Stranger to Contract, Privity of Consideration and Exceptions | Indian Contract Act, 1872

Two concepts are often confused while studying consideration; Stranger to consideration and stranger to contract. They are not the same.

Indian law permits consideration to move from a person who is not the promisee. However, the general rule is that a person who is not a party to a contract cannot sue upon it. This distinction becomes much easier once the two concepts are separated.

Stranger to Consideration

Section 2(d) of the Indian Contract Act provides that consideration may move from “the promisee or any other person.” Therefore, under Indian law, consideration may be supplied by a third person.

• For example, A promises to pay B ₹50,000. C, at A’s request, provides something of value to B. The fact that the consideration came from C does not by itself invalidate the agreement between A and B.

Thus, a stranger to consideration can exist under Indian law.

Landmark Case: Venkata Chinnaya Rau v. Venkata Ramaya Garu (1882).

An old lady transferred property to her daughter on the condition that the daughter would pay an annuity to the old lady’s brother. The daughter agreed to pay the annuity but later failed to do so. The court held that the consideration supplied by the mother was sufficient even though the brother, in whose favour the promise was made, had not supplied the consideration.

The case demonstrates the Indian rule that consideration may proceed from a third person.

Stranger to Contract

The position is different when we ask whether a person who is not a party to the contract can sue upon it. The general rule is, ‘A stranger to a contract cannot sue upon the contract’. This is known as the doctrine of privity of contract.

• For example, A owes B ₹50,000. A sells his property to C, and C promises A that he will pay B the ₹50,000. If C fails to pay, B generally cannot sue C merely because the arrangement was intended to benefit B. B was not a party to the contract between A and C.

Therefore, Stranger to consideration may be valid, but, Stranger to contract generally cannot sue. This distinction is extremely important.

Case: Tweeddle v. Atkinson (1861)

The fathers of a bride and groom agreed in writing that each would pay a sum of money to the groom. They agreed that the groom would have full power to sue for the money. The groom sued after his father-in-law died without paying.

The groom’s claim failed. The court held that no stranger to the consideration can take advantage of a contract although made for his benefit. Under English law, both privity of consideration and privity of contract are strictly required.

Privity of Consideration vs Privity of Contract

So, a person may be a stranger to consideration but still be a party to the contract. Likewise, a person may be intended to benefit from a contract but still be unable to enforce it because he is a stranger to the contract.

Exceptions to the Doctrine of Privity of Contract

The general rule is that a person who is not a party to a contract cannot sue upon it, even if the contract is made for his benefit. This is known as the doctrine of privity of contract.

However, Indian law recognises certain exceptions where a person who is not an original party may enforce a contractual benefit.

1. Beneficiary under a Trust or Charge

Where a contract creates a trust, charge or other beneficial interest in favour of a third person, the beneficiary may enforce that benefit even though he or she was not a party to the original contract. The right enforced is essentially the beneficial or equitable right created in the person’s favour. The Supreme Court has also recognised this principle.

• Case: Khwaja Muhammad Khan v. Husaini Begum (1910) – An agreement was entered into in connection with the marriage of Husaini Begum, under which her father-in-law agreed to pay her a monthly allowance known as Kharch-i-Pandan. Certain immovable property was specifically charged for payment of the allowance. When the allowance was not paid, she sued, although she was not a party to the agreement. The Privy Council allowed her claim, holding that the agreement had created a specific benefit in her favour. She was therefore entitled to enforce it.
• Case: M.C. Chacko v. State Bank of Travancore (1970) - The Supreme Court clarified that a person who is not a party to a contract cannot enforce it merely because he derives a benefit from it. The court held that to invoke this exception, a clear and specific trust or charge must be created over specific property in favour of the third party. A mere personal covenant or agreement between two parties to pay a debt to a third party does not create a trust, and the third party cannot sue upon it.

Thus, a third-party beneficiary cannot sue unless a genuine trust or specific charge is created.

2. Family Settlement, Partition and Marriage Arrangements

A person who is not a party to a contract may enforce a provision made for his or her benefit in a family settlement, partition arrangement or marriage arrangement. Courts have recognised this exception particularly where refusing enforcement would defeat the purpose of the family arrangement.

• Case: Shuppu Ammal v. Subramaniam (1910) – Two brothers, while dealing with the partition of family property, made provision for their mother’s maintenance. Although the mother was not a formal party to the document, the arrangement created a charge in her favour. The Madras High Court held that she was entitled to enforce the provision and seek appropriate relief.

Thus, a person intended to benefit under a family settlement or partition arrangement may enforce the benefit even without being a formal party to the agreement.

3. Assignment of Contractual Rights

Where a contractual right is validly assigned to another person, the assignee may generally enforce the assigned right against the other contracting party. The assignee effectively steps into the position of the original holder of the right, subject to the nature of the right and the applicable law.

Note: This is better understood as an assignment of an existing contractual right, rather than a general exception allowing any third-party beneficiary to sue. Therefore, it should not be stated broadly that every person benefiting from a contract automatically acquires a right to sue.

4. Acknowledgement or Estoppel

A third person may acquire an enforceable right where the promisor, by his conduct, acknowledgement or representation, recognises an obligation towards that person and acts upon it.

• For example, where A owes money to B and B transfers money to C for payment, and C is informed by B that the money is being held for him, subsequent conduct acknowledging C’s right may prevent B from denying the obligation.

The underlying idea is that a person who has acknowledged a third party’s right and acted upon that acknowledgement may be prevented from subsequently denying it.

5. Covenants Running with Land

Certain obligations attached to land may bind or benefit subsequent owners, even though they were not parties to the original agreement, particularly where the subsequent purchaser has notice of the covenant.

• Case: Tulk v. Moxhay (1848) – The owner of land sold it subject to a restrictive covenant that the land would be kept open and free from construction. A subsequent purchaser bought the land with notice of the restriction but attempted to build upon it. The court restrained the construction, recognising that the restrictive covenant could bind a subsequent purchaser who had notice of it.

Thus, certain covenants concerning land may operate against subsequent purchasers who take the property with notice of the covenant.

6. Contracts Entered into Through an Agent

Where an agent enters into a contract on behalf of a disclosed principal and within the scope of his authority, the contract is enforceable by and against the principal. The principal need not have personally signed or entered into the contract.

This is not strictly a case of an ordinary stranger acquiring contractual rights. Rather, the law treats the acts of an authorised agent as creating contractual relations between the principal and the third party.