Privity of Contract and Consideration

The doctrine of privity means that as a general rule, a contract does not grant rights or enforce duties arising under it on any person except the parties to it. In common contract law, the concept of contractual privacy provides that a contract does not grant rights or enforce duties arising under that contract on any party or agent other than the parties to the contract.

The idea is that only parties to contracts should be allowed to sue in case of violation to protect their obligations or seek damages. The conventional legislation was very stringent because if they were affected, third parties had no solution of any sort. The doctrine of privity has, however, been relaxed to a considerable degree in modern times. Third parties can now demand compensation if, under the arrangement, they are the intended beneficiary and a violation is proved. This article analyses the history of the privacy doctrine, taking the legislation into account in multiple countries, concentrating primarily on England and India.

This article comprehensively analyses the doctrine of privity and provides readers with an insight into the related provisions in the Indian Contract Act.

I. Introduction

The key idea underlined by the definition of contractual secrecy includes the interests of third parties in a contract. Thought that the role of different countries is now equal if not the same before the law came into being it was not the same. Whether a third party could obtain rights, or incur responsibilities, to a contract to which he or she is not a party, were the most relevant issues to consider? [1]

From the 17th to the 20th century, these issues were incredibly prevalent in England. The response to these questions, in common law, was no. By the end of the 19th century, it was known that third parties were necessarily strangers to the contract and should thus not obtain either party’s rights or incur liabilities to a contract to which they were not themselves a party.

“Privity doctrine implies that as a general rule, a contract may not confer rights or impose obligations arising under it on any person other than the parties to it.”

II. Privity of Contract

The “Privity of Contract Doctrine” [2] is a long-established English law concept that guarantees that no one should be entitled to or bound by the provisions of the arrangement to which he is not an original party. In other words, it is a theory of common law that provides that privileges or duties should be enforced only on the parties to a contract.

The doctrine makes it difficult for a third party to have any legitimate power to execute the contract or to have contractual liabilities enforced as a result of the contract and that contractual options are exclusively for the contracting parties. In essence, it prohibits the third party from imposing a contract’s terms. The theory has also proved to be troublesome for third parties since they are not in a position to implement the contracting parties’ obligations [3].

III. Illustration

If A strikes a contract with B, if he fails to uphold his word, he is under a civil requirement to pay damages. The enforceability or obligation of this contract is squarely in the hands of A and B, to the exclusion of others, and it is the basis of the doctrine of contractual secrecy.

The theory of the privacy of a contract is that it is not possible for a contract to grant rights or enforce on any individual, except on the parties, certain duties arising under it. The word “parties” may sound clear enough, but there are circumstances in which it may become doubtful as to just who the parties are and as a result, who should be responsible or should be paid in the eyes of the law in the case of inevitable violations that may arise from time to time.

IV. The Doctrine of Privity of Contract and the Indian Contract Act

It is to be noted that there is no single clause relating to this doctrine in the Indian Contract Act. In India, through a series of case rules, it has been generally recognized. Section 2(h) of the Indian Contract Act, 1872 describes a contract as an agreement enforceable by statute backed by any consideration between two parties. In other terms, just a binding agreement is a contract.

Under Section 2(e) of the Act, the term ‘agreement’ has been specified [4]. Each promise and each set of promises, establishing the consideration for each other is an agreement, according to this clause. Section 2(d) describes consideration as an act that must have been undertaken at the promiser’s desire or request.

One of the noteworthy features of this section is that the promisee or some other person may conduct the act that is to constitute consideration. This suggests that it is immaterial who furnished it as long as there is a consideration for the promise [5]. In the case of Dutton v Poole, this principle was established [6].

V. The History of Privity of Contract

While the theory of privity was accepted and developed in the case of Tweddle v. Atkinson, over the years, from as early as the end of the 16th century, the foundations were laid by the English courts. Yet in these cases, it can be found that by holding the so-called “Interest Theory” in mind, the courts instead ruled on them. This theory essentially meant that it was only he who had an interest in the promise that could bring an action before the court, or in the words of the Court:

“He who has an interest in the promise must have the action.”

In 1599, the first recorded case with such an example was ruled upon. This was the Levett v Hawes[7] case. In this case, on a promise made specifically to him that marriage money would be paid to his son, a father brought an act of assumpsit. The court was of the view that the suit should have been taken by the son:

“For the promise is made to the use of the son and the ordinary marriage covenants are with the father to stand seized for the use of the son and the usage shall be altered and transferred to the son as if it were a covenant with himself and the damage to the son is that of non-performance.”

Rippon v. Norton[8], which was ruled upon in 1602. In this situation, in order to discourage the latter child from targeting the previous, the parent of a child’s expectations about the father of another child but the objection, which was based on the case of Levett, was made by the defendant’s side.

Hawes was upheld by the court and it was held that because the battery of the son does not harm the father, an action is not for the father. And although it was protested that the father was at the charge of healing the son of his wounds, while it was a matter, he was not obliged to do it is not a justification why this conduct should be continued.

The judgement of Hadves v Levit (1632)[9], is another crucial mention. In this case, the father of the bride (the defendant) had told the father of the groom (the plaintiff) that he would pay 200 pounds to the son of the plaintiff after the marriage had taken place, and so the plaintiff gave his marriage consent on this basis. However, the defendant refused to pay the appropriate amount to the son after the union, which resulted in the plaintiff bringing assumpsit and litigation. The Court of Common Pleas dismissed this assertion. It claimed that the case should have been brought by the son “more appropriately”, for he was the person “in whom the interest is”.

A son told his father in Dutton v. Poole[10], that in exchange for his father not selling the wood, he would pay his sister 1,000 pounds. The father started selling the timber, but the son didn’t pay. It was held that the sister may appeal, on the ground that because of the relation of blood between them the care and promise of the father could well have expanded to her.

The House of Lords recognized in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd[11] that it was a basic principle of English law that it could be sued only by a party to a contract who had given consideration. Tweddle v Atkinson[12] is a case relating to the concept of contract privity and consideration in English contract law.

The panel of appeal judges reiterated that the doctrine of privity meant that only those who are party to an arrangement would sue or be sued (other than one of the well-defined exceptional relationships such as agency, bailment or trusteeship) and established the concept that “consideration must flow from the promisee.”

A contract cannot be enforced by an individual who, even though it has been made for his benefit, is not a party to the contract.

Although the concept of consideration is narrower than that of English law under the Indian Contract Act, 1872, and consideration may very well be provided by a non-contracting party, the doctrine of privity principle of common law is widely agreed in India.

The Privy Council, for instance, broadened the scope of the doctrine by implementing it in India in the case of Jamna Das v. Ram Avtar[13]. It was congruously held that an individual who is not a party to the agreement is not permitted to recover from a party to the agreement the amount due. The Supreme Court cleared out the ambiguity surrounding this doctrine in 1970.

In the instance of M.C. The Supreme Court articulated itself in support of the Dunlop Pneumatic Tyre Co. Selfridge & Co. Ltd.[14] case in Chacko v. State Bank of Travancore[15]. Judge Benjamin N. Cardozo found Macpherson v. Buick Motor Co[16] to be a prominent case in the New York Court of Appeals. This case brought out the law that served as a pioneer for the product liability rule. It also eliminated the prerequisite of privity of contract in negligence proceedings[17].

The Court held that it is the duty of the manufacturer to construct carefully, anything which might be dangerous to the user of the product. If the manufacturer is proved to be negligent, then irrespective of the contract the liability will fall on the maker.

VI. Exceptions to the Rule

The exceptions to the above provision of common law are based on the basis of statutory exemptions. In the case of a trust, where a bond is negotiated between a trustee and another person, the beneficiary is entitled to sue in order to satisfy the rights attached to the trust established. In the event that a deal is made for the benefit of a person particularly though he is not a party to the contract, he will sue the parties.

In the event that a contract allows a party to pay a certain amount to a third party and is recognised by that party, the third-party may sue the party that has recognised the contract for compliance.

An arrangement entered into by an attorney is also an exception to the above clause. A third party can sue the seller in the case of faulty products if he/she has been harmed by the flaws. An instance of this exemption is consumer rights legislation. In the event of personal injuries, a liable party can be sued by a third party that is not a party to the deal.

In the case of a family arrangement, such a party may sue to enforce the contract until no arrangements are made for a specific family member. The third-party has the right to appeal in the case of multilateral and collateral arrangements in order to enforce his or her rights[18].

VII. Contracts (Rights of Third Parties) Act, 1999

The Contracts (Rights to Third Parties) Act, 1999, an Act of the United Kingdom Assembly, aimed at changing the Doctrine of Privity of Contract common law. Owing to the strong condemnation of the doctrine by jurists, lawyers and academicians, this Act came into being. It allows for the inclusion of settlement provisions in respect of an arrangement & for the promisor’s immunity against double liability lawsuits and foresees the defences of the promisor. The Act further stipulates the degree to which the rights of third parties are accurate, ensuring that they are not abused.

The Act allows for two statutory exceptions to the above-mentioned law in order to amend the doctrine, namely when the Contract specifically provides for it, or where the contract purports to inflict a profit on such a person. In order to amend the doctrine, the Contracts (Rights of Third Parties) Act 1999, enacted in the United Kingdom, provides for two statutory exceptions to the above provision, namely where it is specifically provided for in the contract, or where the contract is intended to confer a gain on such a party.

VIII. The Doctrine of Privity in India

The Doctrine of Privity is one of the doctrines examined under contract law, not only in India but worldwide. In this sense, the ambiguity behind the legal situation is not simply attributable to the lack of clarification in the laws or dissenting judicial pronouncements, but also largely due to the scholarly and judicial controversies related to the very foundation of this theory and its comparative advantages and disadvantages[19].

Not only in day-to-day business contracts, but even for high value and complicated transactional contracts, the controversy and unsettled situation about the Privacy Doctrine is important. It is not unusual in practice for contracting partners to enforce restrictions on affiliates, families and representatives of other parties with regard to provisions such as restrictive covenants, non-compete and secrecy obligations. By the negotiating parties through which they are linked to the deal, the rights of those third parties are very well secured.

There is no question that there are volumes of cases in books and papers in which relevant third parties who are not parties to a deal have been empowered to sue them and their protection is protected by the counterparty against any violation. However, such cases are focused on the view that some relevant third parties claim through a party to the contract that it is in the place of a “cestuique trust” (meaning “the person for whose gain something is offered in trust to another”) or of a principal suing an agent that he/she could have brought a lawsuit in equity under the old procedure, even though he/she could not have sued at common law[20].

Presently, the legal fraternity around the world has acknowledged that there must be certain improvements with the highly dynamic world of trade to escape the hardship created by the strict commitment to the Privacy Doctrine and to accept some exceptions to the general rule while granting restitution to the aggrieved individuals. The degree to which these exceptions are accepted, however, varies from one jurisdiction to another. In Jenkins’ words:

“The Indian Contract Act is unlike the English Contract Act and the limitations with which the doctrine of privity works in English law cannot extend to the Indian Contract Act with the same authority.” [21]

Time and again, the Indian judiciary has repeated that Tweedle v. Atkinson [22] does not obstruct the administration of justice and that we are free from these trammels in India and are directed by the laws of justice, equality and good faith in matters of procedure.

The Indian courts have appreciated the enforcement of the Privacy Doctrine with well-recognized exceptions such as trust recipients, family relationships and marriage settlements, tort, collateral contracts, charge development or land-running covenants.

More or less the following are the well-accepted and settled exceptions to the Privacy Doctrine. These are not exhaustive, however, and from time to time, the list of exceptions to the Privity Doctrine has grown and been accepted by the Indian courts, and the exception, more than always cited, is that a person for whose advantage the contract is entered into will definitely sue because as he is a “beneficiary” in the contract.

In India, through its decision in M.C. Chacko v. State of Travancore [23], the supreme court has in a far-reaching effort to clarify the ambiguities in the implementation of the Doctrine of Privity, held that an individual not a party to a contract cannot be entitled to such well-recognized exceptions, upholding the terms of the contract. In order to protect the beneficiaries under the terms of the deal, the understood exception referred to in the cited decision is strongly worded[24].

Other courts in the country have formed opinions on the rights of third-party beneficiaries. The division bench of the Calcutta High Court, for example, ruled in Bhujendra Nath v. Sushamoyee Basu[25] that a stranger to a contract that is to his advantage is entitled to pursue the deal to his advantage. In Pandurang v. Vishwanath[26], even though not a party to the contract itself the individual beneficially entitled under the contract was held to be eligible to sue.

IX. Who Essentially is a “Beneficiary”?

The word “beneficiary” provided under the Indian Contract Act does not have a specific meaning. Analysing the treatment of the Indian Judiciary in such cases, however, it becomes apparent that the intention is not to catch any person who receives any profit from the contract or is harmed by a violation by any side, but rather those entities who are clearly meant to be beneficiaries under the contract or for whose benefit the contract is concluded.

For this reason, any indefinite or unidentified person should not be regarded as a “beneficiary” In other words, it is important to differentiate the “intended beneficiary” from the “incidental beneficiary” The “intended beneficiary” is the group which comes under the agreed exemption.

X. Critical Analysis

If two parties to a contract grant a benefit on a third party who has not signed the contract, it would appear that they wished the third party to be in a position to enforce the right individually. Under other cases, if the two parties who signed the contract were to void or change the contract to the detriment of the third party, the third party would be adversely affected.

In its 87th Report, the Law Commission of India proposed that when a contract specifically conferring a profit explicitly to a third party has been adopted by a third party, the negotiating parties should not replace or cancel a new contract or change it in order to impact the rights of a third party.

This suggestion, however, has not been adopted to date. Perhaps the reason against its application is that because of those limitations, the very meaning of the contract i.e. the intention of the parties and the right of the parties to vary the contract as per common understanding and consent at any time, will be at stake.

That being said, it may be claimed that as long as there is reciprocity as to the binding existence of the contract between the individuals who wish to impose it and the party against whom it is meant to be imposed, the parties should not be permitted, except with mutual consent, to alter or modify the terms of the contract. In the case of Kedar Das Mohta v. Nand Lal Poddar[27], the above opinion is backed by the judgement given.

Accordingly, once the intended beneficiary fulfils his duties under the contract and the parties agree or behave in compliance with the contract, it will mean that the parties have behaved in accordance with the contract and if the recipient has done so he cannot take further action to deny the beneficiary’s rights.

It has been concluded that an agreement should not be enforced in the case of a person who is not bound by it. In other words, the binding essence of the agreement between the parties who wish to impose it and the person against whom it is supposed to be imposed must be reciprocated.

XI. Conclusion

While the doctrine sets down the rights of third parties, it is ambiguous in essence and lacks clarification. According to the recommendations of the 13th Commission Report, abatement of the doctrine is necessary to allow a third party to sue for a contract rendered for its benefit in such circumstances, i.e., a clearer cut definition or a statutory clause must be added or special legislation must be passed for third party rights under certain qualifying conditions equivalent to contracts (Rights of Third Parties) Act, 1999.

In relation to the Privity Doctrine, the new relaxed conditions of contemporary contract law and the non-conventional stance of the courts have given a means of redress for legitimately affected parties who may have been stripped of rights as such under the strict application of the Doctrine of Privity. A stranger may be awarded damages under the existing application of the law if the violation were proven. However, a stranger who has mutual responsibilities under the contract should be counted within the reach of the “intended beneficiary”.

The opinions of the judiciary and also of experts on the scope of the “beneficiary” and the applicability of this theory are not universal and it is difficult to rule out the prospect of disagreement or controversy. In fact, with respect to transactional and nuanced arrangements concerning such third-party commitments such as agents, associates, advisors, etc., it is difficult to decide who the ‘intended recipients’ really are.

From a realistic point of view, it is prudent to include in the agreement a clear provision specifying that the parties (whether clearly defined or categorised) may impose their rights under the contract as “third party beneficiary”. However, any defences which are applicable to the contracting parties will be subject to the inclusion of such a particular provision.

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References

[1] Jain, S. (2014). Rule of Privity of Contract: Study in English and Indian Context. Available at SSRN 2461688.

[2] Harnam Singh v. Purbi Devi, AIR 2000 HP 108.

[3] Treatment Of “Doctrine Of Privity” By Indian Judiciary: Priyesh Sharma, Vaish Law Associates

[4] Section 2(d), Indian Contract Act of 1872.

[5] Section 2(e), Indian Contract Act of 1872.

[6] Dutton v. Poole, 1678 2 Lev 211.

[7] Levett v. Hawes (1599) Cro. Eliz. 619, 652, Moo.

[8] Rippon v. Norton, Cro. Eliz. 849.

[9] Hadves v. Levit (1632) Het. 176. 17.

[10] Supra^6

[11] Dunlop Pneumatic Tyre Co Ltd v. Selfridge Ltd [1915] AC 847.

[12] Tweddle v. Atkinson (1861) 1 B&S 393.

[13] Jamna Das v. Ram Autar Pande, (1916) ILR 38 All 209

[14] Supra^11

[15] M. C. Chacko v. State Bank of Travancore, 1970 AIR 500

[16] MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050

[17] C. Venkatachalam v. Ajitkumar C. Shah & Ors, Civil Appeal No.868 OF 2003

[18] Swaminathan, S. (2016). In Search of a Mythical Exception to Privity of Contract in Indian Law. Journal of Malaysian and Comparative Law, 43(1. Jun.), 53-end.

[19] Garg, V. K. Doctrine of privity of contract and privity of consideration in India and British context.

[20] Narayani Devi v. Tagore Commerical Corpn Ltd, AIR 1973 Cal 401.

[21] Debnarayan Dutt v. Chunilal Ghose, reported in (1914) ILR 41 Cal 137 N.

[22] Supra^12

[23] Supra^15

[24] Devaraje Urs v. M Ramakrishniah AIR 1952 Mys 109.

[25] Bhujendra Nath Biswas And Ors. v. Sushamoyee Basu And Anr, AIR 1936 Cal 67.

[26] Pandurang v. Vishwanath, AIR 1939 Nag 20.

[27] Kedar Das Mohta v. Nand Lal Poddar, AIR 1971 Pat 253.

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