Doctrine of Privity of Contract

The article 'Doctrine of Privity of Contract' delves into the significance of parties of a contract in order to sue in a court of law. The article analyzes various case laws to understand this common law principle. Further, it prescribes the importance of this rule in India and some of its exceptions followed in India. Different judgments gave it a broader approach, and this piece of work tries to explore the intricacies of the privity of contract. This doctrine can be summed up in short in the words of Benjamin Franklin,

"Justice will not be served until those who are unaffected are as outraged as those who are."

Introduction

When two parties enter into an agreement in the same sense to perform a lawful thing, they are said to be part of a valid contract. There are some essentials to a valid contract that are given under section 10 of the Indian Contract Act, of 1872. It says that all agreements are contracts if they are made by the free consent of the competent parties, for a lawful consideration, for a lawful object, and that is not expressly declared as void. Free consent is defined under section 14, as there should be no coercion, undue influence, fraud, misrepresentation, or mistake.

The doctrine of Privity is a well-established English Law Principle, and the basis of it is the interest theory which means the parties of the contract have only got a legal right to sue in court in order to make the contract enforceable. Obviously, this made it troublesome for the third party to put forward any of the obligations of the parties of a contract.

Meaning and Scope

The doctrine of privity of contract means that only the party 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. In other words, no third party can enforce the contract, but there can be a third party to the consideration, that is, there can be no stranger to the contract, but there can be a stranger to the consideration. For example, A borrowed money from B, A owns a property and decides to sell it to C. C promises to pay B on behalf of A. In this scenario, if C fails to pay, then B cannot sue C, since he is a stranger to the contract.

According to the legal definition of privity of contract:

"The doctrine of privity in contract law provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it."

There have been developments in the doctrine of privity of contract, which has eroded the strictness of the doctrine. And some beneficiaries under the contract can also sue for the breach of contract, and have rights and obligations under it.

Essentials of Privity of Contract

The doctrine of privity of contract applies only upon fulfilling some essentials or conditions:

1. There is a valid contract between the parties:  The most important essential is that there has been a valid contract between 2 or more parties. Meaning thereby that a contract with free consent, lawful consideration, and a lawful object.

2. There must be a breach of contract by a Party:  A condition of a contract must be breached by a party, or the whole contract has been breached thereof.

3. Only parties to the contract can sue each other: Only the Parties to a contract are entitled to sue each other for non-performance the of contract/term of the contract.

Position in India

In the context of India, there has been neither rule in favour nor against under Contract law. There can be seen divergence of opinion in Indian courts with respect to how far a stranger to a contract can enforce it. Various case laws signify that a contract cannot be enforced by a person who is not a party to it. There can be seen applicability of Tweddle v. Atkinson in India as it is in England. However, with the changing times, courts have created certain exceptional rules in India. Decisions reflect that a beneficiary (3rd person) under a trust, family arrangement and under various laws can sue or enforce his rights. 

Decisions in Favour of the Rule of Privity of Contract

In the case of Tweddle v. Atkinson, [1861] EWHC J57, the father of A and the father of B made a contract that each would pay a certain amount of money to A. Both the fathers gave a privilege in that contract that A can file a suit if they didn't pay him. After both father's death, A filed a suit against the executor of B's father. The Court said that as A was not a part of the contract that was concluded between both the fathers and A was a stranger to the contract. Hence he cannot file a suit.

In the case of Dunlop Pneumatic Tyre Co. Ltd v. Selfridge and Co. Ltd., [1915] UKHL 1 (26 April 1915), the Dunlop Pneumatic Tyre Co. Ltd sold tyres to Dew and Co. Ltd with a condition that the tyres won't be sold below a particular price. Dew & Co. sold the tyres to Selfridge in the same condition. Further, Selfridge sold them below that price. Dunlop Pneumatic Tyre Co. Ltd filed a suit against Selfridge, Court said that Dunlop Pneumatic Tyre Co. Ltd was a Stranger to the contract and could not enforce contract.

In the case of Jamna Das v. Ram Avatar (1916) ILR 38 All 209, A mortgaged property to Jamna Das, A also sold the same property to Ram Avatar with the condition that Ram Avatar would pay the mortgage money. Jamna Das filed a suit against Ram Avatar to claim the mortgage money. The Court held that Ram Avatar is a stranger to the Contract. Hence, the suit filed by Jamna Das could not be entertained.

Decisions against the Rule

In the case of Donoghue v. Stevenson [1932] UKHL 100, a friend of a lady, Ms Donoghue, gifted her a bottle of ginger beer, and at the end of the bottle, there were remains of a snail. Specifically, partially decomposed remains of a snail. The contract was made between that friend and the shopkeeper, meaning there was no privity of contract between the manufacturer and the consumer, but the court held that the manufacturer has a duty of care owed to their consumers and she was awarded damages in tort.

In the case of Provender v. Wood (1630), Het. 30, 124 E.R. 318, a father-in-law told another father-in-law that if his daughter and his son got married, he would give some amount of money to the groom. Accordingly, they got married thereafter he refused to give money to the groom. Groom sued the father-in-law. The court held that he could do so because the 3rd party was so closely related to the contract, and his claim was awarded to him.

The Supreme Court in M. C. Chakoo v. SBT (AIR 1969 SC 504) Shah CJ observed:

"It must, therefore, be taken as well settled that except in the case of a 'beneficiary under a trust' or under a 'family arrangement', no right may be enforced by a person who is not a party to the contract."

English Law v. Indian Law

According to English law, a stranger to consideration cannot sue when a dispute arises, whereas, in India, a stranger to consideration can sue in that case. This means that only persons who are parties to the contract can take action to enforce it in English Law, whereas in the Indian perspective, beneficiaries can also file a suit.

Role of Consideration in the Privity of Contract

Consideration is an important element in a contract, without it, the contract is void. It is defined under section 2(d). There are certain requirements that a contract shall

1. Consideration should be lawful under section 23 of the Indian Contract Act, of 1872.

2. It must not be adequate, i.e., it's not necessary that in return for that consideration, the promise of the same value has been agreed to be given.

In the case of Vijaya Minerals Pvt. Ltd v. Bikash Deb.,(AIR 1996 Cal. 67), it was held that inadequate consideration might imply that the contract may be without free consent, and when there is no question of free consent, then the court will not have to look at the consideration, as whether it is adequate or not.

3. It can be past consideration or executed consideration. However, under section 25(2) past consideration must be at the desire of the promisor.

4. consideration should not involve an act that a person is legally obliged to do.

In India "stranger to consideration" can sue but a stranger to contract cannot i.e., the Doctrine of Privity of Consideration is not applicable in India but the Privity of Contract is applicable both in England and India.

Exceptions to the Privity Rule

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.

For example, if A gives his Property in equal portions to his 3 sons with the condition that after his death, all of them shall be giving Rs. 10,000 each to C, who is the daughter of A. Now C can prosecute if any one of them fails to obey this.

In the case of Sundaraja Aiyanger v. Lakshimammal, (1915) ILR 38 Mad 788, a partition deed of property was executed. Before 2005, women didn't have the right to inherit the property, Lakshimammal was just a beneficiary in the partition deed. Male members of the family agreed to contribute to her marriage expenses. Later on, they refused to do. So, she filed a suit to get that enforced. The Court held that even though she was not part of the contract, she is entitled to get the contract enforced as a beneficiary.

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.

For example, if X enters into a contract with B that X will pay Rs 5000 every month to B during his lifetime and after that to his Son C. X acknowledges this contract/transaction in the presence of C. Now when X defaults C can sue him, even though he is not a direct party to the contract.

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. 

5. Covenants Running With Land

The rule of privity may also be modified by the principles relating to the transfer of immovable property. The principle of the famous case of Tulk v Moxhay, (1843 – 60) AII ER Rep 9., is that

"a person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land shall be bound by them although he was not a party to the agreement."

Conclusion

According to Oliver Wendall Holmes,

"The life of the law has not been logic, it has been experience."

It can be concluded that the doctrine of privity of contract is not a strict rule per se, it has its exception. It is said that in earlier times, the law was based on pure logic. The doctrine of privity of contract continued to be dynamic as it has undergone a change in recent years and it is now an established principle that a beneficiary under any contract or under any special law can commence legal action against a third party without being a party to the contract.

References

[1] What is doctrine of Privity, Available Here

[2] Doctrine of Privity of Contract, Available Here

[3] Doctrine of Privity of Contract and Consideration, Available Here

[4] Privity of Contract: Contract for the benefit of third parties, Available Here

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