Contract Assignment

LAW OF CONTRACT

“THIRD PARTY’S ROLE IN CONSIDERATION”

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

Submitted to:Mr. Atul PandeyAssistant LecturerFaculty of LawNLU, Jodhpur

Submitted By:Khelendra KumarMBA- Insurance1st SemesterNLU, Jodhpur

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.


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


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


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.


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


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.


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.


Contract Assignment

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