WHAT MAKES A CONTRACT ENFORCEABLE? 7 LANDMARK CASES EXPLAINED

This article is written by Kimaya Anavkar, a T.Y.LL.B. student at Kishinchand chellaram Law College.

THE PILLARS OF A BINDING CONTRACT – CONSIDERATION, INTENTION, AND PRIVITY

Once an offer has been accepted, an agreement is formed. But what makes that agreement legally enforceable in a court of law? In this second part of our series, we explore the essential pillars that support a valid contract: Consideration, the Intention to Create Legal Relations, and the doctrine of Privity of Contract.

First, we will examine Consideration, the legal term for the value exchanged between parties. A contract is not a one-way street; each party must give something to get something. Cases like Chinnaya v. Ramayya and Durga Prasad v. Baldeo reveal the nuances of this rule, showing that consideration must be meaningful but not necessarily adequate. Next, we’ll explore the crucial element of Intention. Not every promise is meant to be a legal one, as famously illustrated in the domestic arrangement of Balfour v. Balfour.

Finally, we will unpack the doctrine of Privity of Contract, which answers the question: who has the right to sue on a contract? The landmark case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. provides the definitive answer, establishing that a contract is a private matter between the parties involved.

1. CHINNAYA V. RAMAYYA (1882) – CONSIDERATION

CITATION: ILR (1876-82) 4 Mad 137

This case is a key authority in Indian contract law, establishing that consideration need not move directly from the promisee.

• Detailed Facts:
  • An elderly woman owned certain property. She decided to gift this property to her daughter, Ramayya (the defendant), through a deed of gift.
  • This gift came with a condition: Ramayya must pay an annuity (an annual sum) of ₹653 to the old woman’s sister, Chinnaya (the plaintiff).
  • On the same day the deed was executed, Ramayya entered into a formal agreement with her aunt, Chinnaya, promising to pay the stipulated annuity.
  • Ramayya honored the agreement for a time but later stopped making the payments. Chinnaya then sued her niece to enforce the promise and recover the unpaid annuity.
  • Ramayya’s defense was that her aunt, Chinnaya, had provided no consideration for the promise and therefore, there was no valid contract.
• Legal Issues:
  • Can a person who is not a party to the consideration (a stranger to the consideration) bring a suit to enforce a contract?
  • Is a promise enforceable if the consideration for that promise was provided by a third party and not the promisee herself?
• Judgment:
  • The Madras High Court ruled in favor of the plaintiff, Chinnaya. It held that the promise was legally enforceable, and Ramayya was obligated to pay the annuity.
• Legal Principle (Ratio Decidendi):
  • This case established a vital exception to the privity rule in India, specifically regarding consideration. The principle is that in Indian Contract Law, consideration can move from a third party; it is not necessary for it to be furnished by the promisee. The consideration for Ramayya’s promise to pay her aunt was the gift of the property from her mother. As long as there is some consideration for a promise, the contract is valid.

2. KEDARNATH BHATTACHARJI V. GORIE MAHOMED (1886) – CONSIDERATION

CITATION: (1887)ILR 14CAL64

This case deals with the enforceability of promises made as charitable subscriptions.

• Detailed Facts:
  • The plaintiff, Kedarnath, was a municipal commissioner of Howrah and a trustee of the Howrah Town Hall Fund.
• • The commissioners decided to build a Town Hall, provided the public raised sufficient funds through subscriptions.The defendant, Gorie Mahomed, was a subscriber to this fund, promising to donate ₹100.Relying on the promised subscriptions, Kedarnath and the other commissioners entered into a contract with a contractor to build the Town Hall, thereby incurring a legal liability.
  • The defendant subsequently refused to pay his subscription amount.
• Legal Issues:
  • Is a promise to subscribe to a public or charitable cause, which is initially gratuitous, legally enforceable?
  • Does the act of incurring a liability based on that promise constitute valid consideration?
• Judgment:
  • The Calcutta High Court held that the promise was enforceable, and the defendant was liable to pay the amount he subscribed.
• Legal Principle (Ratio Decidendi):
  • A promise to contribute to a public cause becomes a valid and binding contract if the promisee, relying on that promise, incurs a liability. The act of the promisee (Kedarnath) entering into a contract with the builder was done in faith of the subscriptions. This act of incurring a detriment or liability is sufficient consideration to make the subscriber’s promise legally binding.

3. DURGA PRASAD V. BALDEO (1880) – CONSIDERATION

CITATION: (1881) ILR 3 All 221

This case clarifies that consideration must be given at the promisor’s request.

• Detailed Facts:
  • The plaintiff, Durga Prasad, decided to build a market with several shops in a town. He did this not at his own initiative, but at the desire and request of the town’s Collector.
  • The defendant, Baldeo, occupied one of the shops in this newly constructed market.
  • In order to compensate the plaintiff for his expense in building the market, the defendant promised to pay him a commission on all articles sold through his shop.
  • The defendant subsequently failed to pay the promised commission, and the plaintiff sued him.
• Legal Issues:
  • Was the act of building the market a valid consideration for the defendant’s promise to pay a commission?
  • Can an act done at the request of a third party form a valid consideration for the promisor’s promise?
• Judgment:
  • The court dismissed the plaintiff’s suit, holding that the promise was unenforceable.
• Legal Principle (Ratio Decidendi):
  • The core principle of this case is that consideration must be at the desire of the promisor. The plaintiff had built the market at the request of the Collector, not at the desire of the defendant. Therefore, the construction of the market was not valid consideration for the defendant’s promise to pay the commission. Any act done at the request of a third party is not a valid consideration.

4. CHAPPEL & CO LTD V. NESTLE CO LTD (1960) – CONSIDERATION

CITATION: [1960] AC 87

A famous case that explains that consideration need not be “adequate” but must be “sufficient.”

• Detailed Facts:
  • Nestle ran a marketing promotion where they offered to sell a gramophone record to anyone who sent in 1 shilling and 6 pence, plus three wrappers from their 6d chocolate bars.
  • Chappell & Co owned the copyright to the song on the record. According to copyright law, they were entitled to a royalty of 6.25% of the “ordinary retail selling price.”
  • Chappell argued that the three chocolate wrappers were part of the consideration (and therefore part of the price) for the record.
  • Nestle contended that the wrappers were of trivial value and were merely a condition to qualify for the offer, not part of the price.
• Legal Issues:
  • Did the chocolate bar wrappers, which had no intrinsic monetary value to Nestle (they were thrown away), form part of the legal consideration for the sale of the record?
• Judgment:
  • The House of Lords, in a 3-2 majority, held that the wrappers were indeed part of the consideration for the record.
• Legal Principle (Ratio Decidendi):
  • This case famously established that consideration need not be adequate, but it must be sufficient. “Sufficient” means that it must have some value in the eyes of the law, regardless of how trivial or economically inadequate it may be. The court reasoned that Nestle had stipulated the wrappers as a condition of the purchase, and this demonstrated that the wrappers were of value to them (as they boosted chocolate sales). Therefore, even trivial items can be valid consideration if agreed upon by the parties.

5. BALFOUR V. BALFOUR (1919) – INTENTION TO CREATE LEGAL RELATIONS

CITATION: [1919] 2 KB 571

The leading case establishing the presumption against an intention to create legal relations in domestic agreements.

• Detailed Facts:
  • Mr. Balfour, a civil servant stationed in Ceylon (now Sri Lanka), and his wife, Mrs. Balfour, were living together in England while he was on leave.
  • When his leave was over, he was scheduled to return to Ceylon, but his wife was advised by her doctor to remain in England due to her health.
  • Before he left, Mr. Balfour promised to pay his wife a monthly allowance of £30 for her maintenance until she could rejoin him.
  • Later, their relationship deteriorated, they separated, and Mr. Balfour stopped making the payments.
  • Mrs. Balfour sued him for breach of this promise.
• Legal Issues:
  • Did the verbal promise made between a husband and wife in a domestic context constitute a legally binding contract?
• Judgment:
  • The Court of Appeal ruled in favor of Mr. Balfour, holding that there was no enforceable contract.
• Legal Principle (Ratio Decidendi):
  • In agreements made between a husband and wife in a domestic setting, there is a rebuttable presumption that the parties do not have the intention to create legal relations. The court reasoned that these are private family matters and that opening such arrangements to litigation would flood the courts. It is presumed that such promises are based on mutual trust and affection, not legal obligations.

6. ROSE & FRANK CO. V. J.R. CROMPTON & BROS. LTD. (1923) – INTENTION TO CREATE LEGAL RELATIONS

CITATION: [1924] UKHL 2, [1925] AC 445

This case demonstrates that parties can expressly state that their agreement is not legally binding.

• Detailed Facts:
  • An American company (Rose & Frank Co.) and a British company (J.R. Crompton & Bros.) entered into a commercial agreement regarding the supply of paper tissues.
  • The written agreement contained a specific clause, referred to as the “Honourable Pledge Clause.”
  • This clause explicitly stated that the arrangement was not a formal or legal agreement and would not be “subject to legal jurisdiction in the Law Courts” in either the US or the UK. It was to be carried out with “mutual loyalty and friendly co-operation.”
  • A dispute later arose, and one party sued for breach of the agreement.
• Legal Issues:
  • Can parties in a commercial transaction expressly exclude the intention to create legal relations, thereby rendering their agreement unenforceable as a contract?
• Judgment:
  • The court held that the agreement was not a legally binding contract because of the explicit clause.
• Legal Principle (Ratio Decidendi):
  • The intention to create legal relations is an essential element of a contract. The principle is that if parties to an agreement explicitly state that they do not intend for it to be legally enforceable, the courts will respect that intention. By including the “honorable pledge” clause, the parties had clearly and deliberately excluded the jurisdiction of the courts, making their agreement binding in honor only.

7. DUNLOP PNEUMATIC TYRE CO. LTD. V. SELFRIDGE & CO. LTD. (1915) – PRIVITY OF CONTRACT

CITATION:

The classic case that affirmed the doctrine of privity of contract in English law.

• Detailed Facts:
  • Dunlop, a tire manufacturer, entered into a contract to sell tires to a wholesaler, Dew & Co.
  • A term of this contract was that Dew & Co. would not sell the tires for less than Dunlop’s list price. The contract also required Dew & Co. to obtain the same price maintenance agreement from any retailer they sold the tires to.
  • Dew & Co. subsequently sold tires to Selfridge, a retailer. The contract between Dew & Co. and Selfridge included a clause that Selfridge would not sell the tires below the list price and would pay Dunlop £5 in damages for each tire sold in breach of this clause.
  • Selfridge then sold some of the tires for less than the agreed-upon list price.
  • Dunlop sued Selfridge directly to enforce the promise and claim the damages.
• Legal Issues:
  • Can a third party (Dunlop) sue to enforce a term of a contract to which it is not a party (the contract between Dew & Co. and Selfridge)?
• Judgment:
  • The House of Lords dismissed Dunlop’s claim.
• Legal Principle (Ratio Decidendi):
  • This case established the fundamental principle of privity of contract. This doctrine states that a contract is a private matter between the parties involved, and a third party cannot sue on it. Dunlop was not a party to the contract between Dew & Co. and Selfridge, and therefore, it could not enforce the terms of that contract, even though it was intended to benefit from them. Furthermore, Dunlop had not provided any consideration for Selfridge’s promise to maintain the price.

CONCLUSION

Having established the framework of an agreement, the cases in this second part demonstrate that a simple offer and acceptance are not enough to create a legally enforceable duty. The principles of consideration, intention, and privity are the pillars that give a contract its legal substance.

Consideration ensures that the law enforces bargains, not one-sided gifts, by requiring a meaningful exchange between the parties. The doctrine of intention to create legal relations acts as a crucial filter, separating serious commercial commitments from the casual promises made in a domestic or social context. Finally, the rule of privity of contract maintains the integrity of the agreement as a private matter, ensuring that only the parties who made the promises can enforce them. Together, these pillars transform a basic agreement into a robust and legally binding contract.