This article is written by Adhila Muhammed Arif, a student of Government Law College, Thiruvananthapuram. This article elucidates on the Doctrine of Privity and the exceptions to its application.
According to Section 2(h) of the Indian Contract Act, 1872, a contract can be defined as an agreement that subsists between two or more parties that is enforceable in the courts of law. When one party fails to perform their obligations provided in the contract, the other party can sue them for the breach and obtain adequate remedy. Consideration is one of the major requisites for the validity of a contract and it is defined in Section 2(d) of the Indian Contract Act. It refers to any act or abstinence performed by the promisee or any other person at the request of the promisor. Indian law permits consideration to be moved by persons who are not parties to the contract as long as it is at the request of the promisor.
What is privity of contract?
The doctrine of privity of contract is one of the major principles that govern the law of contracts. The word ‘privity’ means ‘with knowledge and consent’. According to this doctrine, only parties to a contract have the right to enforce the rights and obligations provided by the contract and strangers to the contract are barred from enforcing any obligation on any party. This doctrine protects parties to a contract from obligations that they never agreed to incur. Only those parties that have an interest in the contract can sue for its enforcement. The first case in India that affirmed the applicability of the doctrine was the case of Jamna Das v. Ram Autar Pande (1916).
For example, A and B entered into a contract where A gave Rs.100 in return for which B agreed to deliver a watch to C. Here since C is a stranger to the contract he cannot sue B if he fails to deliver the watch.
Though consideration can be provided by third parties, they can never enforce the performance of the contract as they are strangers to the contract. It is important to note that there is a difference between a stranger to contract and stranger to consideration. As a stranger to consideration remains a party to the contract in spite of not providing consideration, he can still file a suit challenging the contract.
Doctrine of privity in english law
English law is more restrictive in comparison to Indian law in the application of the doctrine of privity. This is because English law only recognizes consideration that moves from the promisee himself and not from anyone else, which puts both strangers to contract and strangers to consideration on the same footing. Thus, when the promisee to a contract does not provide the consideration himself, he loses his right to enforce the contract as he is a stranger to consideration.
The doctrine of privity of contract was first recognized in English law in the case of Tweddle v. Atkinson (1861). In this case, John Tweddle William Guy entered into a contract where they agreed that both of them would pay a sum of money to their children who were engaged. However, the father of the bride William passed away before he fulfilled his obligation. The father of the groom died too before he filed for a suit. The groom filed a suit against the executor of William for the payment of the sum of money. The Court ruled that since the son was both a stranger to the contract and a stranger to the consideration, his suit was not maintainable.
The relevance of the doctrine was affirmed again when it was cited in the well-known case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd (1915). In this case, Dunlop Company manufactured tyres and they entered into an agreement with Dew & Co., who were dealers. Dunlop entered into the agreement so that they can maintain a standard market price for the tyres and Dew & Co. agreed that they would not sell the tyres below the fixed price. Dunlop also insisted that the dealers must have the same terms in their agreements with the retailers. Dew & Co. entered into a contract with a retailer Selfridge, which had a provision that if the tyres were sold below the fixed price, they would have to pay 5 Pounds per tyre as damages to Dunlop & Co. When Selfridge sold some tyres below the fixed price, Dunlop sued them for damages and the decision was in favour of Dunlop. But, on appeal the decision was reversed and it was held that Dunlop did not have the right to claim damages as the contract was only between the retailer Selfridge and Dew & Co.
Exceptions to the rule that a Third Party to contract cannot sue
The doctrine of privity of contract is however not absolute. There are several exceptional situations in which a third party to a contract can sue. The following are the exceptions to the doctrine of privity in Indian law :
Trust of contractual rights or beneficiary under a contract
A trust refers to something created by a contract for the benefit of a third party. In a contract of trust, the trustor transfers the title of a property to the trustee, so that the trustee holds it for the benefit of a third party who is also called the beneficiary. Even though beneficiaries are third parties to a contract they have the right to enforce the provisions of trust.
To cite an example, in the case of Rana Uma Nath Baksh Singh v. Jang Bahadur (1938), the trustor was a father who transferred all of his estates to his son for him to hold in trust for the benefit of the trustor’s illegitimate son. The son had the obligation to provide the illegitimate son with money on a regular basis. When the son failed to perform his obligation, the illegitimate son filed a suit to recover the amount to be paid and the suit was maintainable even though he was not a party to the contract.
Provision for marriage or maintenance under family arrangement
In a contract for a family settlement either for marriage or maintenance, where the contract is intended to benefit a third party, he may sue on the contract to secure his rights.
For example, in the case of Lakshmi Ammal v. Sundararaja Iyengar (1914), there was an agreement among the brothers of a Hindu joint family to pay for the expenses to be incurred for the marriage of their sister. Despite being a third party to the agreement, the sister had the right to enforce the provision that was made for her.
In the case of Veeramma v. Appayya (1955) the daughter of the family had the responsibility of taking care of the father. So, there was a family arrangement made for conveying the father’s house to her. Since the agreement benefited her, she had the right to file a suit for the specific performance of the contract.
Acknowledgement or Estoppel
According to the law of estoppel, if a person by words or conduct suggests something, he is not allowed to contradict it later. Thus, if a party to a contract acknowledges by words or conduct that a third party has the right to sue him, he cannot deny that later by the rule of estoppel. In such cases, a suit filed by that party, despite being a stranger to the contract, is maintainable.
For example, A and B enter into a contract where A pays B a sum of money that has to be given to C. B acknowledges to C that he is holding the sum for him. If B defaults in the payment, C will have the right to recover the sum from him.
In the case of Devaraj Urs v. Ramakrishnayya (1951), A bought a house from B. B asked A to pay the price for the sale to B’s creditor. The buyer paid a part of the price to the creditor and promised him that he would pay the rest later. On his default, the creditor filed a suit against him. The court ruled in favour of the creditor, though he was a third party to the contract.
Contracts entered into through an agent
It is not uncommon for people involved in commerce and business to enter into contracts through their agents. These agents can enter into contracts for them and represent them in the relations that arise in such contracts. Thus, whatever contracts entered into by an agent while acting within the scope of his authority can be enforced by the principal. It may seem that the agent is the party to the contract, but in reality, he is more of a representative of the principal.
For example, A appoints B as his agent. He asks B to buy a bag of rice from C on his behalf. Here, B enters into a contract with C when he buys the bag of rice, but it is A who has the right to enforce the contract as B is a mere representative of A.
Charge created on a specific immovable property
In certain cases, charges or covenants are made on a specific immovable property, like land for the benefit of a third party. In such cases, these third parties can enforce the contract, though they are strangers to the contract.
Assignment of a contract
Assignment of contract refers to the transfer or assignment of the rights and liabilities arising from contractual relations to a third party. In cases where the benefits of a contract are being assigned, the assignee of the benefits can sue upon the contract though he is not a party to the contract.
For example, a husband assigns his insurance policy in favour of his wife. As the benefit of the contract is assigned to her, she has the right to enforce the contract though she is not a party to it.
Collateral contracts refer to the contracts subsidiary to the original contract. It could be entered into by the same parties or one of the original parties with another party. It can be made before or after the main contract is formed. When a third party has entered into a collateral contract, he can also file a suit to enforce the main contract in spite of not being a party to it. The best example of a collateral contract is a manufacturer’s guarantee regarding the goods sold. The sale of the goods is the main contract and the guarantee is the contract collateral to it.
In the case of Shanklin Pier Ltd. v. Detel Producers Ltd. (1951), a person A was employed as a contractor by B. B asked A to buy some paint manufactured by C. B wanted A to buy C’s paint because of a statement that was once made by C that the paint would last for seven years. But the paint only lasted for three months. In this case, the guarantee given by C to B forms a contract that is collateral to the contract made by A and B. The suit filed by B was maintainable even though he was not a party to the main contract.
To sum up, the doctrine of privity of contract is not an absolute rule. There are many cases in which a person who is not a party to a contract can enforce the contract as explained above. The doctrine of privity of contract protects the parties to a contract from legal action taken by strangers against them, as they are obligated to only the party with whom they contracted. But, there are situations where third parties can be aggrieved by the breach of a contract and the exceptions to the doctrine enable them to take action against the parties to the contract.
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