Privity of contract and of consideration

1. Privity of consideration: the Indian departure

English law requires that consideration move from the promisee: only a person who has given consideration can enforce the promise. Section 2(d) of the Indian Contract Act says consideration may be furnished by “the promisee or any other person”. So in India a promisee can sue even though the consideration came from someone else.

In Chinnaya v. Ramayya (Madras High Court, 1882) an old woman gifted her property to her daughter Ramayya by a deed, directing that Ramayya pay an annuity to the old woman’s sister, Chinnaya. Ramayya agreed with Chinnaya to pay it, then refused, pleading that Chinnaya had given no consideration. Held, Chinnaya could recover. Consideration for Ramayya’s promise had moved from the mother, and under s.2(d) consideration from “any other person” is enough. On the facts Chinnaya was also a party to the promise made to her, so the case does not decide that a total stranger may sue.

2. Privity of contract: the general rule

A contract cannot confer rights or impose obligations on anyone who is not a party to it. Only a party can sue on it.

• Tweddle v. Atkinson (1861). The fathers of a bride and groom agreed with each other to pay the groom sums of money, and gave him the right to sue. The bride’s father died without paying. The groom’s action against the executor failed: he was not a party to the contract and had given no consideration.
• Dunlop Pneumatic Tyre Co. v. Selfridge & Co. (1915, House of Lords). Dunlop sold tyres to Dew & Co., wholesalers, who agreed not to sell below list price and to obtain a similar undertaking from retailers. Selfridge bought from Dew, promising Dew that it would pay Dunlop £5 a tyre if it sold below list. Selfridge did so. Dunlop’s action failed. Viscount Haldane said only a person who is a party to a contract can sue on it, and consideration must have been given by him to the promisor.

In England the rule has since been relaxed by the Contracts (Rights of Third Parties) Act, 1999, which lets a third party enforce a term that expressly confers a benefit on him. India has no such statute.

3. Exceptions

• Trust or charge. A beneficiary under a trust, or a person in whose favour a charge is created on property, can enforce it though not a party: Gregory and Parker v. Williams (1817). In India, a direction in a partition or sale deed creating a charge for someone’s maintenance is enforceable by that person.
• Marriage settlement, partition and family arrangements. Where an arrangement is made for the benefit of a family member, that person may sue. In Khwaja Muhammad Khan v. Husaini Begum (1910, Privy Council) the father of a bridegroom agreed with the bride’s father to pay the bride an allowance, charging property for it. The bride, though not a party and a minor at the time, was allowed to sue.
• Acknowledgment or estoppel. Where the promisor, by his conduct or by acknowledgment, constitutes himself an agent or trustee of the third party, he is bound to him. If A gives money to B to pay C, and B acknowledges to C that he holds it for C, C can recover from B.
• Assignment. The benefit of a contract (not its burden) can be assigned, and the assignee may sue, for example the holder of a negotiable instrument or the assignee of a debt or insurance policy.
• Covenants running with the land. A purchaser of land with notice of a restrictive covenant affecting it is bound, though not a party to the original covenant: Tulk v. Moxhay (1848); in India, s.40 of the Transfer of Property Act, 1882.
• Agency. A principal may sue and be sued on contracts made by his agent within authority (ss.226 and 230), though he did not personally make them.

4. The Indian position: M.C. Chacko

Because s.2(d) lets consideration move from a stranger, it was once argued that a stranger to the contract could also sue in India. The Supreme Court settled the matter in M.C. Chacko v. State Bank of Travancore, 1969 INSC 151, AIR 1970 SC 504. A bank sought to enforce against a son a direction in his father’s deed of family settlement that a debt owed to the bank be met out of the properties allotted to the son. The bank was not a party to the deed. The Court held that a person not a party to a contract cannot, subject to well-recognised exceptions, enforce its terms; the exceptions are a beneficiary under the terms of the contract (as in a trust) and a contract that is part of a family arrangement. The bank fell within neither, and its claim on that footing failed.

The Indian rule, then, is: consideration may come from anyone, but only a party to the contract can sue on it, unless one of the exceptions applies.

5. Problem

A sells his shop to B for Rs 10 lakh. The sale deed provides that B shall pay Rs 2 lakh out of the price to C, A’s creditor. B pays A Rs 8 lakh but does not pay C. C sues B. Will he succeed?

Issue. Whether C, a stranger to the sale deed, can enforce B’s promise to pay him.

Law. Only a party to a contract can sue on it: Tweddle v. Atkinson; Dunlop v. Selfridge; M.C. Chacko. The exceptions include trusts and charges, and acknowledgment by the promisor in favour of the third party.

Application. C is not a party to the sale, and the deed does not create a trust or charge in his favour on these facts. Unless B has acknowledged the liability to C, for example by writing to him that he holds the Rs 2 lakh for him or by part payment, no exception applies. A, as the promisee, can however sue B to perform the promise or for damages.

Conclusion. C cannot sue B on the sale deed. His remedy is against A, his debtor; A in turn can enforce B’s promise. If B had acknowledged to C that the sum was held for him, C could sue B directly.

How this is examined

As an essay: “A stranger to a contract cannot sue. Discuss the exceptions” (set in January 2026), or “Distinguish privity of contract from privity of consideration.” Begin with the two doctrines, then Chinnaya, Tweddle, Dunlop, the six exceptions with a case or section each, and end with M.C. Chacko. As a short note: Chinnaya v. Ramayya, or privity of consideration.