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Consideration, Privity of Consideration & Privity of Contracts

(Project Work)

Gokul Nair C.C. Roll No.: 670

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A contract, according to s. 2(h) of the Indian Contract Act, is an agreement enforceable by law. For an agreement to be enforceable by law, s. 10 imposes certain conditions that are to be satisfied: There must be sufficient consideration. The parties must be competent to contract. The consent of the parties should be free. The object of the agreement must be lawful. The contract thus created can confer rights or impose obligations on the parties to the contract. Third parties are not under such an obligation to perform or demand performance under a contract as they are stranger to the contract/consideration. A stranger to the contract/consideration cannot sustain an action on the promise made between two persons unless he has in some way intervened in the agreement. This is referred to as the Doctrine of Privity. Privity can be either Privity of Consideration or Privity of Contract.

CONSIDERATION Consideration is considered to be one of the most important essentials in a valid contract. Every agreement to be enforceable at law must necessarily be supported by consideration. This principle is based on the maxim: Ex Nudo Pacto Non Oritur Actio (from a nude pact, no cause of action arises.) Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable.1 Consideration is the evidence of

Pollock and Mulla, Indian Contract Act and Specific Relief Acts, 13th edition, 1972, p.113

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mutual obligations which the law can enforce. It is the sign and symbol of every bargain. The term consideration has been defined in various ways. In Curri v. Misa2, Lush,J. states, A valuable consideration may consist either in some right, interest, profit or benefit accruing to one party or forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party. In Thomas v. Thomas3, it was held that consideration may be some benefit to the plaintiff or some detriment to the defendant. According to these definitions consideration consists in some benefit to the promisor, or some detriment to the promise. The British contract Act defines 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 form doing, or promises to do or to abstain from doing, something, such act or abstinence or promise are called a consideration for the promise. Consideration need not necessarily be in cash or kind. It may be an act or abstinence or promise to do or not to do something. In Lees v. Whitcomb4, it was held that a promise to remain with the plaintiff for two years for the purpose of learning a trade was not binding, for want of a corresponding promise to teach. Sufficient consideration was not expressed on the face of the instrument.

2 3 4

1875 LR 10 Ex.153 1842 (2) QB 851 1828 (130) ER 972

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LEGAL RULES AS TO CONSIDERATION

Consideration must move at the desire of the promisor
The act done or loss suffered by the promisee must have been done or suffered at the desire or request of the promisor. The act done at the desire of a third party or without the desire of the promisor cannot be a good consideration. It is not necessary that the promisor himself should be benefited by the acts of the promisee. The benefit may be intended for a third party. But the desire or request of the promisor is essential. In Durga Prasad v. Baldeo,5 Baldeo expended some money on the improvement of a market at the desire of the Collector of the district. In consideration of this, Durga Prasad who, was using the market, promised to pay some money to Baldeo. Held, the agreement was void being without consideration since it was not moved at the desire of Durga Prasad.

Consideration may move from the promisee or any other person

Consideration can be given or supplied by the promisee or any other person who is not a party to the contract. As long as there is a consideration it is not important who has given it. Therefore, a stranger to consideration can sue on a contract provided he is not a stranger to contract. This is known as the doctrine of constructive consideration. This principle had its genesis in the English common law, having been adopted by the Court of Kings Bench as early as 1677 in Dutton v. Poole6.On failure of the
5 6

ILR (1880) 3 All 221 (1677) 2 Levinz 210: 83 LR 523

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defendants promise to his father to give 1000 to his sister on her marriage if father forebears to sell the wood, the daughter and her husband sued the defendant for the amount. Though the plaintiff was not a privy to the contract, the defendant was held liable because the whole object of the agreement was to provide a portion to the plaintiff. The current English law position that, consideration must proceed only from the promisee was established by the Court of Queens Bench in Tweedle v. Atkinson7. A stranger to a consideration cannot sue under English law. This principle 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 a consideration can also sue under Indian law. In Chinnayya v. Ramayya8, the daughter promised her mother to pay maintenance to her uncle in consideration for her mother gifting properties. It was held that whatever consideration had moved from the mother could be presumed as having moved from the uncle.

Consideration may be past, present or future

Consideration may, under s. 2(d) of the Indian Contract Act, consist of a past, present or a future act.9

Past consideration
When a consideration by a party for a present promise was given in the past, it is treated to be a past consideration. It indicates a past act or forbearance.

7 8

(1861) 1 B&S 393 (1882) 4 Mad.137 9 Pankaj Bhargava v. Mohinder Nath, (1991) 1 SCC 566

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According to Anson, past consideration is a mere sentiment of gratitude or honour, prompting a return for the benefits received. Under the English law, past consideration is no consideration. A promise to pay compensation for something already done is past consideration and is no consideration.10 The Indian position with regards to this is different from that of the English rule as it treats past voluntary services and services previously rendered at the desire of the promisor to be good consideration11. In Sindha Shri Ganpatsinghji v. Abraham12, it was held that the services rendered at the request of a minor during his minority were held to form good consideration for the promise subsequently made by the minor after attaining majority. In certain cases, promise to pay time-barred debts and negotiable instruments given in consideration of some past act can also be taken as valid consideration for a subsequent promise and the party can validly enforce it.

Present consideration
When consideration is given simultaneously with the promise, it is said to be present or executed consideration. The act here is done in response to a positive promise. For instance, in sale of goods over the counter and in offers of reward, present consideration takes place. S.K. Das, J. of the Supreme Court explains this in Union of India v. Chaman Lal Loona & Co.13, An executed consideration consists of an act for a promise. It is the act which forms the consideration. No contract is formed unless and until the act is performed.
10 11

Re Mc Ardle [1951] 1 Ch 669 P Kanakasabapathy Mudaliar v. Hajee Oosman Sahib, AIR 1925 Mad 192 12 1895 (20) Bom 755 13 AIR 1957 SC 652

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Future consideration
When consideration from one party to the other is to pass subsequently to the making of the contract (i.e., to receive consideration in future for the promise), it is a future consideration. A promise is made by one party in return for a promise made by the other. It is also known as an executory consideration. In executory consideration, S.K. Das, J. states, It is in fact a promise for a promise; one promise is bought by the other. The contract is concluded as soon as promises are exchanged.14 Mutual promises to marry, or promise to work in return for promise of payment, are examples of future consideration.

Consideration need not be adequate

Consideration need not be adequate to the promise, but it must be of some value in the eye of law. So long as consideration exists, the courts are not concerned as to its adequacy. Provided it is of some value. The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced. However, 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. This is because inadequacy may suggest fraud, mistake or coercion etc. The best known English authority is De La Bere v. Pearson Ltd.15 The defendants, who were newspaper proprietors, offered to answer enquiries from readers of the paper desiring financial advice. The plaintiff wrote to them asking for a safe investment and also for the name of a good stockbroker. The editor recommended
14 15

AIR 1957 SC 652 [1908] 1 KB 280 (CA)

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a person who, unknown to him, was in fact, an undischarged bankrupt. The plaintiff, in reliance on the recommendation, sent sums for investment and they were immediately misappropriated. In an action against the defendants, the question was whether there was sufficient consideration for the offer of the advice. It was held that there was sufficient consideration.

Consideration must be real and not illusory

Although consideration need not be adequate, it must be real, competent and of some value in the eyes of the law. Real consideration is one which is not physically or legally impossible. If a person agrees to perform a physically impossible act for a consideration or the performance of a promise is legally impossible, the consideration is not real and enforceable. For example, discovering treasure by magic or making two parallel straight lines meet or putting life back into a dead body cannot be enforced as promises because of impossibility. A consideration cannot be deemed as good, if it is uncertain or ambiguous. A promise to pay a reasonable sum is not enforceable as it is uncertain. There is no recognized method of ascertaining the reasonable remuneration.

Consideration must be something which the promisor is not already bound to do

A promise to do what one is already bound to do, either by general law or under an existing contract, is not a good consideration for a new promise. There will be no detriment to the promisee or benefit to the promisor over and above their existing rights or obligations. Similarly, a promise to perform a public duty by a public servant is not a good consideration.

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For example, A promises to pay $ 200 to police officer for investigation into a crime. This promise is without consideration because the police officer is already bound to do so by law.

Consideration must be lawful

The consideration for an agreement must be lawful. An agreement is invalid if it is based on unlawful consideration. Consideration is unlawful16: a. if it s forbidden by law or b. if it is of such a nature that, if permitted it would defeat the provisions of any law, or c. is fraudulent, or d. involves or implies injury to the person or property of another, or e. the court regards it as immoral, or opposed to public policy

Consideration may be an act or abstinence or promise

Consideration may be a promise to do something or not to do something. So it may be either positive or negative. Consideration need not always be doing some act. It can be not doing an act also. Forbearance to sue, Compromise of a disputed claim and Composition with creditors are considered to be good consideration for a contract.

Forbearance to sue
It means a person who has a right of action against another person, refrains from bringing the action. If a party who could sue another for the enforcement of a right agrees not to pursue his claim at the desire of the debtor, it constitutes a good consideration for a promise by the other person. Forbearance to sue may be forever or for a short or limited time.
16

S.23 of Indian Contracts Act,1872

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For example, A has a right to sue his debtor B for $5000. But he postpones suing as B agreed to pay $ 2000 more. Such forbearance is a valuable consideration for the promise of B.

Compromise of a disputed claim

Compromise is a kind of forbearance. For this purpose, claim should be reasonable and the party claiming should prudently believe that it is a valid claim. The compromise of a disputed claim is a good consideration for the fresh agreement of compromise. The claimant should also act bona fide. If the claim is useless and the claimant was not acting bona fide, the other party can claim compensation. For example, A sues to recover a debt of $2000 from B. B denies the whole debt and promises to pay $500 to A as a sort of compromise. This compromise of B is supported by consideration and is valid.

Composition with creditor

A debtor under financial burden may convene a meeting of his creditors and earnestly request creditors to accept lesser amount in full settlement of their debt. If creditors agree to the request of the debtor, the contract is binding upon both the debtor and the creditors as this amounts to a compromise of the claims of the creditors.

Validity of an Agreement without consideration

The general rule is that an agreement made without consideration is void.17 In every valid contract consideration is very important. A contract may only be enforceable when an adequate consideration is there. However, the Indian Contract

17

S.25, Indian Contracts Act, 1872

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Act, 1872 contains certain exceptions to this rule. In the following cases, the agreement though made without consideration, will be valid and enforceable.

Natural Love and Affection

A written and registered agreement based on Natural Love and Affection between the parties standing in near relation to each other is enforceable even without consideration18. There is always some degree of instinctive love and affection between parties nearly related (blood relation & marriage). But this instinct may be overruled by external circumstances. For example, in Rajlukhy Dabee v. BhootnathMookerjee,19 The defendant promised to pay his wife a fixed sum of money every month for her separate residence and maintenance. The agreement was contained in a registered document which mentioned certain quarrels and disagreements between the two. The Calcutta High court refused to regard the agreement as one covered by the exception. The court could find no trace of love and affection between the parties whose quarrels had compelled them to separate.

Compensation for past voluntary services

A promise to compensate, wholly or in part, a person who has already done something voluntarily for the promisor, is enforceable under s. 25(2)20. In order for a promise to pay for the past voluntary services to be binding, the following essential factors must exist: i. ii. iii. The services should have been rendered voluntarily.21 The services must have been rendered for the promisor. The promisor must be in existence at the time when services were rendered.22
18 19
20

Suredra Behari Lal v. Jodonath, 1984 All LJ 21 (NOC) 1900 (4) Cal. WL 488
Indian Contracts Act, 1872

21

T.V. Krishna Iyer official Liquidator of Cape Comorin General Traffic Co., AIR 1952 TC 99

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iv.

The promisor must have intended to compensate to the promisee.

Promise to pay time barred debt

Where a promise, made in writing and signed by the person making it or by his agent generally or specially authorised in that behalf, to pay a debt barred by limitation, is valid without consideration under s. 25(3)23.

DIFFERENCE BETWEEN INDIAN LAW AND ENGLISH LAW REGARDING CONSIDERATION

A. 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. B. In England, consideration may be present or future. But in India past consideration can be a good consideration and will support a subsequent promise. C. In England, consideration means something of some value in the eyes of law moving from the promisor. Natural love and affection is not sufficient in the 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. D. Under the English law, contracts are divided into formal contracts and simple contracts. A formal contract is one which is in writing, signed, sealed
22
23

Ahmedabad Jubilee S.&M. Co v. Chhotalal Chaganlal, (1908) 10 Bom LR 141

Indian Contracts Act, 1872

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and delivered to the other party. All other contract are simple contracts. Formal contracts do not require any consideration but simple contract must be supported by consideration. No such distinction exists in India. All contracts expect those specified in section 25 and 185 must be supported by consideration.

Privity of Contract and Consideration

The two basic principles under the English Law that can be identified with the doctrine of privity are: 1. consideration should move from the promisee only and 2. a contract cannot be enforced by a person who is not a party to the contract even if it is made for his benefit. The doctrine of privity means that a contract cannot, as a general rule, confer rights and obligations arising under it on any person except the parties to it24 . The rule laid down in Tweedle v. Atkinson25 laid down the foundation of the doctrine of Privity of Contract which means that a contract is a contract between the parties only and no stranger to the contract can sue even if the contract is avowedly made for his benefit.26 Thus a stranger to the consideration cannot sustain the action on the promise made between two persons unless he has in some way intervened in the agreement. However, this doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.

24 25

G.H. Treitel, The Law of Contract (1861) 1 B&S 393 26 Kanta Devi Berlia v. Mohit Jhunjhunwala, (2006) 2 CHN 161 (Cal)

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The decision of the House of Lords in Beiswick v. Beiswick27discusses about these issue. B, a coal merchant entered into an agreement with the defendant by which he transferred to the defendant. B was to be employed in it as a consultant for his life and after his death the defendant was to pay his widow an annuity of 5 per week. After Bs death, the defendant paid Bs widow only one sum of 5. The widow brought an action to recover the arrears of the annuity and also to get specific performance of the agreement. Lord Denning, MR identified the rule of privity as being merely procedural. But then decides to hold that where a contract is made for the benefit of a third person who has a legitimate interest to enforce it, it can be enforced by the third person in the name of the contracting party or jointly with him, or if he refuses to join, by adding him as a defendant. In that sense the third person has a right arising by way of contract and his interest will be protected by law. (Beswick C.A.) The House of Lords28 did not approve of this approach initiated by Lord Denning in the Court of Appeal and held that the plaintiff in her personal capacity has no right to sue, but she has a right as administratrix of her husbands estate to require the appellant to perform this obligation under the agreement. 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. There was some divergence of opinion on this point.29 Even though under the Contract Act, the definition of consideration is wider than in English law, yet the common law principle is generally applicable in India with the effect that only a party to the

27 28

(1966) 3 All ER 1 (CA) Beswick v. Beswick, (1967) 2 All ER 1197 HL 29 Subbu Chetti v. Arunachalam, (1930) 53 Mad 270

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contract is entitled to enforce the same. The best statement of the law is that of Rankin CJ in Krishna Lal Sadhu v. Promila Bala Dasi:30 Clause (d) of section 2of the contract act widens the definition of consideration so as to enable a party to a contract to enforce the same in India in certain cases in which the English law would regard the party as the recipient of a purely voluntary promise and would refuse to him a right of action on the ground of nudum pactum. Not only, however, is there nothing in s.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 rigidly excluded byu the definition of promisor and promisee. The Calcutta High Court has held that the administration of justice was not to be hampered by Tweddle v. Atkinson and that in India, we are guided in matters of procedure by the rules of justice, equity and good conscience.31 Privity of contract occurs only between the parties to the contract, most commonly contract of sale of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company. If a third party gets a benefit under a contract, he does not have the right to go against the parties to the contract beyond his entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.

30 31

AIR 1928 Cal 518 Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137

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This, however, does not mean that the parties do not have another form of action . In the case of Donoghue v. Stevenson32 , a friend of Mrs. Donoghue bought her a bottle of ginger beer, which was defective. Specifically, the ginger beer contained the partially decomposed remains of a snail. Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it was established that the manufacturer has a duty of care owed to their consumers and she was awarded damages in tort. Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.

Exceptions to General Rule of Privity

Collateral Contracts
A collateral contract is one that accompanies the main contract between two parties. It is one involving either of them and a third party. This contract may enable a third party to enforce the first contract. A classic example of this happened in England in 1953 in the case of Shanklin PierLtd. v. Detel Products Ltd33. In this case Shanklin Pier (plaintiff) employed contractors to paint a pier. The contractors then instructed Detel Products to supply them paint. This instruction was given based on a statement made by the defendants to the plaintiffs that the paint would last for seven years. When after just three months the paint work fell apart, the plaintiff sued and was given the go ahead by the courts to proceed with the suit against the defendant because even though the main contract had been between the contractor and the defendant there was in existence a

32 33

(1932) AC 562 [1951] 2 All ER 471

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collateral contract between the plaintiff and the defendant guaranteeing seven years protection.

Multilateral Contracts
When a person joins an unincorporated association such as a club, it could be said that he has gone into a contractual relationship with other members even if he may not be aware of their identity and if the person only liaises with the secretary of the organization. In one case the courts decided that a competitor in a race contracted not only with the organizers but also with other competitors.

Trust
Where a person acts as a trustee and enters into a contract the beneficiary of the contract can sue if the promise has not been performed. In M.C.Chacko v. State Bank of Travancore34 it was observed that a trust does not arise simply because a party to the contract undertakes to confer a benefit on the stranger .For this exception of Trust to be applicable it has to be established that there was an intention to enter into the contract as a trustee like use of express words like trust or trustee to establish the intention. When an obligation in equity amounting to a trust arising out of the contract exists, the beneficiary has a right to sue. In Narayani Devi v Tagore Commercial Corpn Ltd.35 a bargain between the husband of the plaintiff and the defendants, where the shares belonging to the plaintiffs husband were sold to the defendant and the share money remained charge for payment of monthly sums both to the husband and after his lifetime to the wife, could be enforced by the wife since an obligation was in the nature of Trust.

34 35

AIR 1970 Sc 504 AIR 1973 Cal 401

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Agency
The status and vicarious liability issues of an agent also create exceptions to the rule of privity. When an agent negotiates a contract between his principal and a third party, it is generally regarded as being between the principal and the third party. However there are situations where it is subject to question as to whether or not an agent acted on his own behalf or not. It may even reach new heights of complexity when an agent makes use of a sub-agent, spawning twin questions of whether or not the contract will now be between the principal and the sub-agent or the agent and the sub-agent.

Conclusion
Consideration is one of the most essential elements in a contract. A contract without sufficient consideration cannot be enforced at law. The Indian Contract Act, 1872 distinguishes which considerations are good from which are unlawful and unreal. With reference to consideration of a contract the position in India and England are however different. Under the English law only a party to the contract can pay the consideration. If he doesnt pay the consideration he becomes a stranger to the contract. Under the Indian Law, it is not necessary that consideration should be paid by the promisee himself. Though the Act does not specifically provide for the doctrine of Privity of Contract and Privity of Consideration, however through a series of case laws the doctrine as laid down in Tweddle v. Atkinson is now applicable in India along with various exceptions.