Privity of Consideration

Meaning of Privity of Consideration

Privity of consideration refers to the relationship between the person who provides consideration and the promise made under a contract.

In traditional English contract law, the general rule was that consideration must move from the promisee. A person who was not a party to the contract could not ordinarily provide consideration for the promise.

However, Indian contract law is different.

Under Section 2(d) of the Indian Contract Act, 1872, consideration may move from the promisee or any other person.

Therefore, in India:

Consideration may move from a third person.

This means that Indian law does not require strict privity of consideration in the same way as traditional English law.

Statutory Basis: Section 2(d)

Section 2(d) defines consideration and expressly states that an act, abstinence or promise may be done or given by:

“the promisee or any other person”

at the desire of the promisor.

The words “or any other person” are particularly important.

They mean that the person who provides consideration need not necessarily be the person to whom the promise is made.

Example

A promises B that A will pay B ₹1 lakh.

C, at B’s request, pays ₹1 lakh to A.

Here:

• B = promisee
• A = promisor
• C = person providing consideration

C is not the promisee, but consideration has moved from C.

The arrangement can still satisfy Section 2(d).

Privity of Consideration in India

Indian law therefore recognizes what is commonly described as the absence of privity of consideration.

The important principle is:

Consideration may move from the promisee or any other person.

This is different from the doctrine of privity of contract, under which a person who is not a party to a contract generally cannot enforce the contract.

Thus:

Third person provides consideration → Permissible

Third person seeks to enforce a contract to which they are not a party → Generally not permissible

Chinnaya v. Ramaya

Chinnaya v. Ramaya (1882)

This is the leading Indian case on consideration moving from a person other than the promisee.

A mother transferred certain property to her daughter by a gift deed. The transfer was subject to the daughter’s agreement to pay an annuity to the mother’s brother.

The daughter later refused to pay the annuity.

The court held that the consideration could move from a person other than the promisee.

Principle

Under Section 2(d), consideration may move from the promisee or any other person.

The case is therefore the leading authority for the proposition that Indian law does not require consideration to move only from the promisee.

Privity of Consideration vs Privity of Contract

These two doctrines must not be confused.

Privity of Consideration

It concerns who provides the consideration.

Under Indian law, consideration may be provided by:

• the promisee; or
• another person.

Privity of Contract

It concerns who is a party to the contract.

A person who is not a party to the contract generally cannot enforce the contract merely because they provided consideration or benefited from it.

Example

A promises B that A will pay B ₹50,000.

C pays the consideration at B’s request.

Here:

• C may be the provider of consideration.
• B is the promisee.
• A and B are the parties to the contract.
• C does not become a contractual party merely because C provided consideration.

Therefore:

No privity of consideration is required, but privity of contract generally remains necessary for enforcement.

Stranger to Consideration

A stranger to consideration is a person who provides consideration even though they are not the promisee.

Indian law permits this because of Section 2(d).

Example

A agrees to sell property to B for ₹20 lakh.

C pays ₹20 lakh to A on behalf of B.

Here, C is a stranger to the consideration in the sense that C provides the consideration but is not the promisee.

The contract does not automatically become invalid merely because B did not personally provide the money.

Stranger to Contract

A stranger to contract is a person who is not a party to the contract.

Such a person generally cannot enforce the contract.

For example:

A contracts with B that A will pay ₹1 lakh to C.

If C is not a party to the contract, C generally cannot sue merely because C was intended to benefit from the arrangement, unless a recognized exception applies.

This distinction is important:

Basis	Privity of Consideration	Privity of Contract
Concerned with	Who provides consideration	Who is party to contract
Indian rule	Consideration may come from any person	Stranger generally cannot enforce
Main provision	Section 2(d)	Primarily judicial doctrine
Example	C provides payment for B’s promise	C is not a party and generally cannot sue
Leading authority	Chinnaya v. Ramaya	M.C. Chacko v. State Bank of Travancore

English Law vs Indian Law

Traditional English Rule

Traditional English contract law generally required consideration to move from the promisee.

A person who was not the promisee could not ordinarily provide consideration and enforce the promise on that basis.

Indian Rule

Indian law deliberately adopted a broader definition.

Section 2(d) expressly states:

consideration may be provided by “the promisee or any other person.”

Therefore, a third person can provide consideration in India.

Key Difference

English law: Consideration generally must move from the promisee.

Indian law: Consideration may move from the promisee or any other person.

Does a Person Providing Consideration Become a Party?

No.

The fact that a person provides consideration does not by itself make that person a party to the contract.

For example:

A promises B that A will transfer property to B.

C pays A ₹5 lakh on B’s behalf.

C has provided consideration, but C does not automatically become a party to the contract between A and B.

This is why privity of consideration and privity of contract are separate concepts.

Does a Stranger to Consideration Have a Right to Sue?

Not merely because they provided consideration.

Suppose:

A promises B to provide a service.

C provides the consideration at B’s request.

C cannot automatically sue A simply because C provided the consideration.

The right to enforce a contract ordinarily depends on being a party to the contract or falling within a recognized exception.

Importance of Section 2(d)

The words “or any other person” in Section 2(d) are crucial for understanding privity of consideration.

They demonstrate that:

1. the promisee need not personally provide consideration;
2. a third person can provide consideration;
3. consideration can move from someone other than the promisee; and
4. this does not automatically give that third person contractual rights.

Relation with Privity of Contract

The easiest way to remember the distinction is:

Privity of consideration asks: “Who gave the consideration?”

Privity of contract asks: “Who entered into the contract?”

For example:

A promises B ₹1 lakh.

C pays ₹1 lakh to A on B’s behalf.

C gave consideration, but C is not necessarily a party to the contract.

Therefore:

Consideration can come from C → Yes

C can automatically sue on the contract → No

Important Cases

Chinnaya v. Ramaya (1882)

Principle: Consideration may move from the promisee or any other person under Section 2(d).

This is the leading Indian case on privity of consideration.

M.C. Chacko v. State Bank of Travancore (1969)

Principle: A person who is not a party to a contract generally cannot enforce the contractual rights arising from it, subject to recognized exceptions.

This case is important for distinguishing privity of contract from privity of consideration.

Important Points for Exams

1. Privity of consideration concerns the source of consideration.
2. Under Section 2(d), consideration may move from the promisee or any other person.
3. Therefore, Indian law does not require strict privity of consideration.
4. A person other than the promisee can provide consideration.
5. A stranger to consideration does not automatically become a party to the contract.
6. A stranger to contract generally cannot enforce the contract.
7. Chinnaya v. Ramaya is the leading case.
8. M.C. Chacko v. State Bank of Travancore is important for privity of contract.
9. Privity of consideration and privity of contract are distinct concepts.
10. The key statutory words are “the promisee or any other person.”

Quick Revision

Privity of Consideration: Relationship concerning the person who provides consideration.

Indian Rule: Consideration may move from the promisee or any other person.

Section: Section 2(d)

Leading case: Chinnaya v. Ramaya (1882)

Stranger to consideration: Can provide consideration.

Stranger to contract: Generally cannot enforce the contract.

Easy Formula

Indian Law: No strict privity of consideration

But: Privity of contract generally required for enforcement

Conclusion

Privity of consideration deals with the person from whom consideration moves. Unlike traditional English law, Indian law does not require consideration to come only from the promisee. Section 2(d) of the Indian Contract Act, 1872 expressly permits consideration to move from the promisee or any other person. The leading case of Chinnaya v. Ramaya establishes this principle. However, a person who provides consideration does not automatically become a party to the contract or acquire a right to enforce it. This distinction between privity of consideration and privity of contract is fundamental to Indian contract law.