Venkata Chinnaya Rau vs Venkataramaya Garu case laid down the rule that the doctrine of privity of consideration is not applicable in Indian contract law in these types of cases and that under the Indian Contract Act 1872, consideration may move from the parties or anyone who is not a party to a contract. The doctrine of privity to contract is a common law principle that states that a contract cannot confer rights or enforce obligations on someone who is not a party to a contract. It implies that only the parties to a contract are subjected to contractual obligations. It defends third parties from unsolicited legal obligations. It is a well-known fact that consideration is an essential element of a contract.
- An old woman transferred certain property consisting of a few acres of land in the name of her daughter, the defendant, by a deed of gift. The deed of gift was registered by the respective authorities.
- The terms of the contract specified that the defendant will have to pay an amount of Rs. 653/- annually to the woman’s sister, the plaintiff. The defendant signed an Iqrarnama (agreement), in favour of the plaintiff, agreeing to do the same.
- However, after the old woman passed away, the defendant failed to pay the money she had promised to the plaintiff. Hence, the plaintiff sued the defendant to recover the promised amount.
- Whether the plaintiff can sue the defendant for the amount promised in a contract where the consideration for such promise has been furnished by a person who is a party to the contract?
- The plaintiff claimed that the consideration for the property transferred to the defendant by her mother was the defendant’s promise to pay the promised sum annually to the plaintiff. Hence, the plaintiff has the right to sue the defendant and is entitled to the amount promised by the defendant.
- The defendant argued the plaintiff was not a party to the contract and hence had no legal right to sue the defendant or to compel her to pay the promised amount. According to the doctrine of privity of consideration, the consideration may move only from a party to a contract and not from a third party.
Innes J: It could flow from someone who is not a party to the contract. Innes J. quoted the case of Dutton v. Poole [(1677) 2 Levinz 210, wherein it was observed that despite the fact that the defendant made the promise to his father and the father provided the consideration for it, it was obvious that the contract was made for the plaintiff’s benefit. The court ruled that depriving the plaintiff of the money would be extremely inequitable, and ordered the defendant to pay the same to her. In the present case, prior to the formation of the contract in question, the plaintiff had been receiving a sum of money from her sister’s estate. When the lady passed it to the defendant, the contract required her to continue the same arrangement. When the plaintiff’s sister transferred the property to the defendant, she lost the annuity that she had been getting. It was held that such loss served as consideration for the promise. Therefore, the plaintiff was presumed to have given the consideration.
Kindersley J: The deed of gift and the defendant’s agreement to pay the annuity to the plaintiff were executed simultaneously. Thus, they may be considered components of the same transaction. The defendant’s promise to compensate the plaintiff served as consideration for the defendant’s mother transferring the property to the defendant. Therefore, the defendant’s failure to pay the same would constitute a breach of contract, entitling the plaintiff to sue her for the sum.
The Court observed that according to the definition of “consideration” provided in Section 2 (d) of the Indian Contract Act, 1872, it is clear that in a valid contract, consideration does not have to move solely from the promisee. The Court held that the defendant was entitled to payment for the annual sum of money and issued a decree ordering the plaintiff to pay an annuity to the defendant.
This case explained the applicability and relevance of the doctrine of privity of consideration to Indian contract law. In Venkata Chinnaya Rau v. Venkataramaya Garu, the court ruled that the doctrine of privity of consideration does not apply in India. Under the Indian Contract, consideration may be provided by the pledge or by someone else. According to the Indian Contract Act, 1872, consideration may move not from the promisee, but even from a third person who is not a party to the contract, as opposed to English law, which requires consideration to move only from the promisee.