M.C. Chacko v State Bank of Travancore, Trivandrum (1969)

This is the Supreme Court's own statement of the Indian rule on privity of contract. A creditor who is not a party to a deed tried to enforce a promise in it that his debt would be paid. The Court said no, and put the rule in a form you can quote: a stranger to a contract cannot sue on it, subject to two recognised exceptions — a beneficiary under a trust created by the contract, and a family arrangement.

It also shows the Supreme Court adopting Dunlop Pneumatic Tyre Co v Selfridge & Co for India, and explaining why the wide definition of consideration in s. 2(d) does not change the position: a promise may be supported by consideration moving from a third person, but that does not let a third person enforce it.

The High Land Bank, Kottayam, of which the appellant M.C. Chacko was Manager (the judgment also describes him as its Managing Director), had an overdraft account with the Kottayam Bank. His father, K.C. Chacko, executed letters of guarantee in favour of the Kottayam Bank for the amounts due on the overdraft. The last letter of guarantee, dated 22 January 1953, limited his liability to Rs. 20,000.

Earlier, by a deed dated 21 June 1951 (Ex. D-1, called a deed of partition), K.C. Chacko gave away his properties to his sons, daughter and wife. Clause 17 recited that any amount due to the Kottayam Bank under his letter should be paid by the High Land Bank through his son Chacko, and if it became payable by him, "for that my eldest son, Chacko and the properties in Schedule A alone will be answerable for that amount."

The Kottayam Bank sued the High Land Bank, K.C. Chacko as guarantor, and the family as donees under the deed, claiming that the deed created a charge on the properties. K.C. Chacko died while the suit was pending. The trial court decreed the suit against the High Land Bank and against M.C. Chacko, limited to the property he received under the deed; the claim on the guarantee against K.C. Chacko personally was held time-barred. The Kerala High Court confirmed the decree. The Kottayam Bank had merged with the State Bank of Travancore. M.C. Chacko appealed by special leave.

The Court framed two questions:

1. Whether under Ex. D-1 a charge was created in favour of the Kottayam Bank to satisfy the debt arising under the letter of guarantee.
2. Whether that charge, assuming one arose, was enforceable by the Bank when it was not a party to the deed.

The appeal succeeded and the suit against M.C. Chacko was dismissed. The Court declared that he was not personally liable for the debt under his father's guarantee, and that the Schedule A properties were not liable to satisfy it. Each party bore its own costs.

No charge was created

No particular form of words is needed to create a charge on immovable property. "But in order that a charge may be created, there must be evidence of intention disclosed by the .deed that a specified property or fund belonging to a person was intended to be made liable to satisfy the debt due by him." [The stray full stop before "deed" is in the reported text.]

Clause 17 showed no such intention. The recitals "merely set out an arrangement between the donor and the members of his family that the liability under the letter of guarantee, if and when it arises, will be satisfied by M.C. Chacko out of the property allotted to him under the deed."

"The letter of guarantee created merely a personal obligation." It was the father's own debt, not a family debt, and "an intention to convert a personal debt into a secured debt in favour of the Bank, a third person, cannot be inferred." Following a Madras High Court decision on a partition deed, the Court treated the covenant as giving the other family members a right of indemnity against M.C. Chacko if the Bank proceeded against them — not a charge in the Bank's favour. Clauses 12 and 13, which kept the coconut income for the father and let his wife occupy and let the houses, pointed the same way.

A stranger to the deed cannot enforce it

Even if a charge had been intended, the Bank could not enforce it. The Court stated the rule: "It is settled law that a person not a party to a contract cannot subject to certain well recognised exceptions, enforce the terms of the contract".

It relied on Rankin C.J. in Krishna Lal Sadhu (I.L.R. 55 Cal. 1315), who said that s. 2(d) widens consideration, but that "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 rightly excluded by the definition of 'promisor' and 'promisee'."

It cited Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847 for the English common law rule, the Privy Council in Khwaja Muhammad Khan v Husaini Begam for the trust exception, and Jaman Das v Ram Autar, where a mortgagee could not enforce a purchaser's contract to pay off the mortgage debt. It concluded:

"It must therefore be taken as well settled that except in the case of a beneficiary under a trust created by a contract or in the case of a family arrangement, no right may be enforced by a person who is not a party to the contract."

The Bank could have enforced the charge "only if it was a beneficiary under the terms of the contract, and it is not claimed that the Bank was a beneficiary under the deed Ex. D-1."

1. A charge arises only where the document shows an intention that a specified property or fund is to be made liable for the debt. A family arrangement that one member will pay a debt out of the property given to him creates an indemnity among the family, not a charge for the creditor.
2. A person who is not a party to a contract cannot enforce it, except (a) a beneficiary under a trust created by the contract, and (b) in the case of a family arrangement. Section 2(d) widens the idea of consideration but does not allow a stranger to the contract to sue on it.

• Direct question: "A stranger to a contract cannot sue." Explain with exceptions under Indian law. Use Chacko for the rule and its two stated exceptions (trust; family arrangement), and pair it with Dunlop v Selfridge.
• Distinguish two ideas that students confuse: consideration may move from a third party under s. 2(d), but a third party cannot enforce the contract. Quote Rankin C.J. as adopted in Chacko.
• Problem question: a father's deed says his son will pay the father's creditor out of property gifted to him; the creditor sues the son. Apply Chacko: no charge without clear intention to make the property liable, and no action by a non-party unless the creditor is a beneficiary under a trust or the case falls within a family arrangement.