What did the Supreme Court decide in M.C. Chacko?

A charge in favour of the bank was not created under the family deed; the letter of guarantee created only a personal obligation. The bank, as a non-party, could not sue on that deed.

When can a non-party sue on a contract in India?

A non-party can sue if the contract creates a trust in their favour or if they are a clear beneficiary under a genuine family arrangement intended to benefit them.

Was there a valid charge for the bank here?

No. The deed showed only an internal family arrangement that the appellant would meet the father’s liability from his allotted property. It did not create a charge enforceable by the bank.

What is the key exam takeaway?

Privity bars non-parties. Exceptions: trust or family arrangement intended to benefit the third party. Personal guarantees bind signers, not outsiders.

How does this case relate to letters of guarantee?

A letter of guarantee usually creates a personal obligation of the guarantor. Without more, it does not give third parties rights under separate family deeds.

M.C. Chacko v. State Bank of Travancore

M.C. Chacko v. State Bank of Travancore (1969) — Privity, Trust & Charge

Court: Supreme Court of India Year: 1969 Citation: (1969) 2 SCC 343 Area: Contract & Guarantee Reading time: ~7 min

Author: Gulzar Hashmi Location: India Publish Date: 26 Oct 2025

PRIMARY_KEYWORDS: M.C. Chacko v. State Bank of Travancore, privity, charge, guarantee SECONDARY_KEYWORDS: trust under contract, family arrangement, third-party beneficiary, Indian contract law

Quick Summary

High Land Bank had an overdraft. Its managing director, M.C. Chacko, got his father to sign guarantees. The father later executed a family deed saying the son (and property allotted to him) would meet any future liability. When the bank’s debts were not paid, the State Bank tried to recover by relying on that deed. The Supreme Court said: the deed was only an internal family arrangement; it did not create a charge in favour of the bank. The guarantee made a personal obligation of the father, not a right for the bank under the deed. As the bank was not a party to the deed, privity blocked its claim.

Issues

Was a charge created in favour of the bank to satisfy liability under the guarantee?
If yes, could the bank enforce it though not a party to the family deed (privity)?

Rules

A third party may sue on a contract only if the contract creates a trust clearly in its favour, or
the third party is a beneficiary under a genuine family arrangement intended to confer enforceable benefits.
A letter of guarantee normally creates a personal obligation of the guarantor; it does not, by itself, create a charge on someone else’s property for a third party.

Facts (Timeline)

Banking Link: High Land Bank had an overdraft with Kottayam Bank (later merged into State Bank of Travancore).

Guarantees: At the request of his son (the MD), K.C. Chacko signed letters of guarantee for the overdraft.

Family Deed (21 June 1951): If debts had to be paid by K.C. Chacko, the appellant (M.C. Chacko) or property allotted to him (Schedule A) would be answerable.

Default & Suit: High Land Bank defaulted; Kottayam/State Bank sued the bank, K.C. Chacko, and donees. K.C. Chacko died; case continued against his widow and children.

Core Dispute: Did the deed create a charge for the bank, and could the bank enforce it as a non-party?

Timeline of events in M.C. Chacko v. State Bank of Travancore

Arguments

Appellant (M.C. Chacko)

The deed was an internal family arrangement; it did not create any charge in favour of the bank.
The bank, a non-party, lacked privity and could not sue under the deed.

Respondent (State Bank)

The deed should be read as creating a charge to secure liabilities under the guarantee.
As beneficiary, the bank should be allowed to enforce payment against the Schedule A property.

Judgment

The Supreme Court held that the family deed did not create a charge in favour of the bank. It merely recorded how family members would meet liability if it arose. The letter of guarantee created a personal obligation of K.C. Chacko. Even if a charge had existed, the bank could not sue on the deed because it was not a party and no trust in its favour was created.

Ratio Decidendi

Privity applies: a non-party cannot sue on a contract unless a trust is clearly created in their favour or the contract is a family arrangement intended to benefit and clothe them with enforceable rights. A general family deed dividing responsibility does not create a bank’s charge.

Why It Matters

Clarifies when third parties (like banks) can enforce contracts in India.
Separates personal guarantees from charges and property security.
Guides drafting: if you want a bank to have rights, create an explicit charge or trust.

Key Takeaways

Privity Rule: Non-parties cannot sue, save trust/family-arrangement exceptions.

No Implicit Charge: Family deeds of internal adjustment don’t secure creditors by default.

Guarantee ≠ Security: Personal guarantees need separate security to bind property.

Do	Avoid
Draft explicit charge/mortgage if property security is intended.	Relying on vague family arrangements for creditor rights.
State beneficiary trust terms clearly.	Assuming guarantees create automatic charges.
Check privity before suing as a third party.	Overlooking trust/family-arrangement limits.

Mnemonic + 3-Step Hook

Mnemonic: “NO PARTY? NO RIGHT.”

Party? Is the claimant a party to the contract?
Exception? Trust in favour or true family-benefit arrangement?
Security? Any clear charge/mortgage language on property?

IRAC Outline

Issue

Did the family deed create a charge enforceable by the bank, and could the bank sue as a non-party?

Rule

Third parties cannot sue absent privity, unless a trust is created in their favour or the contract is a family arrangement intended to benefit them.

Application

The deed only allocated liability within the family; it did not express a charge or trust for the bank. The guarantee bound the father personally. The bank, not a party, lacked enforceable rights.

Conclusion

No enforceable charge for the bank; claim under the deed fails due to privity.

Glossary

Privity of Contract: Only parties to a contract can sue or be sued on it, subject to limited exceptions.
Charge: A security interest over property to secure a debt; needs clear creation language/formality.
Trust (in Favour): A legal arrangement where property/rights are held for a beneficiary who can enforce them.
Family Arrangement: An agreement settling family property/obligations; may create enforceable rights if intended.

FAQs

Yes, against the guarantor who signed it. But the family deed did not add a separate enforceable charge for the bank.

When it clearly states that specified property is security for a debt and follows legal formalities (description, intent, registration where required).

Then a charge might arise, subject to compliance with formalities. The bank could potentially enforce it as beneficiary of that charge.

No. Only if the arrangement was intended to benefit an outsider with enforceable rights, or creates a trust specifically for them.