M.C. Chacko v. State Bank of Travancore
1970 AIR 500
[Section 25(1) of Indian Contract Act, Privity Of Contract, Exceptions, Section 40]
H bank had an overdraft account with State Bank. MC Chacko was the manager of H bank and his father K had guaranteed the repayment of debt. K gifted his properties to members of his family. The gift deed provided that liability if any under the said guarantee should be met either by MC personally or through property gifted to him under the said deed. State Bank sued all the heirs under the deed alongwith MC; albeit limitation period to sue on letter of guarantee had already passed.
1) Whether a ‘charge’ was created in favor of State Bank under the said deed to satisfy the debt under the letter of guarantee?
2) Whether the charge, assuming that a charge exists, is enforceable by bank when it is not a party to the deed?
A ‘charge’ may be created on immovable property when either through express words or implied from deed, it is clear that party intended to make a specified property or fund, belonging to him, liable for debt due by him.
In present case, no such charge was created in favor of State Bank—the deed merely set out an internal arrangement between the donor and members of family which conferred a right of indemnity upon them against M.C. Chacko and his inherited property—however, no intention to convert a personal debt into a secured debt in favor of the bank could not be inferred. Since it was a debt of K such that he was personally liable under the debt; after his death all his inheritors were liable to satisfy the debt out of his estate, inherited by them. However, in such a case, other members would have been indemnified by M.C. Chacko for any share of debt paid by them.
By the definition of promisor and promisee as contained in S.2 along with constructive interpretation of ICA in light of similar provisions in English Law, the notion that ‘a stranger to a contract could enforce the obligations there under’ is completely excluded. A person not a party to contract cannot enforce the terms of the contract unless he is a beneficiary under the contract or the contract is one of family arrangement (which confers upon him equitable rights, albeit not contractual)
Even if charge would have been created in favour of State Bank, it wouldn’t have been able to enforce it since it is not a party to the deed and, was a complete stranger to it: it wasn’t a beneficiary under the contract.
Since limitation period has passed, State Bank couldn’t claim anything under the letter of guarantee either from MC Chacko (who personally never guaranteed payment) and or from any other heir of K.
Author: Vishrut Kansal (National University of Juridical Sciences, Kolkata)