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Exploring Privity of Contract: Its Evolution, Impact on Modern Law, and Key Legal Considerations

As a general rule, only the parties to the contract have contractual rights and obligations towards each other, i.e.; only the parties to the contract can sue and be sued in case of breach of contract.

This rule is based on the doctrine of privity of contract which means that only those persons who are parties to the contract can enforce the same. Thus, a stranger to the contract cannot enforce it.

For instance, A & B enter into a contract for the benefit of X. Here, X, being a stranger to the contract cannot file a suit to enforce it even though it was entered into for his benefit.

English Law
In the landmark case of Tweddle v. Atkinson[1], it was held that only parties to the contract can sue each other.

In this case, the plaintiff, Mr.Tweddle (A) married a girl, B. There was a contract in writing between A's father and B's father that A's father would pay a certain sum of money to B and B's father would pay a certain sum of money to A if they got married. But, right after the marriage, B's father died before he could fulfil his promise.

Now, A brought an action against the executor of B's father, Mr.Atkinson to recover the promised amount. It was held that A could not sue for the same as he was a stranger to the contract. Hence, he could not enforce the claim.

Indian Law
The rule of privity of contract is equally applicable in India as in England. Even though under the Indian Contract Act,1872, the definition of consideration is wider than that under the English law, yet the common law principle of privity of contract is generally applicable in India, with the effect that only parties to the contract is entitled to enforce the same.

This is apparent from analogous cases in India that parallel those in England.

In Jamna Das v. Ram Avtar[2], A had mortgaged some property to Mr.Jamna Das (X). Subsequently, A sold this property to Mr.Ram Avtar (B), B having agreed with A to settle the outstanding mortgage debt owed to X and recover the property. However, B defaulted on the mortgage payment, leading X to bring an action against B to recover the money. It was held by the Privy Council that since there was no contract between X & B, X could not enforce the same to recover the amount from B.

The rule of privity of contract was criticised by many jurists on various grounds, leading to the recognition of the following three exceptions to the general rule:

Beneficiary under a contract: Under this exception, the basis of an action by the third party is actually not the enforcement of the contract but of the rights conferred in his favour in the form of trust.
For instance, A & B enter into a contract whereby a beneficiary right is created in favor of C in respect of some property. In such a case, C can enforce his claim on the basis of the rights conferred upon him.

This exception was recognised by Lord Haldane in Dunlop Pneumatic Tyre Co. v. Selfridge & Co[3]., itself.

Indian law has also recognised this exception. In Narayani Devi v. Tagore Commercial Corporation Ltd.[4], A held various shares of the value of Rs.40,500. It was agreed that A would sell his shares in favor of B and in return B would pay to A Rs.500 per month and after A's death, would pay Rs.250 per month to A's widow during her life, if she survived her husband. C stood a surety for B. Some payments were made to A and after his death to A's widow. Thereafter, the payments were discontinued, leading A's widow to bring an action against B & C to recover the amount.

The defendants' contention was that the rule of privity of contract should be applicable in this case. Rejecting the contention, the Calcutta High Court held that from the facts and circumstances of the case, an obligation in the nature of trust could be inferred in favor of the plaintiff, and an equity having been created in her favor, she was entitled to sue even though she was not a party to the contract. A decree was passed in her favor for the arrears of the amount due.

Please note that the question whether in a particular case there is an obligation in the nature of a trust in favor of a third party arising out of a contract will depend on the facts of the case.
  • Conduct, Acknowledgement, or Admission:
    Under this exception, if one of the parties to the contract by his conduct, acknowledgement, or admission recognises the right of the third party (stranger to contract) to sue him, he may be liable on the basis of the law of estoppel[5].

    Let's take an example of the previous case (Narayani Devi) only where no direct contract existed between the plaintiff and the defendants, but the defendants under the contract with the plaintiff's husband, had agreed to pay a certain amount to him during his lifetime and thereafter to his widow (the plaintiff). It was also established that the defendants had made certain payments to the plaintiff after her husband's death, in pursuance of the contract. Apart from this, it was also found that the defendants, by their admission had earlier called upon the plaintiff to execute certain documents in this connection, which implies they considered the plaintiff to be entitled to certain rights.

    It was, therefore, held that the defendants had created such privity with the plaintiff by their conduct, acknowledgement and admission, that the plaintiff was entitled to her action even though there was no direct contract between the plaintiff and the two defendants.
  • Provision for marriage expenses or maintenance under family arrangement:
    Under this exception, where there is a family arrangement and the contract is intended to secure a benefit to a third party, he may sue in his own right as a beneficiary.

    Such an action has been allowed in many cases where, on the partition of joint family property between the male members, a provision is made for the maintenance of female members of the family.

    The basis of the recognition of such an action is the application of the rule (the stranger is entitled to claim as a beneficiary) laid down in Khwaja Muhammad Khan v. Husaini Begum[6] to such situations.

In Veeramma v. Appayya[7], under a family arrangement, the father's house was to be conveyed to his daughter and the daughter undertook to maintain him in his lifetime. The daughter being a beneficiary under the compromise arrangement, it was held that she was entitled to sue for the specific performance in her favor.

Therefore, as a foundational principle, a third party to the contract cannot enforce it. However, if such a party aligns with any of the aforementioned exceptions, they may assert their rights.

  1. (1861) 1 B & S 393
  2. (1911) 30 IA 7
  3. (1915) AC 847
  4. AIR 1973 Cal. 401
  5. Section 115 of The Indian Evidence Act, 1872
  6. ILR (1910) 32 All. 410 (P.C.)
  7. AIR 1957 AP 965

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