By Yukta Bissa
In Madras High Court
| CITATION | ILR (1876-82) 4 Mad 137. |
| DATE OF CASE | 21st October 1987 |
| APPELLANT | Venkata Chinnaya |
| RESPONDENT | Venkata Ramayya Garu |
| BENCH/JUDGE | Innes J. and Kindersely J. |
| STATUES INVOLVED | Section 2(d) and Section 10 of the Indian Contracts Act, 1872 |
| IMPORTANT ARTICLES AND SECTIONS INVOLVED | Indian Contracts Act, 1872 |
ABSTRACT
‘Lawful consideration’ is one of the requirements for a valid contract under Section 10 of the Indian Contract Act, 1872, but what constitutes a valid consideration and can such a consideration come from a third party who is not a party to a contract or would the concept of privity of consideration be applied similarly to English Law?[1]
According to Section 2(d) of the Indian Contracts Act of 1872 the term ‘consideration’ is described 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”.
Simply put, it means that “consideration” can be regarded as “a favour given in exchange for something.” ‘Quid-Pro-Quo’ is the legal word for consideration, which refers to the exchange of something between two parties in order to create a legally binding contract.
According to the common law principle known as privity of contract, a contract cannot confer rights to or compel the compliance of a third party who is not a party to it. It implies that the obligations of a contract are limited to those who sign it. It shields third parties from unexpected legal obligations. It is impossible to overstate the significance of consideration as a part of a contract.
INTRODUCTION
The present discusses the Privity of Consideration, which actually means “stranger to consideration”, stating that a stranger to consideration cannot sue and the consideration must move from the promisee only, and not any third party. Unlike English Law such notion was not applicable here in the Indian scenario.
It is essential that one understands that privity of contract is mandated by contract law. The idea can be viewed as an essential component of English law that denotes the applicability of the rights and obligations of a contract’s parties only to themselves. The divide between the law of contracts and the law of property is likewise based on this idea. The concept of privity of consideration stands in contrast to the concept of privity of contract because the Privity of Consideration is not an essential part to a valid contract.
In this case an elderly lady gift her daughter her entire property on a condition that she would pay some annuity to her aunt every month. After the old lady’s death, her daughter refuses to do so and hence a law suit is filed by her aunt. Here the ‘promise’ to pay the annuity to aunt is considered as a ‘lawful consideration’ and the daughter is made liable to pay the annuity and court expenses of her aunt.
FACTS
In this case, an old lady owned some estate which she wanted to transfer it her daughter (the respondent, Venkata Ramayya Garu), before her death. The transfer was to be made by means of a ‘Gift Deed’ on the condition that Ramayya would pay an amount of Rs 653/- every year to the sister (the appellant, Venkata Chinnaya Rau) of the old lady.[2]
The elderly lady called upon her daughter to her home and informed her of her dying request. The daughter (Ramayya) agreed to the condition and promised to pay the annuity amount to her aunt (Chinnaya). Ramayya and Chinnaya ratified the formal contract.
However, after the death of that old lady and the acquisition of her estates, her daughter (Ramayya) refused to pay the annuity sum to her aunt Chinnaya. Chinnaya subsequently went to court in order to have the contract enforced.
ISSUES BEFORE THE COURT
- Can the plaintiff sue the defendant for the amount promised in a contract if the consideration for the promise is provided by someone other than the plaintiff?
- Whether the notion of “Privity of Consideration” applicable in the Indian context?
ARGUMENTS
- Arguments by the Appellant Side :
The learned counsel from the appellants’ side contended that when the respondent’s mother transferred her whole property to her daughter (respondent), the consideration for her mother was the respondent’s agreement to pay the appellant (mother’s sister) a specified sum annually.[3]
The learned counsel also claimed that under the Indian Contract Law, the appellant has the right to file a lawsuit against the respondent and recover the sum of money signed and promised by the respondent in the contract.
- Arguments by the respondents’ side :
The learned counsel from the respondents’ side contented that the property or the estate which is being referred here was received by the plaintiff from her mother as a gift, and thus the respondent here has no obligation to pay any amount or annuity as a consideration to her aunt (the appellant).
The learned counsel also contented before the Hon’ble court that the contract which is being referred here was actually signed between the respondent and her mother, so the appellant has no right to interfere in such a contract after the death of the old lady i.e., the mother of the respondent.
Additionally, the counsel contented even if there was a contract between the appellant and the respondent, the respondent didn’t get anything as a consideration from her aunt (appellant), which is a necessity for valid contract under section 10 of the Indian Contracts Act. And the gifted property cannot be considered as a valid consideration because the appellant was a total stranger to the property.
RELATED PROVISIONS
Section 2(d) of the Indian Contracts Act, 1872
“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;”[4]
Section 10 of the Indian Contracts Act, 1872
“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.
Nothing herein contained shall affect any law in force in [India] and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.”[5]
JUDGEMENT
The Court concluded in this instance that a consideration does not have to come from a party to the contract in order to be valid. Innes J. decided that a third party can shift the consideration on behalf of someone who is completely unfamiliar with that consideration by referencing the words ‘promisee or any other person’ as provided in Section 2(d) of the Indian Contract Act, 1872. Thereby, even if the appellant was entirely not acquainted with the gifted property and it was not gifted by her to the respondent, it would be considered a valid consideration since that property was gifted as consideration by that old lady (the third person) on behalf of her sister Chinnaya (appellant). [6]
The gifted property and the respondent’s pledge to pay an annuity of Rs 653, according to Kindersley J., might be regarded as components of the equitable agreement. Therefore, the respondent’s promise to pay the appellant Rs 653 in annuity and later refusal to do so after the old lady passed away would be regarded as a breach of contract, giving the appellant the legal right to file a lawsuit against the respondent and sue her in order to receive the promised sum.
As a result, the respondent was ordered to pay the annuity sum to the appellant and the contract between Chinnaya (the appellant) and Ramayya (the respondent) was deemed legitimate and enforceable.
Thus, the Hon’ble Judges held that that the strangers to a contract cannot sue a person who is a party to the contract, however a stranger to consideration can file a lawsuit if he/she is a beneficiary in contract and can also recover the promised amount. And it was established that the notion of privity to consideration is not applicable in the Indian Context through the Indian Contracts Act, 1872, and a stranger to contract can also provide for a valid consideration for the contract.
CONCLUSION
The case of Chinnaya vs. Ramayya, is a landmark case in the history of Indian Contracts. This case has clarified the applicability and concept of the “Privity to consideration” mainly in the Indian Context. In the present case, if we include the deed of gift signed by the old woman to the respondent and the promise made by the respondent to the appellant, it was a transaction proposed by Judge Kindersley in which the old woman had already made the consideration on behalf of the appellant as a deed of gift. Therefore, the respondent had to pay the appellant the annual amount in accordance with the terms of contract. Since the defendant did not do this, the plaintiff could demand the fulfillment of commitment even if she had not paid the consideration herself.
The erudite judges here, Kindersely J. and Innes J. were on the same page when it came to payment of annuity to the appellant by the respondent and upheld the legal right of the appellant to file a law suit for the same.
The decision by the judges was a pragmatic one as it clearly held that a stranger to contract may not be able to sue, however a beneficiary of the contract can file the case against the party to a contract if his/her benefits are hindered or the promised amount or any other asset is not timely provided to him/her according to the contractual obligations.
[1] iPleaders Blog, https://blog.ipleaders.in/chinnaya-vs-ramayya-case-analysis/, (Last accessed on 28th June 2023)
[2] Rumela Biswas, Jus Corpus Law Journal, juscorpus.com https://www.juscorpus.com/venkata-chinnaya-rau-v-venkata-ramaya-garu/ (last accessed on 28th June 2023)
[3] SimpleKanoon.Com, https://www.simplekanoon.com/contract-law/chinnaya-v-ramayya-1069/, (Last accessed on 28th June 2023)
[4] The Indian Contracts Act, 1872, Section 2(d).
[5] The Indian Contracts Act, 1872, Section 10.
[6] iPleaders Blog, https://blog.ipleaders.in/chinnaya-vs-ramayya-case-analysis/ (Last accessed on 28th June 2023)