PRIVITY OF CONTRACT IN INDIA

PRIVITY OF CONTRACT IN INDIA

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PRIVITY OF CONTRACT IN INDIA
PRIVITY OF CONTRACT IN INDIA

Aapka Consultant Judgment Series- In this series, we are providing case analysis of Landmark Judgments of Hon’ble Supreme Court of India.

M.C. Chacko Vs. The State Bank of Travancore, Trivandrum

AIR1970SC504, (1969)2SCC343

Hon’ble Judges/Coram: J.C. Shah, Ag. C.J., and G.K.Mitter, J.

Decided On: July 23rd, 1969

FACTS

The High Land Bank Kottayam of which the appellant M.C. Chacko was the Manager, had an overdraft account with Kottayam Bank. K.C. Chacko, the father of the appellant had executed letters of guarantee in favour of Kottayam Bank agreeing to pay amounts due by High Land Bank under the overdraft arrangement. Kottayam Bank filed a suit against High Land Bank for the recovery of the amount due in account. To this suit were also impleaded K.C. Chacko, M.C. Chacko and the son, daughter and wife of K.C. Chacko. However, the trial court only decreed the suit against High Land Bank and against M.C. Chacko, received by him from his father under the deed date June 21st, 1951. K.C. Chacko died during the course of the proceedings.

ISSUE:

Whether a third party to a contract is bound by the covenants of the Contract and can s/he enforce it?

JUDGMENT:

The questions that arose in the appeal were whether under the deed of partition a charge was created in favour of Kottayam Bank in favour of Kottayam Bank to satisfy the debt arising under the letter of guarantee and whether the charge, if created, is enforceable by the bank when it was not a party to the deed.

The court observed that the various covenants in the deed were intended to incorporate an arrangement binding between the members of the family for satisfaction of the debt, if any, arising under the letter of guarantee. The court held that the deed was not intended to create a charge in favour of the Kottayam Bank for the amount which may fall under the letter of guarantee as the letter of guarantee created only a personal obligation. Also, the deed was executed before the letter of guarantee. For a charge to be created there must be evidence of intention as disclosed by the deed that a specified property or sum was to be made liable for the debt due by him. The recitals of clause 17 of the deed do not evidence any intention to create a charge in favour of the Kottayam Bank.

The debt which M.C. Chacko was directed by the deed to satisfy was not in any sense a “family debt”. It was a debt of K.C. Chacko, and K.C. Chacko was personally liable to pay that debt. In the present case that M.C. Chacko will either personally or out of the properties given to him satisfy the debt is intended to confer a right of indemnity upon other members of the family, and it created no charge in favour of the bank. K.C. Chacko had no intention to create a charge or to encumber any of the properties for the debt which may become due to the bank.

The court held that Kottayam Bank not being a party to the deed was not bound by the covenants in the deed nor could it enforce the covenants. A person not a party to a contract cannot, subject to certain well recognized exceptions, enforce the terms of the contract. Except in the case of beneficiary under a trust created by a contract and under a trust created by a contract or in the case of a family arrangement, no right may be enforced by a person who is not a party to a contract. Thus, as Kottayam Bank was not a beneficiary under the deed, it could not enforce the charge.

HELD:

M.C. Chacko held not personally liable to satisfy the debt under the letter of guarantee. Properties under Schedule A of allotted to M.C. Chacko under the deed also held not liable to satisfy the debt due to Kottayam Bank under the letter of guarantee. A person not a party to a contract is not bound by the covenants of the contract, nor can s/he enforce the contract, subject to certain well-defined exceptions to this rule.

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