The doctrine of privity of consideration states that the consideration must only move from the promisee and the stranger to the contract, although a beneficiary can enforce the terms of the agreement.
Position of Privity of Consideration in England
Firstly, the doctrine of privity of consideration was not applicable in England. The court in Dutton v. Poole did not consider this principle. In this case, a son made a contract with his father to forbear him to cut down an oak woodland. The son in return, would make a payment to his sister of £1000 once she had married. The father died before the sister was married and the son subsequently refused to pay his sister the money as was previously agreed, at the time of her marriage. The sister and her husband sued her brother for the amount that was originally promised between the father and son.
Here, the agreement was between the father and the son, the defendant had made a promise to pay the amount to the plaintiff. The consideration for the promise is the abstinence by the father to sell the wood. The court did not consider the plaintiff’s privity to the contract nor interested in the consideration. The purport behind the agreement was to provide the plaintiff a certain amount of money. The court held that it was inequitable for the defendant to keep the wood also and deprive the plaintiff of her share. Thus, the relationship between the father and the son had made the sister a party to the agreement, even if she was not included at the time the contract was agreed. The relationship between father and daughter was found to extend the consideration that the father gave in the promise to the children.
Later, in 1861, the position in England changed in Tweddle v. Atkinson. The court of Queen’s Bench denied the principle and ruled that a beneficiary who is stranger to the consideration cannot take advantage of it. Here, the plaintiff’s father and ‘G’ entered into an agreement to pay the plaintiff a certain sum of money in consideration to plaintiff’s marriage to the daughter of ‘G.’‘G’ failed to do so and the plaintiff sued his executors for the same. Thus, though the contract entered between his father and ‘G’ was for he is benefiting he remained stranger the contract and the contract denied to give him rights to enforce the terms of the contracts.
Further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd., the fundamental proposition in the English law, i.e. the Consideration must move from the promisee to the promisor only. If any other person furnishes the consideration, the promisee becomes the stranger and, therefore, cannot enforce the promise. This is the postulate of the doctrine of privity of consideration.
Position of Privity of Consideration in India
This principle of the doctrine of privity of consideration is not applicable in India. As per the Indian Contract Act, 1872 the definition of consideration in Section 2(d) states, consideration may be furnished by ‘the promisee or any other person’ as long as it is ‘at the desire of promisor’. Thus, the consideration may move from promisee, or some other person, if the promisor has no objection, from any other person. The leading authority, in this case, is the case of Venkata Chinnaya v. VenkataramayaGaru.
An old lady gave to the defendant, her daughter, and certainly landed property by way of gift deed. The terms being that a stipulated annuity of ₹ 653 should be paid every year to the plaintiff, sister of the old lady. The defendant executed in plaintiffs favour and iqraranama, agreeing to give effect to this stipulation. The plaintiff filed a suit upon the failure of the defendant to pay the annuity.
The defence put forward by the defendant was that the promisee, i.e. the plaintiff had furnished no consideration. The consideration for the iqraranama, the agreement between the plaintiff and the defendant,was furnished by the old, the plaintiff’s sister.
Here, the consideration for the defendants promise to pay the annuity was the gift deed made by the old lady and the consideration was being furnished by the plaintiff. According to Section 2 (d) of the Indian Contracts Act, 1872, the consideration may move from the promisee or any other person, at the desire of the promisor. The defendant, the promisor agreed to the agreement and also executed an iqraranama in favour of the plaintiff which shows that the term of the gift deed that the consideration will move from the third person was at the desire of the promisor.
The court relied on the judgment of Dutton v Poole, that the gift deed and the contemporaneous agreement between the plaintiff and the defendant may be considered as one transaction and the defendant obtained an estate from her mother that would suffice to constitute consideration under Section 2(d).
American judicial opinion also recognizes this rule and the doctrine of privity of consideration does not hold well in American judicial system.
Dutton v. Poole 2 Lev 211.
Tweddle v. Atkinson(1861) 1 B&S 393.
Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. AC 847.
Venkata Chinnaya v. Venkataramaya Garu ILR (1881) 4 Mad 137.
Dutton v. Poole 2 Lev 211.
The Indian Contract Act, 1872 § 2(d).