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LAW OF CONTRACT

“THIRD PARTY’S ROLE IN CONSIDERATION”

Submitted to: Submitted By:


Mr. Atul Pandey Khelendra Kumar
Assistant Lecturer MBA- Insurance
Faculty of Law 1st Semester
NLU, Jodhpur NLU, Jodhpur

Law of Contract-Assignment, NLU, Jodhpur, Raj. 1


TOPIC: THIRD PARTY’S ROLE IN CONSIDERATION

INTRODUCTION

Consideration is the price given for something which was promised.


Central function of the doctrine of consideration is to prevent people from making gratuitous
promises, purpose of law is to distinguish between gratuitous and non-gratuitous promises.
Other function is may be ignoring risk arising out of non performances.
According to Blackstone, Consideration is the recompense given by the party contracting to
the other.1 Various Authors have defined in the different forms.
According to Sir Frederick Pollock:
“consideration is the price for which the promise of the other is bought and the promise thus
given for value is enforceable”

According to Patterson, Consideration means something which is of some value in the eye of
law…It may some benefit to Plaintiff and some detriment to the defendant. 2 The definition of
consideration as a “price of the Promise” was given by Cheshire and Fifoot.
Under Indian Contract Act 1872, Consideration is one of the essential given under S.10. S.25
states that every contract without consideration shall be void. The definition of consideration
is given under S.2 (d), According to which

”When at the desire of the promisor, the promise 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.”

The definition of the consideration requires three things, first that the act or abstinence, which
is to be consideration for the promise, should be done at the desire of the promisor, secondly,
that it should be done at the desire of the promise or any other person and finally that the act
or abstinence may have been already executed or is in the process of being done or may be
still executor, means it is promised to be done.

For the first part of consideration there is a clear rule that the consideration must be at the
desire of the promisor, but the complicity arises in the second part when it states that the

1
Avtar Singh, Principles of Mercantile Law Eastern book co. 7th edn. 2000.
2
Thomas v. Thomas, (1842) 2 QB 851 at 859.

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promisee or any other person means that under Indian Contract Act it is not must unlike
English Law that Consideration must be given by the promise himself or herself.

Here we are concerned with this second part of consideration’s definition. We are concerned
here about the Role of third party in the consideration. That whether any person other than
promisee can give the consideration? If any person other than Promisee gives the
consideration whether he has the right to sue promisor in case of non performance. So what
will be the status of the third party who gave the consideration? Before discussing this all it is
must to know about the general rule of privity of contract and privity of consideration.

PRIVITY OF CONTRACT AND CONSIDERATION

The rule in Indian Contract act about the consideration regarding “the promise or any other
person” means as long as there is consideration it is immaterial who has furnished it. It may
be given by the promisee or any other person if the promisor has no any objection because the
word used is at the desire of the promisor. This rule has its origin in the English Common
Law, having been adopted by the court of King’s Bench in 1677 in the case of Dutton v.
Poole.3
In DUTTON VS POOOLE 1677 2 LEV
A father was about to cut the timber in his estate in order to provide a marriage portion for his
daughter in consideration of the father not cutting the timber, in an action by the daughter on
the son’s promise ,the court ,while affirming the principle that a stranger to a consideration
cannot sue, held that if the person from whom the consideration proceeds and the person to
whom the promise was made , are related by ties of blood , a natural love and affection , it
might be presumed that the meritorious consideration moved from the person suing . This is
sometimes called the doctrine of constructive consideration. But this doctrine has since been
definitely disclaimed.

In TWEDDLE VS ATKINSON 1861 121 ER 762


An agreement was made between the respective father of a bride and her intended husband
that the bride’s father should pay 200 to the husband in consideration of the bride’s father in
3

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law, similarly pay 100 and a suit was instituted by the husband against the executors of his
father’s in law estate. The court negatived the doctrine of consideration of constructive
consideration and held the promise to be enforceable.
Failure of reform. In 1937, the English Law Reform Committee recommended that “where a
contract by its express terms purports to confer a benefit directly on a third party, it shall be
enforceable by the third party in his own name subject to any defenses that would have been
valid between the contracting parties. However, no action was taken on this recommendation,
and when the issue came before the House of Lords again in 1968, it indicated continued
adherence to the rule of Tweddle v. Atkinson. Thus the matter rests in England. So under
English law it is must that:-

 The consideration must move from the promise and the promise only if it is moved
from any other person other than promoisee becomes stranger to the consideration and
can’t enforce the contract
 A contract cannot be enforced by a person who is not a party to it even though it is
made for his benefit. He is a stranger to the contract and can claim no rights under it.
• INDIAN POSITION IN INDIAN CONTRCT ACT 1872-
According to Section 2(d) of Indian contract act :
It clearly shows that a stranger to a consideration may maintain a suit.
CHINNAYYA VS RAMMAYYA 1881 ILR 4 MAD 137
Where a promise by a daughter to pay maintenance to her uncle (mother’s brother)in
consideration of the mother making a gift of certain properties to her, was sought to be
enforced by the uncle,, here Innes j. followed Dutton vs. Poole and invoked the doctrine of
constructive consideration.
Here whole issue was that the defendants promise was given to the plaintiff, but consideration
was furnished by the plaintiff’s sister.

PRIVITY OF CONTRACT

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The doctrine of privity in contract law provides that a contract cannot confer rights or impose
obligations arising under it on any person or agent except the parties to it. This seems to make
adequate sense, in that only parties to contracts should be able to sue to enforce their rights or
claim damages as such. However the 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. There are certain exceptions to this rule both under English law and
Indian law.

PRIVITY OF CONSIDERATION

The rule in Indian Contract act about the consideration regarding “the promise or any other
person” means as long as there is consideration it is immaterial who has furnished it. It may
be given by the promisee or any other person if the promisor has no any objection because the
word used is at the desire of the promisor. The former provisions of English law are not
applicable in India. So on the question of consideration there is a difference between Indian
and English law. An illustration is the decision of the Madras High Court in Chinnnaya v.
Ramaya.4 In this case an old lady by deed of gift made over certain land property to the
defendant, her daughter. By the terms of the deed, which was registered, it was stipulated that
an annuity of Rs. 653 should be paid every year to the plaintiff, who was the sister of the old
woman. The defendant on the same date executed in plaintiff‘s favor an iqrarnama promising
to give effect to the stipulation. The annuity was not paid and the plaintiff sued to recover it.
It was clear that the only consideration for the defendant‘s promise to pay the annuity was the
gift of certain lands by the old woman to the defendant. The defendant therefore tried to
defend herself on the ground that the promisee had furnished no consideration. Briefly the
whole situation was this defendant’s promise was given to the Plaintiff, but consideration was
given plaintiff’s sister. The court allowed the plaintiff to recover the annuity as consideration
given by any other person is equally effective.

Third Party’s Role in Consideration

4
(1882) 4 Mad 137: 6 Ind Jur 402.

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In English Law

After the Tweddle v. Atkinson case it is a well settled principle that only the promisee
himself/herself can give the consideration. So under English law it is must that:-

1. The consideration must move from the promise and the promise only if it is moved
from any other person other than promoisee becomes stranger to the consideration and
can’t enforce the contract
2. A contract cannot be enforced by a person who is not a party to it even though it is
made for his benefit. He is a stranger to the contract and can claim no rights under it
These two principles are applicable in English law in strict sence, but in India its wider and
liberal version is applicable

In India
The Indian contract act does not contain any provision which specifically barred to stranger
from suing.
Therefore, if A owes money to B, he may make a contract with C whereby he conveys his
house to him and C in consideration of the sale of the house to him, and C in consideration of
the sale of the house to him instead of paying the sale-price in cash, agrees to discharge debt
due from A to B. Such a contract is perfectly legal and valid. No law bars it , and since the law
has made no specific provision on the point, the matter has to be determined on the principles
of justice , equity and good conscience. This principle was applied by the Madras High Court
in the case of Chinnaya V. Rammayya. In which the Madras HC held the decision in favor of
the plaintiff who was not the promise but had given the consideration.

Even American judicial opinion is in the favor of this rule. According to Williston (a great
American writer) the rule that consideration must move from the promisee himself is
somewhat technical, and in a developed system of contract law there seems no good reason
why A should not be able for a consideration received from B to make an effective promise to
C.

In Scotts Engineering, Bangalore Vs. Rajesh P. Surana and Ors.


(2008) 4SCC 256

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A ship vessel M.V. Sagar owned by respondent No. 1 was swept and washed ashore and
grounded offshore near Madras Fishing Harbor as a result of several cyclonic storms. All
efforts of respondent No. 2 herein to refloat the vessel failed, it was abandoned and became a
wreck. Since the crew and master of the vessel were not paid their wages, they filed an
admiralty suit in the Madras High Court. The Court ordered the arrest of the vessel.
Respondent No. 2 through their agent respondent Nos. 3 and 6 entered into a negotiation with
the appellant for sale of the ship and finally entered into a Memorandum of Agreement
counter-signed by defendant No. 5 who was the owner's representative under which the
appellant was required to pay a sum of Rs. 75 lacks forthwith and balance consideration
amount of Rs. 1.50 crores was to be paid by 28.4.1995. On 18.4.1995 the appellant paid a sum
of Rs. 75 lacks and, therefore, filed an application seeking leave to intervene in the matter as
he had already purchased the vessel and also made the payment. The prayer was allowed.
After the crew and Master of the said vessel were paid their wages, the suit was dismissed on
satisfaction and the order of arrest was vacated. However, before the appellant could perform
his part of the contract and pay the balance consideration amount of Rs. 1.50 crores in terms
of Memorandum of Agreement dated 17.4.1995 it appears another suit was instituted in the
High Court. The High Court has restrained the owner and its agent from alienating or
encumbering the said vessel in any manner to a third party. Therefore, the appellant was
unable to perform his part of contract and could not pay the remaining consideration amount
of Rs. 1.50 crores to the owner..

It is in these circumstances contended by learned senior counsel for the appellant that there
was no privity of contract within the plaintiff and defendant No. 6 and the decree was not
against defendant No. 6 - appellant herein. He further submitted that the Court cannot go
behind the decree and the Division Bench was in error in reversing the findings of the learned
Single Judge

. The SC held that suit filed by the plaintiff originally was against defendants 1 to 5. The
appellant became a party to the suit instituted by the plaintiff-respondent herein on his own
initiative. Even after the appellant was arrayed as defendant No. 6 the plaintiff did not care to
amend the plaint except making the appellant as defendant No. 6. No relief was claimed
against defendant No. 6. In fact the relief prayed for in the suit was against defendants 1 to 5
jointly and severally. The learned Single Judge passed the decree against defendants 1 to 5.

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These are all undisputed, facts and so the decision was that there was no any concept of
privity of contract and third party has the right to give the consideration.

So till today it is the rule prevalent in India that third party can give the consideration on the
desire of the promisee.

• CONCLUSION:
So it is apparently clear from the judicial and legislative developments in India that, it
is immaterial about the source of consideration. And promisee or any other party at
the desire of promisor can furnish valid consideration and it doesn’t affect the validity
of the contract.In many instances in India also we can see that when a third party pays
consideration then also the contract is said to valid. Therefore we found that a third
party can also bind us in a contract which is enforceable by law.

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