M.C. Chacko v. State Bank of Travancore, Trivandrum

A father guaranteed the overdraft of his son's bank and later gave his properties to his family by a deed. The creditor bank claimed that the deed created a charge on the son's share. The Supreme Court held that the deed created no charge. It also held that a bank which was not a party to the deed could not enforce it, under the rule of privity of contract (only parties to a contract can sue on it).

Quick Revision

Parties

M.C. Chacko — appellant; Manager (also called Managing Director in the deed) of the High Land Bank, Kottayam, and son of K.C. Chacko. He was a donee under the deed and the defendant against whom the charge was claimed.

State Bank of Travancore, Trivandrum — respondent; the successor of the Kottayam Bank, with which the Kottayam Bank merged. It was the creditor suing on the overdraft and the guarantee.

K.C. Chacko — father of the appellant; guarantor in favour of the Kottayam Bank and donor under the deed of 21 June 1951. He died while the suit was pending.

High Land Bank, Kottayam — the debtor bank with an overdraft account in the Kottayam Bank.

Kottayam Bank Ltd. — the original plaintiff and creditor bank; later merged with the State Bank of Travancore.

M.C. Joseph, Kuriakose Annamma and Chinnamma — son, daughter and wife of K.C. Chacko; other donees under the deed and defendants in the suit.

Procedural History

The judgment is a single opinion by Shah, Ag. C.J. for the Bench. It has no numbered paragraphs, so it is cited by the opinion and not by paragraph number.

1. The Kottayam Bank Ltd. sued in the court of the Subordinate Judge of Kottayam for a decree (a formal order) for the amount due on the overdraft account.
2. The suit named the High Land Bank, K.C. Chacko, M.C. Chacko, M.C. Joseph, Annamma and Chinnamma. During the suit K.C. Chacko died, and the suit went on against his widow, daughter and sons as his legal representatives.
3. The trial court decreed the suit against the High Land Bank. It also decreed the suit against M.C. Chacko, limited to the property he received from his father under the deed of 21 June 1951.
4. The trial court held the claim to enforce the guarantee personally against K.C. Chacko barred by limitation. So it could not be enforced against his heirs and legal representatives.
5. The trial court rejected the claim that M.C. Chacko had personally agreed to pay the amount due on the overdraft.
6. M.C. Chacko appealed to the Kerala High Court (A.S. No. 502 of 1961). By judgment and order of 23 November 1964 the High Court confirmed the decree.
7. The State Bank of Travancore filed cross-objections (objections filed by the respondent in the same appeal) claiming that M.C. Chacko was personally liable. The High Court dismissed them.
8. M.C. Chacko appealed to the Supreme Court by special leave (permission the Supreme Court gives to hear an appeal) in Civil Appeal No. 652 of 1966.
9. The Supreme Court decided the appeal on 23 July 1969. It modified the decree and declared that M.C. Chacko was not personally liable and that his Schedule A properties were not liable.

Facts

1. M.C. Chacko was the Manager of the High Land Bank, Kottayam. That bank had an overdraft account with the Kottayam Bank.
2. K.C. Chacko, the father of M.C. Chacko, gave the Kottayam Bank letters of guarantee from time to time. He agreed to pay the amounts due from the High Land Bank under the overdraft arrangement.
3. By the last letter of guarantee, dated 22 January 1953, K.C. Chacko agreed to hold himself liable for the amounts due on the overdraft, up to a limit of Rs. 20,000.
4. On 21 June 1951 K.C. Chacko executed a deed, Ex. D-1. It is called a deed of partition, but in truth K.C. Chacko gave the properties by it.
5. By Ex. D-1 he gave the properties in Schedule A to M.C. Chacko. He gave the properties in Schedules B to F to M.C. Chacko, M.C. Joseph, Annamma and Chinnamma.
6. Paragraph 17 of the deed recited that K.C. Chacko had no debts. It said that if any amount became due to the Kottayam Bank under his letter, given at his eldest son's request for the High Land Bank, the son was to pay it from the High Land Bank.
7. The same paragraph said that if this was not done and any amount became payable by K.C. Chacko, his eldest son Chacko and the Schedule A properties alone "will be answerable for that amount".
8. Paragraph 10 of the deed put the donees of Schedules A, B and C in possession of their properties from that date. They were to get mutation of registry in their names, pay land revenue and enjoy the income, except the income from coconut trees.
9. Paragraph 12 declared that K.C. Chacko would take the income from the coconut trees on Schedules A, B, C and F until his death. The donees would take it after his death.
10. Paragraph 13 recited that Chinnamma would receive, for her maintenance, the rent of the building in item 7 of Schedule A and item 18 of Schedule B. She was to be in possession from that date.
11. The same paragraph gave Chinnamma full rights to reside in any house in Schedules A, B or C, with the donees of those houses meeting her expenses while she lived there. She could use the rent for her private expenses as she pleased.
12. The Kottayam Bank claimed against the High Land Bank on the overdraft. It claimed against K.C. Chacko on the guarantee.
13. It claimed against M.C. Chacko, his brother, sister and mother as universal donees under the deed. It said the deed created a charge on the properties.
14. It also claimed against M.C. Chacko that he had personally agreed to pay the amount due from the High Land Bank.
15. The State Bank of Travancore, with which the Kottayam Bank merged, claimed in the High Court that M.C. Chacko was personally liable.

Issues Raised

1. Under Ex. D-1, was a charge (a security over specified property for payment of a debt) created in favour of the Kottayam Bank to satisfy the debt arising under the letter of guarantee?
2. Assuming a charge arose, could the Bank enforce it when it was not a party to the deed Ex. D-1?

Arguments Contended

The reported judgment does not set out the arguments of counsel on either side. It records only the claims in the suit and the concession noted below.

For the appellant (M.C. Chacko): the judgment names S.V. Gupte, Anantha Krishna Iyer, S. Balakrishnan and R. Thiagarajan as counsel but records no argument for the appellant.

For the respondent (State Bank of Travancore): the judgment names H.R. Gokhale, J.S. Arora and K. Baldev Mehta as counsel. It records the Bank's claims that Ex. D-1 created a charge on the properties. It also records the claim that M.C. Chacko was personally liable.

Concession before the High Court: the Court's order on costs records that a concession was made before the High Court that persons not parties to a contract may enforce the benefit reserved to them under it. The judgment does not say who made it.

Court's Reasoning

The judgment is a single opinion by Shah, Ag. C.J. for the Bench. It has no concurring or dissenting opinion and no numbered paragraphs.

Opinion of the Bench (delivered by Shah, Ag. C.J.)

1. Noted: Two questions arise. First, whether Ex. D-1 creates a charge in favour of the Kottayam Bank for the debt under the letter of guarantee. Second, whether the charge, if it arises, is enforceable by a Bank that is not a party to the deed.
2. Noted: Ex. D-1 is called a deed of partition. In truth, K.C. Chacko gave the Schedule A properties to M.C. Chacko, and gave Schedules B to F to M.C. Chacko, M.C. Joseph, Annamma and Chinnamma.
3. Held: The various covenants in the deed were intended to set up an arrangement binding between the members of the family for satisfying the debt, if any, arising under the letter of guarantee.
4. Held: The Court could not agree with the High Court that clause 17 was intended to create a charge in favour of the Kottayam Bank. "The letter of guarantee created merely a personal obligation."
5. Noted: Ex. D-1 was executed before the last letter of guarantee of 22 January 1953. By clause 17 it was only directed that any liability under the guarantee would be met by M.C. Chacko, and not by the donor, M.C. Joseph, Annamma or Chinnamma.
6. Why: The reason for the provision is clear. M.C. Chacko was Managing Director of the High Land Bank, and the donor gave the letters of guarantee at his request.
7. Noted: To create a charge on immovable property no particular form of words is needed. By adequate words, intention may be expressed to make property or a fund belonging to a person charged for payment of a debt mentioned in the deed.
8. Held: To create a charge, the deed must show intention that "a specified property or fund belonging to a person was intended to be made liable to satisfy the debt due by him".
9. Held: The recitals in clause 17 do not show any intention of the donor to create a charge in favour of the Kottayam Bank. They merely set out an arrangement between the donor and his family members. Under it, any liability under the guarantee would be met by M.C. Chacko out of the property allotted to him.
10. Noted: The debt which M.C. Chacko was directed to satisfy was not in any sense a family debt. It was a debt of K.C. Chacko, who was personally liable to pay it.
11. Noted: After K.C. Chacko's death, his sons, daughter and widow would be liable to satisfy the debt out of his estate in their hands.
12. Held: From the recitals in Ex. D-1, an intention to convert a personal debt into a secured debt in favour of the Bank, a third person, cannot be inferred.
13. Noted: In Akalla Suryanarayana Rao v. Dwarapudi Basivireddi, the Madras High Court construed a partition deed made under a compromise decree. Properties and certain debts were allotted to branches of a family, with a stipulation that the properties would be liable first for the debts. The Court held that this was not a charge in favour of creditors.
14. Noted: The Madras High Court held that the covenant in that partition deed resulted in a contract of indemnity (a right to be compensated by the person who agreed to bear the debt), and not a charge.
15. Held: In the present case also, the covenant that M.C. Chacko would satisfy the debt personally or out of the properties given to him was meant to give a right of indemnity to the other family members. That right would apply if the Kottayam Bank enforced the liability against them. It created no charge in favour of the Bank.
16. Noted: Clauses 12 and 13 of the deed support this view. Clause 12 reserves the coconut-tree income on Schedules A, B, C and F to K.C. Chacko. Clause 13 lets Chinnamma occupy the houses in the three schedules and use the income for herself.
17. Held: It is clear that K.C. Chacko had no intention to create a charge or to encumber any of the properties for the debt which might become due to the Bank.
18. Held: The Kottayam Bank was not a party to the deed. It was not bound by the covenants in the deed, and it could not enforce them.
19. Noted: It is settled law that a person not a party to a contract cannot enforce its terms, subject to certain well-recognised exceptions. Beneficiaries under the terms of the contract, and a contract that is part of a family arrangement, are the recognised exceptions where the covenant may be enforced.
20. Noted: Rankin, C.J., in Krishna Lal Sadhu v. Pramila Bala Dasi, observed that clause (d) of section 2 of the Contract Act widens the definition of consideration (something given or done in return for a promise). It lets a party to a contract enforce it in India in some cases where English law would refuse because the promise was voluntary (nudum pactum). He added that nothing in section 2 encourages the idea that a non-party can enforce a contract, and that the definitions of promisor and promisee (the person making and the person receiving a promise) exclude this idea.
21. Noted: Under the English common law, only a person who is a party to a contract can sue on it. The law knows nothing of a right gained by a third party arising out of a contract (Dunlop Pneumatic Tyre Co. v. Selfridge & Co.).
22. Noted: Where a trust is created by a contract, a beneficiary may enforce the rights the trust gave him. His rights are equitable and not contractual. The Judicial Committee applied that rule to an Indian case, Khwaja Muhammad Khan v. Husaini Begam.
23. Noted: In a later case, Jaman Das v. Ram Autar, the Judicial Committee pointed out that a purchaser's contract to pay off a mortgage debt (a debt secured over property) could not be enforced by the mortgagee, who was not a party to that contract.
24. Held: It must therefore be taken as well settled that, no right may be enforced by a non-party, except by a beneficiary under a trust created by a contract or in a family arrangement.
25. Held: Even if an intention to create a charge is granted, the Bank could enforce it only if it was a beneficiary under the terms of the contract. It is not claimed that the Bank was a beneficiary under Ex. D-1. So the suit against M.C. Chacko must be dismissed.
26. Held: The decree of the High Court is modified. M.C. Chacko is not personally liable for the debt under K.C. Chacko's letter of guarantee, and the Schedule A properties are not liable to satisfy that debt.
27. Noted: The Court gave a direction on costs because a concession had been made before the High Court. The concession was that persons not parties to a contract may enforce the benefit reserved to them under it.

Authorities

• Akalla Suryanarayana Rao & Ors. v. Dwarapudi Basivireddi (named in the body as Akalla Suryanarayana Rao & Others v. Dwarapudi Basivireddi & Others), I.L.R. 55 Mad. 436 — Madras High Court; referred to; the Court followed its reasoning. Partition deed covenants gave indemnity, not a charge (opinion of the Bench).
• Krishna Lal Sadhu v. Pramila Bala Dasi, I.L.R. 55 Cal. 1315 — Rankin, C.J. quoted on section 2 of the Contract Act and on the definitions of promisor and promisee; a non-party cannot enforce a contract (opinion of the Bench).
• Dunlop Pneumatic Tyre Co. v. Selfridge & Co., [1915] A.C. 847 — only a party to a contract can sue on it; the law knows nothing of a third party's right under a contract (opinion of the Bench).
• Khwaja Muhammad Khan v. Husaini Begam, (1910) 37 I.A. 152 — Judicial Committee; a beneficiary under a trust created by a contract may enforce the trust rights (opinion of the Bench).
• Jaman Das v. Ram Autar, [1911] 39 I.A. 7 — Judicial Committee; a mortgagee, not being a party, could not enforce a purchaser's contract to pay off a mortgage debt (opinion of the Bench).

Also cited in footnotes: the footnotes only give the report citations of the four cases above. No other case is named in them.

Provisions mentioned

• Section 2, clause (d), of the Contract Act — defines consideration. It was mentioned only through Rankin, C.J.'s observation in Krishna Lal Sadhu.
• The definitions of promisor and promisee in the Contract Act — mentioned only through the same observation.

Judgement

1. The appeal is allowed in part, and the decree passed by the High Court is modified.
2. It is declared that M.C. Chacko is not personally liable for the debt due under the letter of guarantee executed by K.C. Chacko.
3. It is declared that the properties in Schedule A, allotted to M.C. Chacko under the deed of 21 June 1951, are not liable to satisfy the debt due to the Kottayam Bank under the letter of guarantee.
4. The suit against M.C. Chacko is dismissed.
5. Costs: the parties will bear their respective costs throughout. The Court gave this direction because a concession was made before the High Court that non-parties may enforce a benefit reserved to them under a contract.

Legal Principle / Ratio

A deed creates a charge only if it shows intention that specified property is to be liable for a particular debt. A recital that a family member will bear a debt gives the other members a right of indemnity and creates no charge for the creditor. A person who is not a party to a contract cannot enforce it, unless the person is a beneficiary under a trust created by the contract or the contract is a family arrangement.

Key holding: "no right may be enforced by a person who is not a party to the contract".

Critical Analysis

Analysis based on the judgment text.

• The two exceptions are stated as settled. The Court names only a trust beneficiary and a family arrangement. It does not discuss any other exception in this judgment.
• The family-arrangement exception is not applied. The Court calls the covenants an arrangement between family members, yet the Bank is a creditor outside the family. The judgment does not test whether the Bank could use the exception.
• The concession shapes costs. The Court did not decide whether a non-party can enforce a benefit reserved to it. It only noted the concession in making the costs order.

Significance

• The case shows the first test for a charge: the deed must show intention to make specified property liable for the debt.
• It shows that a clause fixing who in a family bears a debt gives indemnity among family members and nothing to the creditor.
• It states, in an Indian setting, the rule that a non-party cannot enforce a contract, with two exceptions.

Exam-Important Points

• Charge: no special words are needed, but the deed must show intention to make specified property liable for a debt.
• Guarantee is personal: the Court said the letter of guarantee created merely a personal obligation. It did not become a secured debt through the gift deed.
• Indemnity, not charge: a covenant that one family member will bear a debt gives the others a right of indemnity.
• Privity: a non-party cannot enforce a contract. The exceptions named here are a beneficiary under a trust created by a contract, and a family arrangement.
• Trap: the Bank was a third person, not a beneficiary of the deed. Claiming under the deed failed even if a charge had been intended.
• Costs: each party bore its own costs throughout.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so no paragraph numbers are cited.