Chinnaya v Ramayya (1882)

Section 2(d) contains four words that separate Indian contract law from English: consideration may be furnished by "the promisee or any other person". English law knows no such rule; there, consideration must move from the promisee, and a promisee who has given nothing cannot sue however clearly the promise was meant to benefit him.

Chinnaya v Ramayya is the leading Indian authority applying those words. It establishes the abolition of privity of consideration in India — a stranger to the consideration may sue, provided he is a party to the contract. That last clause is the whole difficulty. Students routinely cite the case for the proposition that a stranger to a contract may sue in India. It decides nothing of the kind, and keeping the two doctrines apart is worth more marks than any other single distinction in the chapter.

An elderly lady in the Madras Presidency owned landed property. Out of the income of that estate she had for some time been paying her sister — the plaintiff — an annuity of Rs 653 a year, and it was the sister's means of support.

The old lady then made over the property to her daughter, the defendant, by a registered deed of gift. The deed was not unconditional: it stipulated that the daughter, having taken the estate, should continue to pay the plaintiff the same annuity every year. The burden the estate had carried in the mother's hands was to be carried in the daughter's.

On the very same day the daughter executed a separate instrument — an iqrarnama, an agreement or acknowledgment — in the plaintiff's own favour, promising to pay the annuity. There were thus two documents executed together as parts of one arrangement: the gift from mother to daughter, and the daughter's promise to the aunt.

The daughter took the land. For a time she paid. Then she stopped, and the aunt sued.

The defence was not that no promise had been made — one plainly had, in writing — but want of consideration. The plaintiff, said the daughter, had given her nothing; the only consideration was the gift of the land, and that came from the mother. The Madras High Court held for the plaintiff.

1. Can a promisee enforce a promise where the consideration for it was furnished not by her but by a third person?
2. Was there, on these facts, any consideration at all moving from the plaintiff?

For the defendant the argument was the classical English one, and on English law it would have succeeded: consideration must move from the promisee, the plaintiff was a stranger to the consideration, and the promise was therefore gratuitous.

For the plaintiff there were two answers. The textual one: s. 2(d) says the act constituting consideration may be done by "the promisee or any other person", so who furnishes it is immaterial provided it was furnished at the promisor's desire. The factual one: but for the daughter's promise the plaintiff would have lost the annuity she was already drawing from the estate.

The plaintiff was entitled to recover the annuity. The two judges reached that conclusion by different routes, which is worth stating precisely, because examiners ask what the case actually decided.

Innes J drew the analogy with Dutton v Poole. The plaintiff had been receiving an annuity of like amount out of the estate; when the estate passed to the defendant it was stipulated that the payment continue, and the defendant promised accordingly. Failure to keep the promise would therefore have deprived the plaintiff of something she was already receiving, and loss to the promisee is good consideration. On this reasoning consideration did move from the plaintiff, and s. 2(d)'s "any other person" was not strictly needed.

Kindersley J took the direct route. The deed of gift and the iqrarnama were executed simultaneously and formed one transaction; the consideration for the daughter's promise was the mother's gift of the land. Since s. 2(d) permits consideration to move from any person, that consideration supported the promise, and the plaintiff — the promisee under the iqrarnama — could enforce it.

The proposition for which the case stands, on the universal understanding of later courts and writers, is Kindersley J's:

Under s. 2(d) it is immaterial who furnishes the consideration. A promise is enforceable by the promisee if consideration for it has been given, at the promisor's desire, by the promisee or by any other person. Privity of consideration does not apply in India.

Be honest about the authority. Innes J's reasoning is an alternative ground which, standing alone, would not establish that proposition at all, since on his view the plaintiff was not a stranger to the consideration. The case is a weaker authority than its reputation suggests, and a good answer says so: what makes it leading is not the reasoning but the clarity of the statutory words, which would produce the same result without the decision.

Nothing in the judgment addresses whether a stranger to the contract may sue. That question did not arise, the plaintiff being a party — the iqrarnama was made with her.

Lord Haldane's speech in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915) states the English position in words worth learning, because Indian law accepts one half and rejects the other: "In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract... A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it, consideration must have been given by him."

Reduced to propositions: (1) privity of contract — a person not a party to a contract cannot sue on it, even if it was made for his benefit; (2) privity of consideration — consideration must move from the promisee, and a promisee who furnished none cannot enforce.

India rejects proposition (2), because of the words "or any other person" in s. 2(d) — that is Chinnaya v Ramayya. India accepts proposition (1) — that is M.C. Chacko.

Dunlop illustrates proposition (2). Dunlop sold tyres to Dew & Co on terms that Dew would not sell below list price and would extract a like undertaking from any trader it sold to. Dew sold to Selfridge, who gave the undertaking and then sold below list price. The House of Lords held that even treating Dunlop as an undisclosed principal, no consideration had moved from Dunlop to Selfridge.

Tweddle v Atkinson (1861) is the parent of the English rule. The fathers of a bride and groom agreed with each other that each would pay a sum to the groom. The groom sued and failed: the whole object of the contract was to benefit him, but it was made with his father. That decision laid the foundation of privity of contract.

Dutton v Poole (1677), on which Innes J relied, is the older, contrary authority. A father intended to sell a wood to raise a marriage portion for his daughter; his son promised that if the father forbore to sell he would pay the daughter £1,000. The father forbore, the son did not pay, and the daughter and her husband recovered. The consideration — forbearance — moved wholly from the father, and the daughter was neither privy to the contract nor a giver of consideration; yet she succeeded, because it would have been grossly inequitable to let the son keep the wood and deprive his sister of her portion. Dutton v Poole did not survive Tweddle in England, but sits comfortably with s. 2(d) in India.

Privity of contract and privity of consideration must not be confused

This is the heart of the chapter, and it reduces to a table you can reproduce in an exam.

| | English law | Indian law | |---|---|---| | Must consideration move from the promisee? | Yes — Dunlop v Selfridge | No — s. 2(d), Chinnaya v Ramayya | | Can a stranger to the contract sue? | No — Tweddle v Atkinson, Dunlop | No — M.C. Chacko, subject to exceptions |

The test for telling the two apart is one question: is the claimant a party to the contract sued upon?

In Chinnaya the aunt was a party — the iqrarnama was executed in her favour and she was the promisee. Her only difficulty was that the value supporting that promise had come from her sister. She was a stranger to the consideration, not a stranger to the contract. In Tweddle, Dunlop and M.C. Chacko the claimant was no party to the contract at all, and no provision of the Indian Act helps such a claimant: s. 2(d) says nothing about who may sue, only about what counts as consideration.

Say it this way: s. 2(d) abolishes privity of consideration in India; it does not touch privity of contract.

The Supreme Court settled the privity of contract question in M.C. Chacko v State Bank of Travancore (1969). The Highland Bank was indebted to the State Bank of Travancore on an overdraft. M was manager of the Highland Bank and his father K had guaranteed repayment. K then gifted his properties among his family, the gift deed providing that any liability under the guarantee should be met by M, either out of the bank or out of the share of property allotted to him. The State Bank sought to hold M liable on that provision.

It failed. The State Bank was not a party to the gift deed; it was not bound by its covenants and could not enforce them. Shah Ag. CJ, after citing Lord Haldane's passage from Dunlop, put the Indian rule in a sentence worth quoting: "It must therefore be taken as well-settled that except in the case of a beneficiary under a trust or in the case of a family arrangement, no right may be enforced by a person who is not a party to contract."

The Court also rejected the argument that the deed created a charge in the State Bank's favour. No particular form of words is needed for a charge, but the deed must disclose an intention that specified property be made liable for the debt. The recitals here evidenced only an arrangement between the donor and his family that M would satisfy the liability out of his allotted property — internal, not a charge in favour of the creditor.

Note the sting in the tail: the representatives holding K's properties would have been liable out of that property had the action against them not been time-barred. The State Bank lost on privity and limitation, not on the merits.

The exceptions to privity of contract

The rule is riddled with exceptions, and an answer that states it without them is incomplete.

Beneficiary under a trust or charge. Where an interest or charge in specific property is created in a person's favour, he may enforce it though not a party — Nawab Khwaja Muhammad Khan v Nawab Husaini Begum (1910), where a father-in-law agreed with the bride's father to pay kharch-i-pandan to the daughter-in-law, charging immovable property with the payment. She sued and succeeded although no party to the agreement.

Marriage settlement, partition or other family arrangement. Provision made for a family member may be enforced by that member.

Acknowledgment or estoppel. Where the promisor by his conduct acknowledges himself liable to the third party, he may be bound. Agency, assignment and covenants running with land supply further instances.

Contrast Jamna Das v Ram Autar Pande (1912): the Privy Council held a mortgagee could not enforce a covenant by the purchaser of the mortgaged property, made with the mortgagor, to pay off the mortgage. He was a stranger to that contract.