent, then the effect of the two deals would really be one deal. In an
agency agreement, the Agent disappears and the contract is between the principal (Dunlop)
and the third party (Selfridges)
Third-Party Consideration

 The Law in England: A Summary

Legal Issue Position in England

• Can the consideration in a

contract flow from a third
party?
No
• Can a third party sue to
enforce the promises made
in a contract?
No
CRITICISM?
 A contract between A and B is intended to confer a benefit on a third party. In such a situation
C cannot enforce a contract because:
 They are not privy to the contract; C has not provided consideration

“where a contract is made for the benefit of a third person who has a legitimate interest to enforce
it, can be enforced by the third person in the name of the contracting party or jointly with him …
because the 3rd person has an interest which the law should protect” [Lord Denning in Beswick
v. Beswick, 1949]
Position in India
 Chinnaya v Ramaya (Madras High Court 1881)

Transferred a piece of
her property

Lakshmi Venkana Rau Ramaya Garu (R)

To pay annuity to L’s

sister C

Agreement: “I hereby agree

to pay the money as
directed by my mother”
Chinnaya (C )

• After the death of the R’s mother, R refused to make the payment to C. C sued R.
• R contended that she was not under an obligation to pay money to C since no consideration was moved from
C to her.

• On the other hand, as regards the transfer of property was concerned, C contended that the consideration for
getting the property was a promise to pay the amount annually to the plaintiff.

Held:
• The court holds that C is entitled to sue to enforce the contract.

• § 2(d): Consideration can flow from “the promisee, or any other person”.

• The consideration furnished by C’s sister (the defendant’s mother) was enough to enforce the contract
between C and R. It constituted sufficient consideration for the plaintiff to sue the defendant on her
promise.

• The defendant was obligated to pay the amount promised in the contract as the consideration for the same
was given to her by the plaintiff’s sister, i.e., the defendant’s mother.
Third-Party Consideration
 The Law in England and India: A Summary

Legal Issue England India

• Can the consideration in a

contract flow from a third
party?
No (
Yes
Chinnaya v
Ramaya, §2(d))

• Can a third party sue to

enforce the promises made
in a contract?
No ?
MC Chacko v State Bank of Travancore (Supreme
Court of India 1969)
 SC Judgment
 The defendant M.C. Chacko was the director of the Highland Bank. He had an overdraft account with
the State Bank of Travancore. K.C. Chacko father of M.C. Chacko had executed a letter of guarantee
making himself liable as a surety for the amounts due by the Highland bank to the State bank. Under a
deed of partition K.C. Chacko had gifted properties to his sons, daughter and wife, and it was provided
that if any liability arises in the enactment of the letter of guarantee, it must be paid by M.C. Chacko
from Highland bank and if not, then the property gifted to him alone will be answerable.
“I have no debts whatsoever. If in pursuance of the letter given by me to the Kottayam Bank at the request
of my eldest son, Chacko, for the purpose of the High Land Bank Ltd., Kottayam, of which he is the
Managing Director, any amount is due and payable to the Kottayam Bank, that amount is to be paid from
the High Land Bank by my son, Chacko. If the same is not so done and any amount becomes payable (by
me) as per my letter, for that my eldest son, Chacko and the properties in Schedule A alone will be
answerable for that amount.”
Third-Party Consideration
 MC Chacko v State Bank of Travancore (Supreme Court of India 1969)

Deed of gift of property

K.C. Chacko M.C. Chacko

Any liability to SBT
must be paid by MC

Can State Bank of

Travancore sue to
enforce the
State Bank of contract?
Travancore
Third-Party Consideration

 MC Chacko v State Bank of Travancore (Supreme Court of India 1969)

 The Supreme Court holds: “It is settled law that a person not a party to a contract
cannot … enforce the terms of the contract.”

 Does §2(d) of the ICA change this result? The Court says no.
 The definition of consideration allows for consideration to flow from a third party, but it does
not allow a contract to be enforced by a third party…
 …there nothing in Section 2 to encourage the idea that contracts can be enforced by a person
who is not a party to the contract, but this notion is rightly excluded by the definition of
'promisor' and 'promisee'.
Third-Party Consideration

 The Law in England and India: A Summary

Legal Issue Answer in England Answer in India

• Can the consideration in a

contract flow from a third
party?
No Yes
Chinnaya v
Ramaya, §2(d)

• Can a third party sue to

enforce the promises made
in a contract?
No No
Chacko
MC
 “Under the Act, the consideration for an agreement may proceed from a third
party, but it does not follow that the third party can sue on the agreement … Even
though under the Contract Act, the definition of consideration is wider than in
English law … only a party to the contract is entitled to enforce the same.”
(Pollock and Mulla)
EXCEPTION TO PRIVITY OF
CONTRACT
1. Trust
 Author appoints a trustee for the benefit of a beneficiary
 Beneficiary although not a party to the contract has equitable rights if not
contractual rights
Eg: A transferred certain properties to B to be held by him in trust for the benefit of C. In this
case, C although not a party to the trust, can sue A or B for the benefits available to him under
the trust.

Read: Nawab Khwaja Muhammad Khan v. Nawab Husaini Begam

EXCEPTION TO PRIVITY OF
CONTRACT
2. On grounds of love and affection

a) England: Dutton v Poole (Good law?)

b) India: Family Arrangements (Read: Nawab Khwaja Muhammad Khan v. Nawab
Husaini Begam)
 Provision of marriage expenses of female members of a Joint Hindu Family, entitles the
female member to sue for such expenses on a partition between male members.
 Two brothers, on partition of family joint properties, agreed to invest in equal shares for
their mother’s maintenance. Held, the mother was entitled to require her sons to make the
investment.
EXCEPTION TO PRIVITY OF
CONTRACT
3. Assignment of Contracts (Under Transfer of Property Act not ICA)

- Assignor – Assignee – Assignment Deed (to assign means to transfer)

- Assignee (the person to whom benefits of contract are assigned) can enforce upon the contract.
 Can be in favour of anyone.
Eg: X purchases an insurance policy. Later assigns it to the bank as a guarantee for availing a loan. Bank
can claim the money from the Insurers.
 EXCEPTION TO PRIVITY OF
CONTRACT

4. Agency (Contracts Law II)

 Governed by Principal-Agent Relationship
 Auctioner, Broker, Property Agent
 Dunlop v. Selfridge

Section 182: ‘Agent’ and ‘principal’ defined.—An ‘agent’ is a person employed to do any act for
another, or to represent another in dealings with third person. The person for whom such act is done, or
who is so represented, is called the ‘principal’.
EXCEPTION TO PRIVITY OF
CONTRACT
5. Covenants running with land i.e. conditions attached to the use of land
 Covenants also transferred to future purchasers.
 X sells a house to Y with the condition that the garden should always be maintained and
should never be used for commercial purposes. 10 years later, Y sells the house to Z who
demolished the house and the garden to construct a commercial building. X can sue Z.

6. Acknowledgement by the Promisor of obligation to Third Party (Chinnaya v Rammaya)