Privity of Consideration

Privity of consideration (consideration from a third party) #

Meaning #

In English law, the traditional rule was: “consideration must move from the promisee” (so a person who didn’t furnish consideration is a stranger to consideration and generally can’t enforce the promise).

Indian law is different. Under the Indian Contract Act, 1872, consideration may move from the promisee or any other person. This is often described as no strict privity of consideration in India.

Statutory basis #

Section 2(d), Indian Contract Act defines consideration so widely that it expressly includes acts, abstinence and promises done by “the promisee or any other person”, provided it is at the desire of the promisor.

What it practically means #

So, in India:

1. A promise is not void merely because the promisee did not personally supply consideration—it is enough if consideration moved from any third person, at the promisor’s desire.
2. But remember: this is about who can furnish consideration (third party can). It is not the same as privity of contract. Generally, a stranger to the contract (not a party) still cannot sue, unless an exception applies. (See the difference between the two: here)

Leading case: Chinnaya (Chinnayya) v. Ramayya (Madras HC) (1882) #

Facts: An old lady gifted certain property to her daughter (Ramayya). The transfer was made on the condition that the daughter would pay an annuity (around Rs. 653) to the old lady’s sister (Chinnaya), the plaintiff. After the old lady’s death, the daughter refused to pay the annuity, arguing that the plaintiff had given no consideration.

Issues:

1. Whether the promise to pay annuity was unenforceable because consideration did not move from the plaintiff (promisee).
2. Whether consideration supplied by a third party (here, the old lady via transfer of property) is sufficient in Indian law.

Held: The daughter was liable to pay the annuity. The court held that under Section 2(d) ICA, consideration may move from the promisee or any other person. Therefore, even though the plaintiff did not personally provide consideration, the transfer of property by the old lady was valid consideration supporting the daughter’s promise to pay the annuity, and the promise was enforceable.

Ratio: In India, a promise can be enforced even if the consideration moved from a third party, because Section 2(d) allows consideration to proceed from “the promisee or any other person.”

Conclusion #

The doctrine of privity of consideration is not strictly applied in India. By virtue of Section 2(d) of the Indian Contract Act, consideration may be furnished by the promisee or any other person, so long as it is at the desire of the promisor. The leading authority is Chinnaya v. Ramayya, where the Madras High Court enforced a promise to pay an annuity even though consideration flowed from a third party (the transferor of property), not from the promisee herself.