‘Privity of contract’ is no longer a rule but only an exception. Explain in the context of a modern transaction.

Question: ‘Privity of contract’ is no longer a rule but only an exception. Explain in the context of a modern transaction. [BJS 2018]

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Answer

The Doctrine of Privity of Contract means that only the parties to the contract will have the rights or liabilities for that contract, also meaning that only the parties to the contract can sue each other in case of a dispute or breach.

Traditionally, the privity of contract was seen as a fundamental principle of contract law. However, in modern times, this principle has been eroded to some extent. In many cases, third parties are now able to enforce rights under a contract, even if they are not a party to the contract themselves. This is known as the "exception to privity of contract."

The following are the exceptions to the doctrine of privity of contract:

1. Trust of contractual rights or beneficiary under a contract

The third person in whom the right is created that person can claim the right. In the case of Khwaja Mohammad Khan v. Husaini Begum, (1910) 37 IA 152, Khwaja Mohammad Khan was the father of a boy, and Husaini Begum (girl) was the beneficiary, an agreement was concluded between the father of the boy and father of the girl, that father of boy would pay allowances to the girl, if she marries the boy by Kharch-e-pandan (betel box expenses) and father of boy created a charge in the property to ensure the same. The Father of the boy failed to do so. Husaini Begum filed a suit to claim the expense. The court said that the girl is entitled to claim the right as a beneficiary. This means that when a charge is created in favour of a beneficiary, it can be enforced, and property can be claimed as a right by a beneficiary.

2. Provision for marriage expenses and maintenance

This exception is there to protect the rights of family members who are disabled to get their share in the property. Also, it was inculcated so that the will of the testator will have the maximum effect/ enforcement.

3. Conduct, Acknowledgement or Admission

When there is no privity of contract between the parties, but if one of them by his conduct or acknowledgement, recognizes the right of the third party, he can be liable on the basis of the law of estoppel held in Narayani Devi v. Tagore Commercial Corporation Ltd., AIR 1973 Cal 401.

4. Assignment of rights under a contract

In favour of a third party either voluntarily or by operation of law, the assignee can force the benefits of the contract, e.g., the assignee of an insurance policy or the official assignee on the insolvency of a person can sue on the contract even though originally they were not parties to it.

Overall, while the principle of privity of contract remains an important part of contract law, the exception to this principle has become increasingly common in modern transactions. This has allowed for greater flexibility and efficiency in commercial relationships, as parties can more easily assign their rights and obligations to others, and third parties can benefit from contracts even if they did not sign them.