Author: Girisha Meena, IV year of B.Com.,LL.B.(Hons.) from Gujarat National Law University
According to Section 2(d), Consideration is defined 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 abstain from doing something, such act or abstinence or promise is called a consideration for the promise".[1] Consideration is an essential element in a contract. Contract isn't enforceable unless each party to the agreement gets something. This “something” here is called consideration i.e something in return or payment or a reward. “Privity” refers to a connection or bond between parties to a particular transaction. Privity of contract is the relationship that exists between two or more parties to an agreement[2]
Privity and its relationship to the doctrine of consideration -The doctrine of consideration says that consideration must move from a promise. “Indian Contract Act” says that consideration may move from the promisee or any other person any it has to move at the desire of the promisor. Under the Indian Contract, the third person can sue and consideration is allowed. The point is that the parties must exchange something of value. Consideration is needed so that both parties incur some sort of burden or obligation in the agreement. Without consideration, the exchange would likely be considered as a gift.
Dutton v. Poole[3] (1678) is a landmark case in the court of chancery and it established the principle that the rule of privity to contract coupled with lack of consideration preclude third-party suit for breach of a contract and an exception to the rule inappropriate close family relationships. The facts are that A son made a contract with his father for his father to not cut down an oak woodland. As consideration for this, the son would make a payment to his sister of £1000 once she had married. The money gained from the woodland would have been paid to the sister. The father died before the sister was married and the son subsequently refused to pay his sister the money as was previously agreed, at the time of her marriage. The sister sued her brother for the amount that was originally promised between the father and son. Court of king’s bench held that “It is clear that the defendant gave this promise to his father and it was the father alone who, by abstaining from selling the wood, had furnished consideration from the promise. The plaintiff was neither privy to the contract nor interested in consideration. But it is equally clear that the whole object of the agreement was to provide a portion to the plaintiff. It would have been highly inequitable to allow the son to keep the wood and yet to deprive his sister of her portion. He will accordingly be held liable.” [4]
English Law states that consideration must move from the promisee and Indian Law states that consideration may move from the promisee or any other person because of section 2(d). It may even move through a stranger. However, the stranger to a contract can only sue if he/she is a party to the contract. A promise is enforceable in the eyes of law if some consideration is there and it is not necessarily granted from the promisee. A promise is enforceable if there is a consideration for it and it is irrelevant whether it moves from any other person or promisee. In the Madras, high court case leading authority decision in Chinnaya v. Ramayya [5]facts of the case are that an old lady by gift deed, made over certain landed property to her daughter (defendant).By the terms and conditions of the deed which was registered that daughter will pay Rs 653 every year to the plaintiff, who was the sister of the old woman. As soon as the deed is executed, the daughter writes an Iqrarnama (agreement) and promises to pay the amount. The annuity was not paid and the plaintiff sued to recover the amount. The court in this case held that the plaintiff can recover the amount as it is a valid consideration. Plaintiff is not a stranger here. She’s the beneficiary of the contract and the court allowed her to execute the Iqrarnama. This case shows how English law deviates from Indian law and consideration can move from promisee and any other person. Relationship between Privity and consideration: Some say consideration and privity are flip sides of the same coin whereas, some say consideration and privity are separate principles. It has been established that the Doctrine of Privity as such was established in the case of Tweddle v. Atkinson[6]facts are that John Tweddle, father of William Tweddle, agreed with William Guy to pay William Tweddle £100 for marrying his daughter. The written agreement contains a clause that specifically granted William Tweddle the power to sue for enforcement of the written agreement. William Guy died, and the estate would not pay and William Tweddle sued and the court held in favour of the defendant. The principle laid down, or the law declared in it, was affirmed in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd[7]. Who is a stranger to contract?-The person who is not a party to the contract is a stranger to the contract.
American writer “Williston”: “The rule that consideration must move from the promisee is somewhat technical, and in a developed system of contracts there seem no good reason that why A was not able from the consideration received from B to make an effective promise to C. Unquestionably he may form of a promissory note, and the same result is generally reached in this country in the case of an ordinary simple contract.”[8]
OTHER JURISDICTIONS
Rule of privity in other countries- English Law and Indian Law is not alone in having it. Various other jurisdictions either have it or have adopted it. New Zealand Contracts (Privity) Act 1982[9] states that “An Act to permit a person who is not a party to a deed or contract to enforce a promise made in it for the benefit of that person”.In the United States of America: There is a vast literature on third party rights in the United States, which no short literature can adequately summarise about privity of consideration “ A person was a “creditor beneficiary” if performance of the promise would satisfy an actual or asserted duty of the promisee to him. A person was an “incidental beneficiary” if the benefits to him were merely incidental to the performance of the promise.”[10]
In Hong Kong-privy council gave an “a fully-fledged exception” to the privity of consideration doctrine. The doctrine of privity is unusual in common law countries. A few countries accepted the rights of third parties to enforce the contract. These countries are:- Scotland, France, Germany, Italy, Australia, Spain, Portugal, Netherlands, Belgium, Greece. In India, consideration may move from the promisee or any other person. But under English Law, the consideration must move from the promisor. In other words, a stranger to consideration can sue in India but not in England. In England, consideration may be present or future. But in India past consideration can be a good consideration and will support a subsequent promise. In England, consideration means something of some value in the eyes of law moving from the promisor. Natural love and affection are not sufficient in English law to support a contract. In India, natural love and affection is considered to be a good consideration and may support a contract if it is in writing and registered.
DIFFERENCE BETWEEN PRIVITY TO CONTRACT AND CONSIDERATION
The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to gain from a third party. Hence fourth, a stranger (third-party) to consideration is unlike a stranger to a contract. The law does not allow a stranger to file a suit on the contract. This right is available only to a person who is a party to the contract and is called the Doctrine of Privity of Contract. Rule of Consideration is that Consideration must flow from the promise. In other words, “if a person with whom a contract has been made is to be able to enforce it, consideration must have been given by him to the promisor” and if there is a breach by other parties, they can sue each other. Only a person who was party to a contract can sue on it and in the privity and its relationship to the doctrine of consideration says that we observed the rule that consideration must move from a promise. There is a distinction between the two expressions, the 'doctrine of privity of contract' and 'doctrine of privity of consideration'. The 'doctrine of privity of consideration' means that the consideration must move from the promisee and not from a stranger Sec. 2 clause (d) of the Indian Contract Act 1872 extended the definition of consideration. Under the rules of privity and consideration may not always occur simultaneously. Both the doctrines are, basically deviated from each other. A person may be a party to a contract, but he may be a stranger to the consideration. Similarly, a person may not be a party to a contract, but he may be a party to the consideration.
SOME EXCEPTIONS
Collateral contracts, Multi collateral contracts, Trust and Agency
CONCLUSION
Every agreement to be enforceable at law must necessarily be supported by some consideration. The act done at the desire of a third party or without the desire of the promisor cannot be considered good consideration. The satisfaction may be intended for a third party. But the desire or request of the promisor is important. Consideration can be given by the promisee or any stranger who is not a party to the contract. As long as there is a consideration it is not essential who has given it. Therefore, a stranger to consideration can sue on a contract provided to him and he is not a stranger to contract. This is called the “doctrine of constructive consideration”. This principle had its origin in the English common law, having been adopted by the Court of King’s Bench as early as 1677 in Dutton v. Poole. The recent English law position that consideration must proceed only from the promisee was established by the Court of Queen’s Bench in Tweedle v. Atkinson. A stranger to consideration cannot sue under English law. This rule forms the basis of the Privity of Consideration. Under Indian Law, the consideration can proceed from the promisee or any other person. Hence, a stranger to consideration can also sue under Indian law like in Chinnayya v.Ramayya. The general rule is that an agreement made without consideration is void. [11]The two basic principles under the English Law that can be identified with the doctrine of privity are: consideration should move from the promisee only and a contract cannot be enforced by a person who is not a party to the contract even if it is made for his benefit.
[1]The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1949 (India).
[2]LEGAL DICTIONARY,https://legal-dictionary.thefreedictionary.com/privity.
[3]Dutton v. Poole, 2 Lev 211.
[4]AVTAR SINGH, CONTRACT AND SPECIFIC RELIEF 111 (EBC 2019).
[5]Chinnaya v. Ramayya, I.L.R. 4 Mad. 137.
[6]Tweddle v. Atkinson, 1 B&S 393, 121 ER 762.
[7]Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd, AC 847.
[8]Samuel Williston, Contracts for the benefit of a third person, (1901-02) 15 Harv L Rev 767.
[9]New Zealand Contracts (Privity) Act, 1982, Acts of parliament, 1982 (NZ).
[10]LAWCTOPUS, https://www.lawctopus.com/academike/basis-privity-contract-consideration/ (last visited Feb. 20 2019).
[11]The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1949 (India).