PRIVITY OF CONTRACT

INTRODUCTION

The doctrine of privity of contract is a common law principle that states only the contracting parties can sue or enforce their rights and liabilities and, no third party or stranger can confer obligations on anyone who is not a party to the contract, even if the contract is in his benefit. Hence, under the doctrine of privity of contract, a third party cannot acquire rights under, be liable for or enforce a contract to which he is not a party.

MEANING AND SCOPE

The doctrine of privity of the contract means that only the parties to the contract can enforce it. A stranger to the contract cannot enforce it, even if the contract may have been made for his benefit. The Indian Contract Act, 1872 enables a third-party to constitute a ‘Consideration’ for a contract[1]. A stranger is not allowed to sue on the contract under the law. According to Indian law, consideration may be given either by a promisee or a third party[2]. It does not affect the rule of privity of contract.

Illustration: If A makes a contract with B, C cannot file a suit to enforce that contract as C is not the party to the contract. A and B are the only parties to that contract, and C is the stranger to the contract.

PRIVITY OF CONTRACT: ENGLISH LAW

Before the foundation of privity of contract was recognized in Tweddle v. Atkinson[3] case, the courts of England relied on the “interest theory”, wherein it emphasized that only he who had an interest in the promise could bring up action before the court[4]. A principle that if there is a consideration for a promise, it makes no difference who furnished it; such notion was prevailing. It might come from the promisee or, if the promisor has no objection, from anybody else.

In Dutton v. Poole[5], in exchange for his father not selling some wood, a son (defendant) told his father that he would give his sister (plaintiff) 1000 pounds. The father withdrew to sell the wood, but his son refused to pay. The sister sued the defendant for the amount. Although the plaintiff was neither a party to the contract nor a party to the consideration, it is evident that the agreement’s sole purpose was to provide the plaintiff with the amount. Hence, the plaintiff was allowed to sue, and the defendant was liable.

Two hundred years later in the Tweddle v. Atkinson[6] case, the court of Queen’s Bench laid down new principles. In this case, the plaintiff’s father and his prospective father-in-law agreed to pay the plaintiff money on marriage. The plaintiff married, but his father-in-law died before the plaintiff obtained his share. The plaintiff acted against his father-in-law’s estate to get the money back. Even though the contract was made in his favour, the court determined that the contract could not be enforced since the plaintiff was not a party to it. Wightman J said: “It is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit.”, whereas, Crompton J said that “consideration must move from the promisee”. Here plaintiff was both the stranger to the contract as well as the stranger to the consideration.

Later in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd[7], the House of Lords reaffirmed that it was a fundamental postulate of English law that only a party to a contract who had provided consideration could sue. Thus, two fundamental propositions were laid down in English law regarding privity of contract. They are[8]:

1. Consideration must move from the promisee and the promisee only. If it is furnished by any other person, the promisee becomes stranger to the consideration and, therefore, cannot enforce the promise.

2. A contract cannot be enforced by a person who is not a party to it even though it is made for his benefit. He is a stranger to the contract and can claim no rights under it.

PRIVITY OF CONTRACT: INDIAN LAW

Even though under Indian Contract Act, the definition of consideration is wider than in English law and the consideration can very well be given by a non-contracting party, yet the common law principle of Doctrine of Privity is generally accepted in India[9]. In the case of Jamna Das v. Ram Autar[10], A borrowed 40,000 by mortgaging zamindari to B. She then sold her home to C for $44,000, permitting C, the buyer, to keep $400,000 of the sale price to redeem the mortgage if he saw fit. B attempted to collect the mortgage funds by suing C, but he was unable since he was not a party to the arrangement between A and B. The Privy Council, in its decision, extended the rule of Tweddle’s case to India.

The Supreme court in M.C Chacko v. State Bank of Travancore[11] endorsed the rule applied by Rankin, C.J in Krishna Lal v. PromilaBala Devi[12] wherein it was observed “…there is nothing in Section 2 to encourage the idea that contracts can be enforced by a person who is not a party to the contract.”

However, the application of the Doctrine of Privity in India is not exhaustive, and the Indian judiciary has advanced and recognized quite a few exceptions to the Doctrine of Privity over time. In DebnarayanDutt vs Chunilal Ghose[13],  Jenkins C.J said“in India, we are free from these trammels and are guided in matters of procedure by the rules of justice, equity and good conscience”. The administration of justice in Indian Courts need not be, in any way, hindered by the doctrine laid down in Tweddle v. Atkinson[14].

EXCEPTIONS TO THE DOCTRINE OF PRIVITY OF CONTRACT

The principle of the doctrine of privity of contract has been generally criticised. In 1937, the Law Revision Committee recommended its abolition. Lord Denning MR in Beswick v. Beswick[15] remarked “Where a contract is made for the benefit of a third person who has a legitimate interest to enforce it, it can be enforced by the third person in the name of the contracting party or jointly with him or, if he refuses to join, by adding him as a defendant. In that sense and it is a very real sense, the third person has a right arising by way of contract.”

Over time, the courts have established several exceptions to the rule of privity of contract, allowing a person to enforce a contract that was made for his benefit but to which he was not a party. Some of the most known exceptions are considered here.

1. Beneficiaries under trust or charge or other arrangements: Even though a person is not a party to the contract, if he is the beneficiary of a charge or other interest in a specific property, then he may enforce it. In Nawab Khwaja Muhammad Khan v. Nawab Husaini Begum[16], the appellant executed an agreement with the respondent’s father that as consideration for the respondent’s marriage with the appellant’s son (both minors at the time), he would pay a sum of Rs. 500 a month to the respondent for petty expenses and charged immovable properties with the payment, with power to the respondent to enforce it. The husband and wife separated due to a quarrel and the suit was brought to court by the plaintiff-respondent for the recovery of the amount overdue of this annuity. Although the respondent was not a party to the agreement, she was entitled to pursue her claim in equity. The agreement entered by the defendant (appellant in this appeal) expressly charges immovable property for the allowance that he agrees to give to the plaintiff (respondent in this appeal); she is the only one who benefits from it.

2. Marriage settlement, partition, or other family arrangements: Though an agreement is made in any of the mentioned matters and a provision is made for a person’s benefit, he may benefit from it even if he is not a party to it. In Rose Fernandez v. Joseph Gonsalves[17], The father of the girl agreed to a contract with the defendant for the girl’s marriage. It was realized that the girl, after attaining majority age, could file a suit for damages for breach of the promise to marry and, the defendant could not make a plea, although she was no party to the agreement. It aims to safeguard the rights of family members who are unlikely to get a specified portion.

3. Acknowledgment or estoppel: If, under a contract, a party undertakes an obligation to make a payment to a third party and he acknowledges it to the said party, the third party, though not a party to the contract, can enforce the contract. In N DevarajaUrs v. Ramakrishniah[18], A sold his house to B under a registered sale deed and left a part of the sale price in his hands, desiring him to pay this amount to C, his creditor. Subsequently B made part-payments to C informing him that they were out of the sale price left with him and that the balance would be remitted immediately. B, however, failed to remit the balance and C sued him for the same. The suit was held to be maintainable as B acknowledged his liability to C. 

4. Covenants running with land: The privity of contract rule may also be modified to include exceptions for principles pertaining to the transfer of immovable property. When a person buys a piece of property with the understanding that the owner would be liable for all duties and liabilities affecting the land, he can sue the landowner even though he was not a party to the contract[19]. In Smith & Snips Hall Farm ltd., v. River Douglas Catchment Board[20], defendant (the board) agreed with certain landowners adjoining a stream to improve the banks of the stream and to maintain them in good condition and hence, the landlords paid costs. Subsequently, one of the landlords sold it to the plaintiff. The board negligently maintained banks, which burst and flooded plaintiff land. It was held that the Board was liable as the whole arrangement was to benefit the lands whoever be the owners and not merely parties to the agreements.

CONCLUSION

The doctrine of privity of contract refers to the connection that exists between the parties to a contract or agreement. This privilege arose from the perception that a contract establishes a connection between the parties, not between third parties. However, as previously noted, there are some exceptions to this concept. These exceptions provide the third party with the ability to enforce the contract and the power to sue the other party. The recent development in the doctrine has paved the way for the restoration of rights to those who are deprived of them due to the legislation’s strict interpretation.


[1]The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India).

[2] R K BANGIA, CONTRACT-I, 78 (7th ed. 2017).

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

[4]Corny and Curtis v. Collidon, 1674 (1) Freem. K.B. 284.

[5]Dutton v. Poole,(1677) 2 Levinz 210.

[6]Supra note. 2.

[7]Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd(1915) AC 847.

[8]AVTAR SINGH, CONTRACT & SPECIFIC RELIEF, 113 (12th ed. 2017, with supplement 2021).

[9]Aakash Kumbhat, Basis of Privity of Contract and Consideration, LAWCTOPUS (July 3, 2021, 6:09 PM),https://www.lawctopus.com/academike/basis-privity-contract-consideration/#_edn19.

[10]Jamna Das v. Ram Autar,(1912) ILR 34 All 63.

[11]M.C Chacko v. State Bank of Travancore,(1969) 2 SCC 343.

[12]Krishna Lal v. PromilaBala Devi, AIR 1928 Cal. 518.

[13]DebnarayanDutt vs Chunilal Ghose, (1914) ILR 41 Cal 137.

[14]Supra note. 2

[15]Beswick v. Beswick, (1967) 3 WLR 932.

[16]Nawab Khwaja Muhammad Khan v. Nawab Husaini Begum, (1909-10) 37 IA 152.

[17]Rose Fernandez v. Joseph Gonsalves, (1924) ILR 48 Bom 673.

[18]N DevarajaUrs v. Ramakrishniah,AIR 1952 Mys 109.

[19]Tulk v. Moxhay, (1919) 88 LJKB 861 (HL).

[20]Smith & Snips Hall Farm ltd., v. River Douglas Catchment Board, (1949) 2 KB 500 (CA).


Authored By: Tejaswi D Shetty, 2nd year, BA LLB, SDM Law College, Mangalore

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