DEFINE CONSIDERATION AND ITS ESSENTIALS

Consideration → (Section 2(d))

Why do we need consideration?
Only the promises that are backed by consideration are enforceable because any promise
made without any obligation is usually very rash and without any sort of deliberation. The
reason for making consideration an essential part of a contract is because it levies a sort of
burden on the parties to fulfill the terms of the contract. For Example, if, A promises to give B
a car without B doing or abstaining to do anything for it, makes the promise unenforceable.
This will be a gift and not a contract per se.

Legal requirements as to consideration

• Must move at the desire of the promisor- Section 2d of the Indian Contract Act,
1872, clearly mentions that the consideration should be at the desire of the promisor
if the consideration is made at the will of the third person or is not according to the
promisor then it is not a good consideration.
• Can move from the promisee or another person- Unlike English law in which the
consideration must move at the desire of the promisor, in Indian law as long as there
is consideration it is immaterial as to who has furnished it. Moreover, in the case of
Chinnaya vs. Rammyya the consideration can also move at the desire of the third
party but only in the condition where he is the beneficiary of the contract.
• Can be an act, abstinence or even a promise- If the promisee does something or
abstains from doing something for the promisor, at his desire, then it will be a good
consideration.
• Can be past, present or future:
PAST- When the consideration is given before the promise was made. For example- A
saves B at the latter’s desire. B after a month promises to pay A. the act of A will amount to
past consideration for the payment made by B.

PRESENT- When the consideration is given simultaneously to the promise made, then this
is present consideration or executed consideration. For example- cash sales.

FUTURE- When the consideration of the promise made is to be passed at a future date then
that is called future or executory consideration. For example- A promises to pay B, when the
latter will fetch a newspaper for him.

• Consideration need not be adequate- It is not necessary that the consideration is

equal or adequate for the promise made. However, it is mandatory that the
consideration should be something in which the law attaches some value. It is for the
parties to decide the value of the consideration and not a court of law. For example-
A sells a table to B and B gives him rs 500. It will be difficult for the court to ascertain
the value of the table, so if A is satisfied with the amount given then the consideration
is valid.
• Should be real- although the consideration need not be adequate it should be real
and not illusory. The consideration should not be physically impossible, legally not
permissible or based on an uncertain event or condition.
• Should not be something which the promisor is already bound to do- a
consideration to do something which the promisor is already required to do is not a
good consideration. For example- the public duty done by a public servant.
• Should not be immoral, or against the public policy of the state- under Section
23 of the Indian contract it is given that consideration should not be illegal, immoral or
against public policy. The court should decide the legality of the consideration and if
found to be illegal then no action on the agreement should be allowed.
 PRIVITY OF CONTRACT
Introduction
According to Section 2(h) of the Indian Contract Act, 1872, a contract can be defined as an
agreement that subsists between two or more parties that is enforceable in the courts of law.
When one party fails to perform their obligations provided in the contract, the other party can
sue them for the breach and obtain adequate remedy. Consideration is one of the major
requisites for the validity of a contract and it is defined in Section 2(d) of the Indian Contract
Act. It refers to any act or abstinence performed by the promisee or any other person at the
request of the promisor. Indian law permits consideration to be moved by persons who are
not parties to the contract as long as it is at the request of the promisor.

What is privity of contract?

The doctrine of privity of contract is one of the major principles that govern the law of
contracts. The word ‘privity’ means ‘with knowledge and consent’. According to this doctrine,
only parties to a contract have the right to enforce the rights and obligations provided by the
contract and strangers to the contract are barred from enforcing any obligation on any party.
This doctrine protects parties to a contract from obligations that they never agreed to incur.
Only those parties that have an interest in the contract can sue for its enforcement. The first
case in India that affirmed the applicability of the doctrine was the case of Jamna Das v.
Ram Autar Pande (1916).

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For example, A and B entered into a contract where A gave Rs.100 in return for which B
agreed to deliver a watch to C. Here since C is a stranger to the contract he cannot sue B if
he fails to deliver the watch.

Though consideration can be provided by third parties, they can never enforce the
performance of the contract as they are strangers to the contract. It is important to note that
there is a difference between a stranger to contract and stranger to consideration. As a
stranger to consideration remains a party to the contract in spite of not providing
consideration, he can still file a suit challenging the contract.

Doctrine of privity in english law

English law is more restrictive in comparison to Indian law in the application of the doctrine
of privity. This is because English law only recognizes consideration that moves from the
promisee himself and not from anyone else, which puts both strangers to contract and
strangers to consideration on the same footing. Thus, when the promisee to a contract does
not provide the consideration himself, he loses his right to enforce the contract as he is a
stranger to consideration.

The doctrine of privity of contract was first recognized in English law in the case of Tweddle
v. Atkinson (1861). In this case, John Tweddle William Guy entered into a contract where
they agreed that both of them would pay a sum of money to their children who were
engaged. However, the father of the bride William passed away before he fulfilled his
obligation. The father of the groom died too before he filed for a suit. The groom filed a suit
against the executor of William for the payment of the sum of money. The Court ruled that
since the son was both a stranger to the contract and a stranger to the consideration, his suit
was not maintainable.

The relevance of the doctrine was affirmed again when it was cited in the well-known case
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd (1915). In this case, Dunlop Company
manufactured tyres and they entered into an agreement with Dew & Co., who were dealers.
Dunlop entered into the agreement so that they can maintain a standard market price for the
tyres and Dew & Co. agreed that they would not sell the tyres below the fixed price. Dunlop
also insisted that the dealers must have the same terms in their agreements with the
retailers. Dew & Co. entered into a contract with a retailer Selfridge, which had a provision
that if the tyres were sold below the fixed price, they would have to pay 5 Pounds per tyre as
damages to Dunlop & Co. When Selfridge sold some tyres below the fixed price, Dunlop
sued them for damages and the decision was in favour of Dunlop. But, on appeal the
decision was reversed and it was held that Dunlop did not have the right to claim damages
as the contract was only between the retailer Selfridge and Dew & Co.

Exceptions to the rule that a Third Party to contract cannot sue

The doctrine of privity of contract is however not absolute. There are several exceptional
situations in which a third party to a contract can sue. The following are the exceptions to the
doctrine of privity in Indian law :

• Trust of contractual rights or beneficiary under a contract

A trust refers to something created by a contract for the benefit of a third party. In a contract
of trust, the trustor transfers the title of a property to the trustee, so that the trustee holds it
for the benefit of a third party who is also called the beneficiary. Even though beneficiaries
are third parties to a contract they have the right to enforce the provisions of trust.

To cite an example, in the case of Rana Uma Nath Baksh Singh v. Jang Bahadur (1938),
the trustor was a father who transferred all of his estates to his son for him to hold in trust for
the benefit of the trustor’s illegitimate son. The son had the obligation to provide the
illegitimate son with money on a regular basis. When the son failed to perform his obligation,
the illegitimate son filed a suit to recover the amount to be paid and the suit was
maintainable even though he was not a party to the contract.

• Provision for marriage or maintenance under family arrangement

In a contract for a family settlement either for marriage or maintenance, where the contract is
intended to benefit a third party, he may sue on the contract to secure his rights.

For example, in the case of Lakshmi Ammal v. Sundararaja Iyengar (1914), there was an
agreement among the brothers of a Hindu joint family to pay for the expenses to be incurred
for the marriage of their sister. Despite being a third party to the agreement, the sister had
the right to enforce the provision that was made for her.

In the case of Veeramma v. Appayya (1955) the daughter of the family had the responsibility
of taking care of the father. So, there was a family arrangement made for conveying the
father’s house to her. Since the agreement benefited her, she had the right to file a suit for
the specific performance of the contract.

• Acknowledgement or Estoppel
According to the law of estoppel, if a person by words or conduct suggests something, he is
not allowed to contradict it later. Thus, if a party to a contract acknowledges by words or
conduct that a third party has the right to sue him, he cannot deny that later by the rule of
estoppel. In such cases, a suit filed by that party, despite being a stranger to the contract, is
maintainable.

For example, A and B enter into a contract where A pays B a sum of money that has to be
given to C. B acknowledges to C that he is holding the sum for him. If B defaults in the
payment, C will have the right to recover the sum from him.
In the case of Devaraj Urs v. Ramakrishnayya (1951), A bought a house from B. B asked A
to pay the price for the sale to B’s creditor. The buyer paid a part of the price to the creditor
and promised him that he would pay the rest later. On his default, the creditor filed a suit
against him. The court ruled in favour of the creditor, though he was a third party to the
contract.

• Contracts entered into through an agent

It is not uncommon for people involved in commerce and business to enter into contracts
through their agents. These agents can enter into contracts for them and represent them in
the relations that arise in such contracts. Thus, whatever contracts entered into by an agent
while acting within the scope of his authority can be enforced by the principal. It may seem
that the agent is the party to the contract, but in reality, he is more of a representative of the
principal.

For example, A appoints B as his agent. He asks B to buy a bag of rice from C on his behalf.
Here, B enters into a contract with C when he buys the bag of rice, but it is A who has the
right to enforce the contract as B is a mere representative of A.

• Charge created on a specific immovable property

In certain cases, charges or covenants are made on a specific immovable property, like land
for the benefit of a third party. In such cases, these third parties can enforce the contract,
though they are strangers to the contract.

• Assignment of a contract
Assignment of contract refers to the transfer or assignment of the rights and liabilities arising
from contractual relations to a third party. In cases where the benefits of a contract are being
assigned, the assignee of the benefits can sue upon the contract though he is not a party to
the contract.

For example, a husband assigns his insurance policy in favour of his wife. As the benefit of
the contract is assigned to her, she has the right to enforce the contract though she is not a
party to it.

• Collateral contracts
Collateral contracts refer to the contracts subsidiary to the original contract. It could be
entered into by the same parties or one of the original parties with another party. It can be
made before or after the main contract is formed. When a third party has entered into a
collateral contract, he can also file a suit to enforce the main contract in spite of not being a
party to it. The best example of a collateral contract is a manufacturer’s guarantee regarding
the goods sold. The sale of the goods is the main contract and the guarantee is the contract
collateral to it.

In the case of Shanklin Pier Ltd. v. Detel Producers Ltd. (1951), a person A was employed
as a contractor by B. B asked A to buy some paint manufactured by C. B wanted A to buy
C’s paint because of a statement that was once made by C that the paint would last for
seven years. But the paint only lasted for three months. In this case, the guarantee given by
C to B forms a contract that is collateral to the contract made by A and B. The suit filed by B
was maintainable even though he was not a party to the main contract.

Conclusion
To sum up, the doctrine of privity of contract is not an absolute rule. There are many cases
in which a person who is not a party to a contract can enforce the contract as explained
above. The doctrine of privity of contract protects the parties to a contract from legal action
taken by strangers against them, as they are obligated to only the party with whom they
contracted. But, there are situations where third parties can be aggrieved by the breach of a
contract and the exceptions to the doctrine enable them to take action against the parties to
the contract.

Mohori Bibee v. Dharmodas Ghosh

In this case, the privy council held that a contract by a minor is void-ab-initio (from the start)
it was held in 1903.

Introduction:
Case Name: Mohori Bibee and Ors. Vs. Dharmodas Gosh
Before The: Privy Council
Decided On: 04.03.1903
Appellants: Mohori Bibee and Ors
respondent: Dharmodas Ghose
Citation: 30M.I.A.114
Facts of the case:
The respondent Dharmodas Ghose on the 20th July of 1895 executed a mortgage deed in
the favor of a moneylender named Brahmo Dutt carrying on business in Calcutta and
elsewhere but throughout the transaction Brahmo Dutt was absent from the Calcutta. The
business was carried out for him by his attorney Kedar Nath Mitter. The respondent
mortgaged immovable property his house for the repayment of Rs. 20,000 at the rate of 12%
(Twelve Percent) interest, the amount increased in the dispute. At that time the respondent
was a minor. On the 15th of July 1895, Kendar Nath received information that the
respondent was still minor through a letter sent by Bhupendra Nath Bose, an attorney. Kedar
Nath denied receiving any letter but court held that he did personally receive the letter on
15th July and the evidence is conclusive.

Issues:
Whether the contract was void or not under The Indian Contract act of 1872 Section 2
Section 10 and most important Section 11;
Whether the respondent was liable to pay back the loan to the Defendant;
Whether the contract of mortgage was avoidable or not.

Judgement:
First, the trial court held that the contract between the Plaintiff and Defendant was void
because at the time of the contract the Plaintiff was a minor.

Later Defendant filed an appeal in the Calcutta High Court where the High Court agreed with
the verdict of the trial court and dismissed the appeal.

Again, Brahmo Dutta went to the Privy Council to appeal and the Privy Council also
dismissed the case and held that the contract between appellant and respondent is void.

The final decision passed by The Privy Council was:

The contract with any minor is void-ab-initio (from the beginning).

The Dharmodas Ghose was not held liable for the repayment of the loan because the
contract was void-ab-initio.