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Consideration,
Privity of Consideration
&
Privity of Contracts

(Project Work)

Aakash Raj
Chauhan,RMLNLU

Roll No.: 180101002

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A contract, according to s. 2(h) of the Indian Contract Act, is an agreement

enforceable by law. For an agreement to be enforceable by law, s. 10 imposes
certain conditions that are to be satisfied:

There must be sufficient consideration.

The parties must be competent to contract.
The consent of the parties should be free.
The object of the agreement must be lawful.

The contract thus created can confer rights or impose obligations on the parties to
the contract. Third parties are not under such an obligation to perform or demand
performance under a contract as they are stranger to the contract/consideration. A
stranger to the contract/consideration cannot sustain an action on the promise made
between two persons unless he has in some way intervened in the agreement. This is
referred to as the Doctrine of Privity. Privity can be either Privity of Consideration
or Privity of Contract.

CONSIDERATION
Consideration is considered to be one of the most important essentials in a valid
contract. Every agreement to be enforceable at law must necessarily be supported
by consideration. This principle is based on the maxim: “ Ex Nudo Pacto Non
Oritur Actio” (from a nude pact, no cause of action arises.)

Consideration is the price for which the promise of the other is bought and the
1
promise thus given for value is enforceable. Consideration is the evidence of

th
1Pollock and Mulla, Indian Contract Act and Specific Relief Acts, 13 edition, 1972, p.113
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mutual obligations which the law can enforce. It is the sign and symbol of every
bargain.

The term consideration has been defined in various ways.

2

“A valuable consideration may consist either in som e right, interest, profit or

benefit accruing to one party or forbearance, detriment, loss or responsibility given,
suffered or undertaken by the other party.”
3
In Thomas v. Thomas , it was held that consideration may be some benefit to the
plaintiff or some detriment to the defendant.
According to these definitions consideration consists in some benefit to the
promisor, or some detriment to the promise.

The British contract Act defines consideration as follows “when at the desire of the
promisor, the promisee or any other person has done or abstained from doing or
does or abstains form doing, or promises to do or to abstain from doing, something,
such act or abstinence or promise are called a consideration for the promise.”

Consideration need not necessarily be in cash or kind. It may be an act or abstinence

or promise to do or not to do something.
4
In Lees v. Whitcomb , it was held that a promise to remain with the plaintiff for two
years for the purpose of learning a trade was not binding, for want of a
corresponding promise to teach. Sufficient consideration was not expressed on the
face of the instrument.

2 1875 LR 10 Ex.153
3 1842 (2) QB 851
4 1828 (130) ER 972
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LEGAL RULES AS TO CONSIDERATION

Consideration must move at the desire of the promisor

The act done or loss suffered by the promisee must have been done or suffered at
the desire or request of the promisor. The act done at the desire of a third party or
without the desire of the promisor cannot be a good consideration. It is not
necessary that the promisor himself should be benefited by the acts of the promisee.
The benefit may be intended for a third party. But the desire or request of the
promisor is essential.

5
In Durga Prasad v. Baldeo, Baldeo expended some money on the improvement of
a market at the desire of the Collector of the district. In consideration of this, Durga
Prasad who, was using the market, promised to pay some money to Baldeo. Held,
the agreement was void being without consideration since it was not moved at the
desire of Durga Prasad.

Consideration may move from the promisee or any other

person
Consideration can be given or supplied by the promisee or any other person who is
not a party to the contract. As long as there is a consideration it is not important who
has given it. Therefore, a stranger to consideration can sue on a contract provided he
is not a stranger to contract. This is known as the “doctrine of constructive
consideration”.

This principle had its genesis in the English common law, having been adopted by
6
the Court of King’s Bench as early as 1677 in Dutton v. Poole .On failure of the

5ILR (1880) 3 All 221

6 (1677) 2 Levinz 210: 83 LR 523
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defendant’s promise to his father to give £1000 to his sister on her marriage if father
forebears to sell the wood, the daughter and her husband sued the defendant for the
amount. Though the plaintiff was not a privy to the contract, the defendant was held
liable because the whole object of the agreement was to provide a portion to the
plaintiff.

The current English law position that, consideration must proceed only from the
7
promisee was established by the Court of Queen’s Bench in Tweedle v. Atkinson . A
stranger to a consideration cannot sue under English law. This principle forms the
basis of the Privity of Consideration.
Under Indian Law, the consideration can proceed from the promisee or any other
person. Hence, a stranger to a consideration can also sue under Indian law.
8
In Chinnayya v. Ramayya , the daughter promised her mother to pay maintenance
to her uncle in consideration for her mother gifting properties. It was held that
whatever consideration had moved from the mother could be presumed as having
moved from the uncle.

Consideration may be past, present or future

Consideration may, under s. 2(d) of the Indian Contract Act, consist of a past,
9
present or a future act.

Past consideration
When a consideration by a party for a present promise was given in the past, it is
treated to be a past consideration. It indicates a past act or forbearance.

7 (1861) 1 B&S 393

8 (1882) 4 Mad.137
9 Pankaj Bhargava v. Mohinder Nath, (1991) 1 SCC 566
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According to Anson, past consideration is a mere sentiment of gratitude or honour,

prompting a return for the benefits received. Under the English law, past
consideration is no consideration. A promise to pay compensation for something
10
already done is past consideration and is no consideration.

The Indian position with regards to this is different from that of the English rule as
it treats past voluntary services and services previously rendered at the desire of the
11
promisor to be good consideration .

12
In Sindha Shri Ganpatsinghji v. Abraham , it was held that the services rendered
at the request of a minor during his minority were held to form good consideration
for the promise subsequently made by the minor after attaining majority. In certain
cases, promise to pay time-barred debts and negotiable instruments given in
consideration of some past act can also be taken as valid consideration for a
subsequent promise and the party can validly enforce it.

Present consideration
When consideration is given simultaneously with the promise, it is said to be
present or executed consideration. The act here is done in response to a positive
promise. For instance, in sale of goods over the counter and in offers of reward,
present consideration takes place.

S.K. Das, J. of the Supreme Court explains this in Union of India v. Chaman Lal
13
Loona & Co. , “ An executed consideration consists of an act for a promise. It is
the act which forms the consideration. No contract is formed unless and until the act
is performed.”

10 Re Mc Ardle [1951] 1 Ch 669

11 P Kanakasabapathy Mudaliar v. Hajee Oosman Sahib, AIR 1925 Mad 192
12 1895 (20) Bom 755
13 AIR 1957 SC 652
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Future consideration
When consideration from one party to the other is to pass subsequently to the
making of the contract (i.e., to receive consideration in future for the promise), it is
a future consideration. A promise is made by one party in return for a promise made
by the other. It is also known as an executory consideration.

In executory consideration, S.K. Das, J. states, “I t is in fact a promise for a

promise; one promise is bought by the other. The contract is concluded as soon as
14
promises are exchanged.”

Mutual promises to marry, or promise to work in return for promise of payment, are
examples of future consideration.

Consideration need not be adequate

Consideration need not be adequate to the promise, but it must be of some value in
the eye of law. So long as consideration exists, the courts are not concerned as to its
adequacy. Provided it is of some value. The adequacy of the consideration is for the
parties to consider at the time of making the agreement, not for the court when it is
sought to be enforced. However, the inadequacy of the consideration may be taken
into account by the court in determining the question whether the consent of the
promisor was freely given. This is because inadequacy may suggest fraud, mistake
or coercion etc.

15
The best known English authority is De La Bere v. Pearson Ltd. The defendants,
who were newspaper proprietors, offered to answer enquiries from readers of the
paper desiring financial advice. The plaintiff wrote to them asking for a safe
investment and also for the name of a good stockbroker. The editor recommended

14 AIR 1957 SC 652

15[1908] 1 KB 280 (CA)
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a person who, unknown to him, was in fact, an undischarged bankrupt. The plaintiff,
in reliance on the recommendation, sent sums for investment and they were
immediately misappropriated. In an action against the defendants, the question was
whether there was sufficient consideration for the offer of the advice. It was held
that there was sufficient consideration.

Consideration must be real and not illusory

Although consideration need not be adequate, it must be real, competent and of
some value in the eyes of the law. Real consideration is one which is not physically
or legally impossible. If a person agrees to perform a physically impossible act for a
consideration or the performance of a promise is legally impossible, the
consideration is not real and enforceable. For example, discovering treasure by
magic or making two parallel straight lines meet or putting life back into a dead
body cannot be enforced as promises because of impossibility. A consideration
cannot be deemed as good, if it is uncertain or ambiguous. A promise to pay a
‘reasonable sum’ is not enforceable as it is uncert ain. There is no recognized
method of ascertaining the “reasonable” remuneratio n.

Consideration must be something which the promisor is not

already bound to do
A promise to do what one is already bound to do, either by general law or under an
existing contract, is not a good consideration for a new promise. There will be no
detriment to the promisee or benefit to the promisor over and above their existing
rights or obligations. Similarly, a promise to perform a public duty by a public
servant is not a good consideration.
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For example, A promises to pay $ 200 to police officer for investigation into a
crime. This promise is without consideration because the police officer is already
bound to do so by law.

Consideration must be lawful

The consideration for an agreement must be lawful. An agreement is invalid if it is
16
based on unlawful consideration. Consideration is unlawful :

a. if it s forbidden by law or
b. if it is of such a nature that, if permitted it would defeat the provisions
of any law, or
c. is fraudulent, or
d. involves or implies injury to the person or property of another, or
e. the court regards it as immoral, or opposed to public policy

Consideration may be an act or abstinence or promise

Consideration may be a promise to do something or not to do something. So it may
be either positive or negative. Consideration need not always be doing some act. It
can be not doing an act also.
Forbearance to sue, Compromise of a disputed claim and Composition with
creditors are considered to be good consideration for a contract.

Forbearance to sue
It means a person who has a right of action against another person, refrains from
bringing the action. If a party who could sue another for the enforcement of a right
agrees not to pursue his claim at the desire of the debtor, it constitutes a good
consideration for a promise by the other person. Forbearance to sue may be forever
or for a short or limited time.
16 S.23 of Indian Contracts Act,1872
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For example, A has a right to sue his debtor B for $5000. But he postpones suing as
B agreed to pay $ 2000 more. Such forbearance is a valuable consideration for the
promise of B.

Compromise of a disputed claim

Compromise is a kind of forbearance. For this purpose, claim should be reasonable
and the party claiming should prudently believe that it is a valid claim. The
compromise of a disputed claim is a good consideration for the fresh agreement of
compromise. The claimant should also act bona fide. If the claim is useless and the
claimant was not acting bona fide, the other party can claim compensation.
For example, A sues to recover a debt of $2000 from B. B denies the whole debt and
promises to pay $500 to A as a sort of compromise. This compromise of B is
supported by consideration and is valid.

Composition with creditor

A debtor under financial burden may convene a meeting of his creditors and
earnestly request creditors to accept lesser amount in full settlement of their debt. If
creditors agree to the request of the debtor, the contract is binding upon both the
debtor and the creditors as this amounts to a compromise of the claims of the
creditors.

Validity of an Agreement without consideration

17
The general rule is that an agreement made without consideration is void. In every
valid contract consideration is very important. A contract may only be enforceable
when an adequate consideration is there. However, the Indian Contract

17 S.25, Indian Contracts Act, 1872

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Act, 1872 contains certain exceptions to this rule. In the following cases, the
agreement though made without consideration, will be valid and enforceable.

Natural Love and Affection

A written and registered agreement based on Natural Love and Affection between
the parties standing in near relation to each other is enforceable even without
18
consideration . There is always some degree of instinctive love and affection
between parties nearly related (blood relation & marriage). But this instinct may be
overruled by external circumstances. For example, in Rajlukhy Dabee v.
19
BhootnathMookerjee, The defendant promised to pay his wife a fixed sum of
money every month for her separate residence and maintenance. The agreement was
contained in a registered document which mentioned certain quarrels and
disagreements between the two. The Calcutta High court refused to regard the
agreement as one covered by the exception. The court could find no trace of love
and affection between the parties whose quarrels had compelled them to separate.

Compensation for past voluntary services

A promise to compensate, wholly or in part, a person who has already done
20
something voluntarily for the promisor, is enforceable under s. 25(2) . In order for
a promise to pay for the past voluntary services to be binding, the following
essential factors must exist:
21
i. The services should have been rendered voluntarily.
ii. The services must have been rendered for the promisor.
22
iii. The promisor must be in existence at the time when services were rendered.
18 Suredra Behari Lal v. Jodonath, 1984 All LJ 21 (NOC)
19 1900 (4) Cal. WL 488
20 Indian Contracts Act, 1872
21
T.V. Krishna Iyer official Liquidator of Cape Comorin General Traffic Co., AIR 1952 TC 99
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iv. The promisor must have intended to compensate to the promisee.

Promise to pay time barred debt

Where a promise, made in writing and signed by the person making it or by his
agent generally or specially authorised in that behalf, to pay a debt barred by
23
limitation, is valid without consideration under s. 25(3) .

DIFFERENCE BETWEEN INDIAN LAW AND

ENGLISH LAW REGARDING CONSIDERATION

A. In India consideration may move from the promisee or any other person. But
under English Law the consideration must move from the promisor. In other
words, a stranger to consideration can sue in India but not in England.
B. In England, consideration may be present or future. But in India past
consideration can be a good consideration and will support a subsequent
promise.
C. In England, consideration means something of some value in the eyes of law
moving from the promisor. Natural love and affection is not sufficient in the
English law to support a contract. In India, natural love and affection is
considered to be a good consideration and may support a contract if it is in
writing and registered.
D. Under the English law, contracts are divided into formal contracts and simple
contracts. A formal contract is one which is in writing, signed, sealed

22 Ahmedabad Jubilee S.&M. Co v. Chhotalal Chaganlal, (1908) 10 Bom LR 141

23 Indian Contracts Act, 1872
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and delivered to the other party. All other contract are simple contracts.
Formal contracts do not require any consideration but simple contract must
be supported by consideration. No such distinction exists in India. All
contracts expect those specified in section 25 and 185 must be supported by
consideration.

Privity of Contract and Consideration

The two basic principles under the English Law that can be identified with the
doctrine of privity are:
1. consideration should move from the promisee only and
2. a contract cannot be enforced by a person who is not a party to the contract
even if it is made for his benefit.

“The doctrine of privity means that a contract cann ot, as a general rule, confer
24
rights and obligations arising under it on any person except the parties to it” . The
25
rule laid down in Tweedle v. Atkinson laid down the foundation of the doctrine of
“Privity of Contract” which means that a contract i s a contract between the parties
only and no stranger to the contract can sue even if the contract is avowedly made
26
for his benefit. Thus a stranger to the consideration cannot sustain the action on
the promise made between two persons unless he has in some way intervened in the
agreement. However, this 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.

24 G.H. Treitel, The Law of Contract

25 (1861) 1 B&S 393
26 Kanta Devi Berlia v. Mohit Jhunjhunwala, (2006) 2 CHN 161 (Cal)
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27
The decision of the House of Lords in Beiswick v. Beiswick discusses about these
issue. B, a coal merchant entered into an agreement with the defendant by which he
transferred to the defendant. B was to be employed in it as a consultant for his life
and after his death the defendant was to pay his widow an annuity of £5 per week.
After B’s death, the defendant paid B’s widow only one sum of £5. The widow
brought an action to recover the arrears of the annuity and also to get specific
performance of the agreement.

Lord Denning, MR identified the rule of privity as being merely procedural. But
then decides to hold that where a contract is made for the benefit of a third person
who has a legitimate interest to enforce it, it can be enforced by the third person in
the name of the contracting party or jointly with him, or if he refuses to join, by
adding him as a defendant. In that sense the third person has a right arising by way
of contract and his interest will be protected by law. (Beswick C.A.)

28
The House of Lords did not approve of this approach initiated by Lord Denning in
the Court of Appeal and held that the plaintiff in her personal capacity has no right
to sue, but she has a right as administratrix of her husband’s estate to require the
appellant to perform this obligation under the agreement.

Under the act, the consideration for an agreement may proceed from a third party,
but it does not follow that the third party can sue on the agreement. There was some
29
divergence of opinion on this point. Even though under the Contract Act, the
definition of consideration is wider than in English law, yet the common law
principle is generally applicable in India with the effect that only a party to the

27 (1966) 3 All ER 1 (CA)

28 Beswick v. Beswick, (1967) 2 All ER 1197 HL
29 Subbu Chetti v. Arunachalam, (1930) 53 Mad 270
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contract is entitled to enforce the same. The best statement of the law is that of
30
Rankin CJ in Krishna Lal Sadhu v. Promila Bala Dasi:
Clause (d) of section 2of the contract act widens the definition of ‘consideration’ so
as to enable a party to a contract to enforce the same in India in certain cases in
which the English law would regard the party as the recipient of a purely voluntary
promise and would refuse to him a right of action on the ground of nudum pactum.
Not only, however, is there nothing in s.2 to encourage the idea that contracts can be
enforced by a person who is not a party to the contract, but this notion is rigidly
excluded byu the definition of ‘promisor’ and ‘prom isee’.
The Calcutta High Court has held that the administration of justice was not to be
hampered by Tweddle v. Atkinson and that in India, we are guided in matters of
31
procedure by the rules of justice, equity and good conscience.

Privity of contract occurs only between the parties to the contract, most commonly
contract of sale of goods or services. Horizontal privity arises when the benefits
from a contract are to be given to a third party. Vertical privity involves a contract
between two parties, with an independent contract between one of the parties and
another individual or company.

If a third party gets a benefit under a contract, he does not have the right to go
against the parties to the contract beyond his entitlement to a benefit. An example of
this occurs when a manufacturer sells a product to a distributor and the distributor
sells the product to a retailer. The retailer then sells the product to a consumer.
There is no privity of contract between the manufacturer and the consumer.

30 AIR 1928 Cal 518

31Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137
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This, however, does not mean that the parties do not have another form of action .
32
In the case of Donoghue v. Stevenson , a friend of Mrs. Donoghue bought her a
bottle of ginger beer, which was defective. Specifically, the ginger beer contained
the partially decomposed remains of a snail. Since the contract was between her
friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it
was established that the manufacturer has a duty of care owed to their consumers
and she was awarded damages in tort.

Privity is the legal term for a close, mutual, or successive relationship to the same
right of property or the power to enforce a promise or warranty.

Exceptions to General Rule of Privity

Collateral Contracts
A collateral contract is one that accompanies the main contract between two parties.
It is one involving either of them and a third party. This contract may enable a third
party to enforce the first contract. A classic example of this happened in England in
33
1953 in the case of Shanklin PierLtd. v. Detel Products Ltd . In this case Shanklin
Pier (plaintiff) employed contractors to paint a pier. The contractors then instructed
Detel Products to supply them paint. This instruction was given based on a
statement made by the defendants to the plaintiffs that the paint would last for seven
years. When after just three months the paint work fell apart, the plaintiff sued and
was given the go ahead by the courts to proceed with the suit against the defendant
because even though the main contract had been between the contractor and the
defendant there was in existence a

32 (1932) AC 562
33[1951] 2 All ER 471
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collateral contract between the plaintiff and the defendant guaranteeing seven years
protection.

Multilateral Contracts

When a person joins an unincorporated association such as a club, it could be said

that he has gone into a contractual relationship with other members even if he may
not be aware of their identity and if the person only liaises with the secretary of the
organization. In one case the courts decided that a competitor in a race contracted
not only with the organizers but also with other competitors.

Trust
Where a person acts as a trustee and enters into a contract the beneficiary of the
contract can sue if the promise has not been performed. In M.C.Chacko v. State
34
Bank of Travancore it was observed that a trust does not arise simply because a
party to the contract undertakes to confer a benefit on the stranger .For this
exception of Trust to be applicable it has to be established that there was an
intention to enter into the contract as a trustee like use of express words like ‘trust
or trustee’ to establish the intention.
When an obligation in equity amounting to a trust arising out of the contract exists,
the beneficiary has a right to sue. In Narayani Devi v Tagore Commercial Corpn
35
Ltd. a bargain between the husband of the plaintiff and the defendants, where the
shares belonging to the plaintiffs husband were sold to the defendant and the share
money remained charge for payment of monthly sums both to the husband and after
his lifetime to the wife, could be enforced by the wife since an obligation was in the
nature of Trust.

34 AIR 1970 Sc 504

35AIR 1973 Cal 401
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Agency

The status and vicarious liability issues of an agent also create exceptions to the rule
of privity. When an agent negotiates a contract between his principal and a third
party, it is generally regarded as being between the principal and the third party.
However there are situations where it is subject to question as to whether or not an
agent acted on his own behalf or not. It may even reach new heights of complexity
when an agent makes use of a sub-agent, spawning twin questions of whether or not
the contract will now be between the principal and the sub-agent or the agent and
the sub-agent.

Conclusion
Consideration is one of the most essential elements in a contract. A contract
without sufficient consideration cannot be enforced at law. The Indian Contract Act,
1872 distinguishes which considerations are good from which are unlawful and
unreal. With reference to consideration of a contract the position in India and
England are however different. Under the English law only a party to the contract
can pay the consideration. If he doesn’t pay the consideration he becomes a stranger
to the contract. Under the Indian Law, it is not necessary that consideration should
be paid by the promisee himself. Though the Act does not specifically provide for
the doctrine of Privity of Contract and Privity of Consideration, however through a
series of case laws the doctrine as laid down in Tweddle v. Atkinson is now
applicable in India along with various exceptions.